The first point to consider when asking yourself whether you need a business bank account is what is dictated by law vs. practice.
There are cases where the legal form of your business makes it mandatory to have a business bank account. No discussion.
However, more often than not, the choice belongs to you and so you will have to decide what is the most appropriate thing to do in practice: have your business run with your personal account or have a dedicated business bank account?
Seasoned entrepreneurs will tell you that a business bank account is definitely recommended.
Trying to manage both your business funds and your own finances from a personal bank account can lead to serious confusion and problems, which ultimately dictate how successful your venture is.
Read on to find out in what cases opening a business bank account is absolutely necessary and the reasons why it is key in running your company efficiently.
What is provided by law?
In most countries, you are legally obliged to open a dedicated business bank account when you have an incorporated business. That’s typically the case for limited liability companies and corporations in the U.S. The reason for that is when a business is incorporated, the newly established entity has its own legal existence separate from the individual or group of individuals who launched the business.
In keeping with its liberal tradition, Hong Kong does not impose any obligation for a limited company to have its own bank account.
Now, if you run your business in the form of a sole proprietorship, you are never obligated to open a business bank account.
That’s simply because in a sole proprietorship there is no legal separation between you and the business.
Which by the way also means that you are always responsible for any debts arising out of the business activity.
However, in some cases, in the small print of your personal bank account agreement, it reads that your personal account can only be used for personal funds and transactions. If your bank finds out that you are misusing your personal account, they may threaten to close your account and say that you have to open a business account.
If you need more information on different company legalities, take a look at this useful link that explains the differences between a sole proprietorship and a limited company status.
What to do in practice?
As your business grows, you will feel the need to have a business bank account rather than continue using your personal account for business expenses. Below are several situations that may bring you to this conclusion:
- Your business is handling a lot of transactions and it becomes difficult to track all these business transactions in your personal account.
- Your company’s income and expenses are getting too complex and you are worried about fulfilling your tax return accurately.
- You want your customers to be able to pay you by payment card.
- You are interested in taking out a business loan or getting a business credit card.
What are the differences between a personal and business bank account?
Business bank accounts always cost more than personal accounts.
However, you should not look at a business bank account simply as an increased expense. You should instead look at the differences and features that assist the growth and maintenance of your venture that make the extra cost worth it.
Here are a few features that only business bank accounts can offer:
- Employee debit cards grant them permission to make purchases and withdraw funds using the business bank account.
- They support multiple signing authorities and different groups of signatories. It is habitual practice for businesses to have more than one person with signing authority to approve transactions. This is an increased security measure compared to personal accounts.
- Having a business bank account may be an asset as banks are sometimes reluctant to open a bank account for certain businesses. For instance, e-commerce companies selling goods on their own platform often have difficulty finding a bank interested in serving their business. In this case, owning a business bank account brings value to the business.
You should also keep in mind that bank fees are a deductible business expense. This lowers the actual cost of your business bank account and is another reason why the benefits of owning a business account outweigh the costs incurred for owning one.
But if you are still worried about the added expense, take your time to look around. Different banks have different fee structures depending on the number of monthly transactions you are planning to make and the sort of business banking you are after.
Below are a few useful links to different banks and their business banking plans:
What are the benefits of business banking?
Whether you are legally obliged to own a business bank account or not, having a business banking channel can be a good idea for most ventures, even freelancers, in managing finances more effectively.
1. It enables you to better assess your business performance
Keeping your business and personal finances separate gives you a clearer view of how your business is performing.
Having easy access to accounts recording all your business costs and revenues for each month can let you know whether you are on the right track or whether it is time to set new goals and go in another direction.
2. It gives your business more credibility
Help your business look less like a pastime and more like a reliable and legitimate business with a dedicated bank account.
When you are running a business, image matters. Clients will be increasingly willing to trust you and your business if your payments are going to and from an account that is registered under your company’s name.
Business bank accounts can also be used to verify the lawfulness of your business when it comes to applying for a business credit card or business loan.
3. It ensures accurate bookkeeping
As your business grows, the volume and complexity of your business dealings will keep increasing. As such keeping track will become progressively more overwhelming if you do not have a separate account for your business finances. Help yourself and simplify your business accounting by separating business from personal transactions.
4. It simplifies your taxes
You must be prepared to document all business activities in great detail during tax season every year. If you fail to do so your company could face heavy penalties. One way to avoid these costly drawbacks is to open a business bank account which gives you a clean and clear record of all the transactions that your business has made and received.
5. It keeps you out of auditing concerns
It is also essential to keep a clear trail of your business transactions should your business ever get audited. As long as you have a clean track record of your business activities an audit is nothing you should ever be concerned about.
But keeping both your personal and business finances in one account could be cause for concern and turn into a real auditing nightmare.
No matter the stature of your company, opening a business bank account is an efficient way to run your company and sort its finances. The biggest difference between business and personal banking is the application process and eligibility requirements.
Just about anybody can open a personal bank account, but this is not the case for business bank accounts. If you are wondering what the process consists of, head to our guide on opening a business bank account in Hong Kong.