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

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.

In many countries, such as Hong Kong, there's no legal requirement to use a business bank account to run your business. Consequently, some small business owners may question whether they can use their personal checking accounts for business expenses.

This article clarifies business transactions, discusses the option of using personal accounts, and highlights the top reasons why it's best to avoid doing so.

What Do We Mean By Business Transactions?

Business transactions are the financial activities that relate to the running of your business, as opposed to personal bills, which are purchases for private use unrelated to your role as a business owner.

Common transactions 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

Business and personal bank accounts are designed for different purposes, each with unique features tailored to their intended use. 

A business account offers capabilities that support the needs of a company, such as higher transaction limits, employee debit cards, and business-related software integration.

Personal accounts, on the other hand, are structured to manage an individual's daily financial activities and may not provide the same level of functionality or support for business activities. 

Key differences also extend to fee structures, with business accounts often incurring higher charges and may be more expensive to maintain than personal accounts.

 Can I Use My Personal Bank Account for Business?

The short answer is – yes, you can, but you shouldn’t.

While there isn't a universal law against using personal bank accounts for business transactions, doing so can lead to problems with compliance, record-keeping, and tax obligations.

In addition, certain business structures will require or strongly recommend separating personal and business accounts to maintain personal liability protection. 

Let's take a closer look. 

You Should Not Use a Personal Account for Business If

• You operate under a "Doing Business As" (DBA) name
• Your business is organized as any structure other than a sole proprietorship, with the exception of sole proprietors who use a "Doing Business As" (DBA) name. This includes a limited liability company, a partnership, etc.
• Regardless of structure, your bank has a policy against using personal accounts for business purposes.  

For the mentioned business structures, it is required or highly recommended to maintain separate business accounts because the business and the business owner are treated as separate entities, thereby having different liabilities and tax obligations. 

In the US, for example, Limited Liability Companies (LLCs) and Corporations are treated as separate taxable entities by the IRS.

In this scenario, If your bank observes business transactions in a personal account, they might flag them as suspicions of unlawful conversion of funds for personal use or potential attempts to conceal business income from tax authorities.

You Can Technically Use a Personal Account for Business If

• You operate solely as a sole proprietor without a DBA name, and your bank allows it. 

It is not strictly illegal to use a personal account, as the business owner and personal funds are one and the same legally.

Irrespective of your business structure and whether you're technically allowed to use a personal account for business transactions, mixing personal and business finances is not recommended. 

The next section will explain why. 

1. Risk of Account Closure

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

If you use a personal account, which has transaction limits designed for personal use, you will eventually exceed the transfer limit. Additionally, your bank might detect business activities in your personal account and will very likely request that you reserve the use of your account for personal matters only.

Disregarding this request could result in the closure of your personal account, as many banks consider using a personal account for business purposes a violation of their account policies.

It's crucial to review the terms and conditions of your personal account to understand the consequences of using it to manage your business finances.

2. Bookkeeping Headaches

Good bookkeeping and accounting serve as the basis for your company’s profit and loss summaries. Having the balance sheet up to date ensures your taxes are accurate and paid on time.

When you use your personal account for business purposes, it results in mixed transactions, making it difficult to track revenues, expenses, and profits. This complexity can lead to errors in financial statements and tax returns, potentially resulting in legal and financial repercussions such as fines. 

Conversely, a separate business bank account means 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. 

Furthermore, many business bank accounts offer expense management tools, customized reports, and accounting software integration. These features may not be as comprehensive or even available in personal accounts.

Tax authorities also prefer a business holding a separate business account under the business name as it saves them time in the verification process.

3. Inaccurate Tax Deductible

Business expenses are generally tax-deductible. They can be subtracted from your business revenue to lower your taxable profit, thus reducing your tax bill.

To maximize tax reduction, it's crucial to keep business expenses separate from personal ones. The best way to achieve this is by maintaining a separate bank account.

A mixed account blurs the line between personal and business matters, making it harder to claim deductions, which could either result in paying more tax than necessary or inadvertently filing incorrect returns.

4. Cash Flow Management Problem

A staggering 82% of small businesses fail because of cash flow problems. 

When personal and business transactions aren't tracked separately, it becomes difficult to assess business revenue. This increases the risk of overspending and accidentally using business funds for personal expenses.

Conversely, maintaining a dedicated business account simplifies tracking and planning for the business's cash flow while also providing avenues for financing and growth. For instance, you can pinpoint where to cut costs or accelerate accounts receivable.

5. Risk of Losing Clients

Your financial practices reflect your business's professionalism. Clients and partners may view payments to a personal account as a sign of an informal or less serious operation. This perception can affect your business relationships and result in lost opportunities.

Some clients, especially larger companies, require payments to business accounts matching your company's name and may refuse to make payments to personal bank accounts. 

Having a business account not only prevents customer loss but can also enhance convenience for them, potentially attracting more customers. Certain providers offer business merchant accounts, allowing your business to accept credit card payments seamlessly.

6. Difficulty in Securing Funding

When seeking funds for your business and engaging with investors, one aspect of the due diligence they may conduct is examining your business's financial health through accounting records.

That said, a separate business account fosters organized financial records and legitimizes the business. In contrast, using a personal checking account instead of a dedicated business account may raise concerns about the transparency and credibility of your business. 

Another perspective to consider is that business accounts often provide access to extra lines of credit options such as a business credit card or business loans. These won't be available if you use personal accounts.

A business account is also essential for building a business credit history, which is necessary for obtaining loans and financing on favorable terms.

7. Risk of Losing Individual Assets

Some entities, such as limited companies and limited partnerships, offer personal liability protection, separating the owner from the business obligations. This means that in the case of business debts, creditors typically cannot go after the owner's personal assets.

However, If you mix your personal and business money in one account, it can be hard to prove what belongs to you and what belongs to the business. This could put your personal assets at risk, as there is a possibility that the courts might "pierce the corporate veil,” as evidenced by real court cases resulting from mingling funds. As a result, your personal assets could be targeted to settle business debts.

When Do You Need to Open a Business Account?

Once your business is established, it's advisable to open a business account promptly. If you're currently using a personal account for business purposes, it's recommended to switch to a business account as soon as you can.

If you're a small business owner and have faced challenges opening a business account with traditional banks, consider exploring alternative solutions such as neobanks, which are often tailored to meet the needs of SMEs. They often offer lower fees and more flexibility in the account opening process.

Get A Multi-Currency Business Account With Statrys

If you have a registered business in Hong Kong, Singapore, or the BVI, you can 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), no initial deposit, and no minimum balance. Statrys fees are transparent and easy to understand.

Here is a quick look at our business account: