6 Reasons Why You Shouldn't Use Personal Accounts for Business

Learn the importance of having a business bank account instead of using your personal account for your business

Contents

    Growing your business is an exciting experience. It can also be overwhelming at times resulting in you playing catchup on important tasks, like opening a business bank account to manage your business’ finances.

    After all, there is no legal requirement in Hong Kong and many other countries for using a business bank account to run your business, so why bother? You can simply use your personal checking account to pay for business expenses, right?

    You can but there are a number of reasons why it’s not a good idea. A business account will help you save time, avoid frustrations, and help you pay less tax at the end of the financial year.

    What do we mean by business transactions?

    Personal and business banking are different. Business costs include any costs incurred in your bank account that relate to the running of your business.

    Personal bills are when you buy something for private use that is not related to your business and being a business owner.

    Common items in business bank accounts include:

    • Rent, utilities, and phones
    • Office equipment and supplies
    • Salaries
    • Insurance premiums
    • Legal and other professional fees
    • Consulting, advertising, marketing, and other promotion fees

    Business account vs personal account

    There are a number of reasons why using a personal account instead of a separate business bank account is not a good idea. Here are six key differences we explain in more detail below:

    1. It causes confusion
    2. Bookkeeping headaches
    3. Cannot claim deductibles
    4. You'll lose clients
    5. Problems raising funds
    6. You'll limit your legal structure options

    1. It Causes Confusion

    As your business grows, the number and volume of your business transactions will grow.

    At some point, your bank might notice you are using your personal bank account for daily business needs. If they do, they are very likely to request that you reserve the use of your account for personal expenses only.

    One reason why your bank may not accept the use of your personal bank account for business reasons is that they charge different fees for personal and business accounts. Fees for a business account are usually higher. 

    So they are missing out on revenue if you are using a personal account to manage money for business spending.

    You may ignore the bank’s request but then you run the risk of having your personal bank account closed by the bank.

    It might be a good idea to check the terms and conditions of your personal account to determine any potential consequences for using it to manage your business finances.

    2. Bookkeeping Headaches

    Carrying on a business requires bookkeeping and accounting tasks. It’s not exciting but there is no way around it.

    Done correctly, good bookkeeping and accounting serve as the basis for your company’s profit and loss summaries, and its balance sheet. Having these up to date come tax time are crucial if you want to ensure your taxes are accurate and paid on time.

    If you want to avoid trouble with your tax authorities, it is best to have your bookkeeping and accounting records in order. 

    Accounting software is a good start. Tax authorities also like to see a business holding a separate business account under the same name. It saves them time in checking your records and identifying and categorizing your business expenses 

    A separate business bank account will also save you time. You do not have to go digging into your own bank account to find and extract expense items to hand over to your bookkeeper, accountant, or tax authority. 

    With extra time on your hands, you can spend more time on activities that add future value to your business.

    3. You Can't Easily Identify Tax Deductible Expenses

    Generally, business expenses are tax-deductible.

    They can be deducted from the revenue generated by your business. In effect, they lower your profit on which tax is calculated, meaning you pay less tax.

    By tracking your business transactions in a separate business account, you will be able to identify expenses related to your business clearly and easily. This could help to increase your expenses and reduce your tax bill.

    It is definitely good news but be aware there are limitations on the tax deductibility of business expenses.

    For instance, you may need to buy a car for your business, but if you buy a Mercedes the tax office may challenge the tax deductibility of the car. Be sure to check with your accountant before you go and make any big purchases. 

    If you want to reduce your taxes, it is in your interest to keep your business expenses separate from your personal finances. Having a business account is the simplest and easiest way to do that.

    4. You'll Frustrate Clients, and maybe Lose Them

    Some clients, especially larger companies, may simply refuse to make payments to personal bank accounts.

    To ensure they are compliant with company rules, clients may insist on making payments to business bank accounts opened in the name of your company.

    If you put yourself in their shoes, it makes perfect sense. They want to match the name of the company issuing the invoice with the name of the bank account they are making a payment to.

    To avoid the embarrassing moment when a client asks you for your business bank account, or worse, you lose that client because you cannot show them one, get a business account up and running in the name of your company.

    5. Say Goodbye to Raising Funds

    If you decide to raise funds for your business and are talking to investors, you can be certain investors will want to look at all of your accounting records and information related to your business. 

    This is called carrying out due diligence.

    Investors examine bookkeeping and accounting records to understand the financial health of your business. 

    If they have any questions, which is very possible, they may want to go a step further and check your bank account records. Discovering a personal checking account is being used instead of a bank account for your business will raise concerns.

    That’s because investors know that a separate business bank helps to produce well-organized bookkeeping and accounting records, as well as legitimizing the business. 

    Make sure your discussions with potential investors are smooth and prioritize opening an account, like a business checking account, for your business.

    6. Personal Accounts limit your Legal Structure Options

    As a small business owner, you may decide to run it as a sole proprietorship or as a company.

    The key difference in business structures is that a sole proprietorship is not a legal entity, and therefore as a business owner, you are personally responsible for business loans.

    A company is a legal entity separate from the business owner. Under a company structure, the owner does not carry the risk of being personally responsible for the debts of the company.

    So a company structure is better from that perspective but company structures can cost more to maintain. There are advantages and disadvantages for each. The best solution will depend on the nature of your business.

    It is important to note though, that if you have a company structure, many authorities around the world will require you to have a bank account set up in the name of the company, separate from the account you use for personal funds.

    So if you are thinking about a company structure, because you do not want to be liable for the debts of your business, be sure to open a business account in the name of your company.

    How do I open a business bank account?

    So you want to avoid wasting time and frustration with clients, investors, and tax authorities and open a business bank. 

    How do you do that?

    You would think it would be pretty straightforward. But some account providers can make the process difficult. Find out the reasons why in this other article.

    If you have a registered business in Hong Hong, Singapore, or the BVI, you may consider opening an account with Statrys.

    At Statrys, we pride ourselves on making the process quick and easy, saving you time and money:

    • Applications are 100% online – no need to visit a branch
    • It will take 10 minutes of your time – skip your next coffee break, and you can finish the application
    • Quick responses – you are guaranteed to hear back from us within 48 hours after submitting the application.
    • No fees for opening an account (except for special companies), and no initial deposit is required, no minimum balance is required. Our fees are easy to understand and transparent.

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