4 reasons to separate business banking from personal

As a sole trader or small business owner it can be tempting to use your personal bank account for company finances. But that may not be the best banking solution for your business.

It may pay to separate your accounts

One of the most useful things you can do when starting a business, is to keep your business finances separate from your personal arrangements. This is the view of Debra Anderson, who is the owner of leading MYOB consultancy Anderson Tax & Consulting and a member of Australian Tax Office advisory boards.

 

“The minute you've got an ABN, open a separate business account,” she says. “It will save you money in the long run – and if you don't keep them separate, you're creating a headache for yourself down the track.” 

 

There are four key reasons for following Debra's tips:

1. Clearer business tracking

If your grocery and office purchases are all on the same statement, it can make it harder to measure how your business is doing and where all the income is going.

 

“A lot of sole traders don't use small business accounting systems, so the only way they can really work out how their business is going is by how much is in the bank,” Anderson explains. “I got stuck a few years ago myself, as I didn't know whether it was me or my business sucking the money out of the account. And I'm an accountant. How is someone else supposed to work it out?!"

 

A separate business bank account¹ can record only your business ingoings and outgoings, so it's simple to see if your expenses are outgrowing your income.

2. Separated funds for tax time

It's easy to accumulate funds in your account, forgetting that at some point down the line there's tax to pay. “When you first start trading, you’re not paying tax on your earnings. But the year after you lodge your first tax return in net profit, you get a tax bill for that year, plus all of a sudden you also have to pay PAYG instalments,” Anderson explains.

 

One way to help avoid any nasty shocks at tax time is to have at least two business bank accounts:

 

1. A business transaction account, with a linked debit or credit card for your expenses.
2. Another transaction account, or a business savings account¹, where you can set money aside to cover your income tax and GST liabilities.

 

"Once these are set up, quit cash and try to do all your transactions electronically," Anderson advises. “If you're paying cash out of your wallet it's very easy to lose your receipt or forget about the payment, but if you pay electronically out of your business account you can always go back and find the transaction.”

 

This approach will ensure you don’t miss out on claiming GST - if you are registered for it - or claiming other tax deductions. 

 

Tip: Before opening additional accounts, it's worth checking if they will cost you any additional fees.

3. Easier accounting

While separating your business and personal bank accounts could be a good way to make sure you don't miss out on tax deductions, it can also help to guard against mistakenly claiming for personal expenses. In the event of an ATO audit or request for information down the track it could also be useful to recall your transactions if you can refer back to your business bank accounts.

 

“This one always scares people,” Anderson says. “If you've kept everything in the one account the ATO is going to say 'What's this? What's that? How do I know this is business and that is personal?' They're going to have to look through all your transactions.”

 

Keeping things clear cut is also likely to save you accounting fees, while giving your accountant time to complete tasks that are more valuable to your business.

4. Simpler and faster banking

Spending some time researching and selecting accounts you feel best meet your business needs could help make life a little easier as your business grows – and registering for online banking¹ can further simplify things. For instance, you might wish to move money in and out of a savings account at short notice and with minimal fuss, which online banking may be able to enable.

FAQs about business banking

What is a business transaction account?

‘Business transaction account’ is another name for ‘everyday business account’ and ‘business cheque account’. It’s the type of bank account you use to receive, manage and monitor your business income, bank in branch (unless it’s an online only account) and make payments by debit card (if offered with the account) and through online, phone and mobile banking (if available). Westpac business transaction accounts come with all these options.

Can I use a personal account for my business banking?

Depending on your business structure (such as ‘sole trader’), you may not be required to have a business bank account – but it could be a good idea to consider getting one for the reasons described in this article. Certain business structures (including ‘limited liability company’ and ‘corporation’) are required to have a separate bank account by law, for tax purposes. If in doubt, check the ASIC website.

How many business bank accounts should I have?

This comes down to personal preference as you may wish to have transaction accounts for different purposes or sides of your business. There’s no limit to how many you can have. You may also wish to open one or more business savings accounts to set aside funds for BAS time, save for new vehicles, equipment or technology, or have a backup for seasonal downturns or unexpected expenses.

Is it easy to change banks?

Switching banks may be simpler than you think, including moving your business finances from a personal account to a business bank account. Read our switching banks article.