Many businesses do not start as grand plans to take over the world with a hulking enterprise. Rather they start as side hustles and hobbies that find favour with enough people to take on a life of their own. So it doesn’t surprise me when I speak to people in business who have not separated their business from themself. This particularly becomes a problem when it’s time to do accounts for the business and they have a whole load of expenses that cannot be substantiated. So why and when should your business have its bank account and be treated as a separate entity from you?
The first and most important reason is tracking. This applies both to income and expenditure but in my experience, people have a harder time keeping track of expenditure than income. Either way, you need to be able to easily measure your business’s incomings, outgoings and performance without going through pages of statements with a highlighter or having your accountant call you to explain why you included that Chicken Inn transaction in your business expenses. If you feel the business is not ready to sustain an account of its own there are tracking tools you can use but the sooner you separate the two the better.
Record keeping is very important to your tracking but it’s also important to the business. For various reasons, you may need to call back on your records and this is one of those things that you won’t know you need until you need it. So it’s best practice to keep a separate account especially if the business is starting to transact high volumes or at high frequency. Pulling up a single statement for all records of transactions is better than trying to bring together receipts and invoices and stubs from all over the place.
For tax purposes
Taxation is a very complicated area so I will do my best to keep it simple here. Businesses are favourably taxed because registered businesses pay tax on their profits (income fewer expenses) while individuals pay tax on their income without deduction of expenses. The important issue with a business bank account for taxation is substantiation, a fancy word for proving. The ability to prove that expenses were actually for the business and not someone taking advantage to claim personal expenses to reduce their taxable (after deductions income).
For credit purposes
Of course, yours is a small business built on your savings and sweat. You’re against credit and would not finance your business through credit. For now. We don’t know what the future holds but if you do your business right borrowing to expand the business or even to export internationally may become a reality sooner than you think. When lenders assess borrowers it’s a game of cash flow and they will request bank statements among other things to show the financial track record. You want it all in one place.
For your sanity
I have saved the best reason for last. The number one reason I recommend separating business and personal accounts is your sanity. It becomes a nightmare for many to keep up with everything that goes through their accounts. If you have a business with a high transaction frequency this alone should motivate you. Then there’s the little matter of keeping the money separate, the very act of transferring money from your business account to your account to spend it is an extra step that can stop you from doing it or just help you keep track of how much it’s happening.
People refer to our businesses as our babies. Those who have experience with raising children say you come to a point where you must step away as a parent to allow the child to grow. So it is with the business and having separate bank accounts is a baby step of sorts.