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Do I need a business bank account?

do you need a business bank account
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    What is a Business Bank Account?

    A bank account is created under the corporate name or business trading name (DBA) to manage funds acquired during actively running the business and include incomes and expenses solely relevant for business purposes. A company can have multiple bank accounts such as current & savings and maybe in different currencies.

    As a business owner are you required to have a business bank account?

    It is advisory for business owners to ensure that their personal and business incomes and expenses are maintained separately.

    There has been no mandatory declaration that a business cannot have a personal bank account used for business purposes. Still, two key factors play an essential role in determining whether a business bank account is mandatory.

    First, Let’s have a look at numerous types of business structures out there.

    We have two main types of business structures out there known as:

    1. Unlimited liability (Sole proprietorships & Partnerships) Companies – recognise the owner and business to be one.
    2. Limited liability companies (Private, public limited companies & Corporations) – recognised as two separate individuals.

    Two Key Factors

    1. Separate Legal Entities: Limited liability companies and corporations must maintain a separate business bank account under the business name because they have a distinct legal identity and operate separately from the owner. This is because if the company gets sued or cannot pay off its debts, the owner will not be liable to use his account to settle these debts or vice versa.
    2. Operating with a DBA (Trading Name): Sole proprietors and partnerships must open a business bank account if they have a trading name, and they are required to show their certification to their bank for them to open the bank account.

    Importance of having a business bank account

    A business bank account is beneficial and vital for several reasons. Please see the below points.

    Size and Nature of the Business

    The number of transactions going out of a business account depends on the size and nature of the business activity. For example, for a sole proprietor who does a retail business, many transactions will take place on a day-to-day basis. It will be highly inconvenient to have transactions going through the personal account as identification will become critical. A business bank account gives the facility to maintain separate accounts for expenses and certain transactions to keep track of the business processes.

    Practical Financial Management and Decision-Making

    There is a greater incentive to manage the business processes and finance daily as the cash flow projections will be highly effective in assuring a smooth decision-making process.

    Promotion of Confidence and Professionalism among Stakeholders

    Help promote confidence and professionalism amongst customers, competitors, suppliers, and other external stakeholders regardless of the nature of the business activity. It provides the insight that the legally engaging trust runs the business, and the risk of frauds or defaults can reduce.

    Simplifies Tax and Audit Processes

    Separation of personal and business transactions provides relevant authorities such as audit teams and relevant internal stakeholders a transparent view and a precise breakdown of business expenses and income received. In addition, it makes it easier for the business to ensure its tax returns are filed accurately and thus simplifies the audit process for the internal and external teams as the trail will be clear and straightforward.

    Organized Bookkeeping

    Having all business-related transactions in the account will enable quick bookkeeping daily and enable timely reconciliations making the process faster during the year-end statements.

    Assists in Long term Objectives of the Business

    It helps in decision-making for future business expansion strategies or consolidated partnerships. It ensures meaningful investment opportunities are not missed since there is always a track on the business finance.

    Obtaining Short & Loan Term Finances

    It is essential and valuable to declare the correct figures and require preparing accurate forecasts and statements to banks when obtaining short- or long-term loans.

    Similarly, it is essential for particular vehicle purpose (SPV) companies when obtaining a mortgage or loans under the business name. Having a business account will depict a clear view of the businesses’ credibility.

    Credibility Checks by Banks

    It is crucial when the business wants to give the customers credit periods for payments. Banks will want to check the company’s financial status and its credibility period in paying the card liabilities before they can provide a business credit card.

    Terms & Conditions & Bank Offers

    Some banks provide terms and conditions saying you must not use your bank account for business purposes.

    In addition, banks may provide business credit offers and other essential services to help run the business.

    Data Protection & Money Laundering

    Unreferenced transactions in a bank account used for business and personal use will trigger suspicion of money laundering and scepticism of tax evasion. Therefore, maintaining a separate business account provides confidence to these authorities. Further, it appears to them that your business is run seriously and not as a hobby.

    If an audit takes place, they will find it convenient, and the process will be faster.

    When is it Not required to have a business bank account?

    There are instances where one can use a personal bank account for business purposes.

    Sole proprietors & Self-Employed

    These groups are not legal entities meaning the owner is responsible for any of the business’s debts. Therefore, most prefer keeping the business transactions going through their bank account.

    This is acceptable if the transactions are labelled correctly. However, real incomes are received and must maintain business expense receipts.

    The business profits can be declared under their self-assessment returns.

    Only have expense reimbursements from the personal account

    There are instances where the incorporated company does not receive any income but is paying for services via their bank account.

    In this scenario, if the invoices have the correct business name shown and sent to their clients, it will be sufficient proof to declare it as a business expense.

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