Navigating the cutthroat world of business entails a continuous optimization of your internal processes.
While most entrepreneurs look towards fine-tuning their operations and supply chain systems, finances also play a crucial factor in influencing your business’s health and prosperity.
One fundamental financial decision that often gets overlooked is the separation of business and personal banking.
Many newly minted entrepreneurs tend to rely on their personal bank accounts for business transactions.
While going this route is undoubtedly the most convenient, it also comes with its fair share of potential legal implications that could restrict your business’s ability to scale to greater heights.
The more suitable and apt alternative is to set up a business banking account dedicated to your business.
Not only will this help legitimise your business in the eyes of various third parties, but it also comes with legal advantages that you otherwise would not have access to if you’re using a personal account.
This article will explore what a business account entails, as well as list possible legal advantages in more detail.
What is a Business Bank Account and How to Set One Up?
A business bank account is a special bank account that’s registered under a business name. Just like a standard personal bank account, you can make purchases, store savings, and pay bills using this account.
However, unlike personal accounts, a business bank account is solely used for business transactions and entirely separate from personal use.
To set up a business bank account in a country like Australia, you’ll need to first be over 18, an Australian citizen, and have all the initial requirements. These include the following:
- Australian ID card (passport, driver’s license, birth certificate)
- Australian Company Number (ACN)
Depending on your business type and the bank account type you’re looking to acquire, additional requirements may be requested. But for the most part, as long as you have the above documentation, you are eligible to open a bank account for your business.
Legal Advantages of Owning a Business Account
Here are some of the legal advantages of owning a business banking account.
- Limited Liability Protection
Normally, when you’re using a personal account, you’re putting your finances and assets at stake in the event that your business goes bankrupt.
When you’re unable to pay or liquidate your business assets but still have debt, your creditors may seek these personal assets as compensation for nonpayment. This means they could chase your car, house, or other personal assets to recoup their losses.
However, if you operate under a limited liability license—which is a type of business structure that requires a business bank account—your creditors won’t be able to chase down your personal assets.
A limited liability license essentially protects you, the business owner, from your business’s shortcomings. Setting one up costs more and requires more than a sole proprietorship or partnership, but the benefits that come with it are unmatched.
- Tax Tracking is Made Easier
When taxation time rolls around, you wouldn’t want to sift through each business transaction in a personal account and run the risk of mislabelling certain expenses.
If you get caught doing so, you could risk getting into trouble with the law or paying hefty fines—further damaging the delicate reputation of your enterprise.
Instead of relying on a personal account for both types of transactions, strive to get a bank account to track your business-related activities instead.
This way, you’ll get a precise read on which expenses and incomes are business-related, making it easier to file your taxes correctly and avoid any potential legal issues.
- It’s More Credible for Third Parties
Running a business, more often than not, isn’t a sole venture. It entails a continuous and positive relationship with vendors, staff, suppliers, lenders, and customers. If you want them to acknowledge you as a credible entity, having a separate business banking account is vital.
The last thing you’d want these entities to do is to question the legitimacy of your operations. If you operate under a personal bank account, that’ll likely dent your business’s image.
Conversely, conducting transactions under a banking account can reflect positively on your image—making you feel more trustworthy in the eyes of these third parties. It’ll also attract more clients and customers to your business at large.
In addition, a banking account for your business can allow you to form heavier, binding contracts that are mutually beneficial for you and the other party.
Convinced about making the switch? See Westpac’s article for more information on how to switch to a banking account seamlessly.
- You’ll Build a Good Relationship with Your Bank
Many banks prohibit people from using their personal accounts to conduct business transactions. This is often stated in the terms and conditions provided by these banks before application.
While banks certainly won’t have an easy time tracking a handful of purchases from a small business, if you intend to scale your operations, you’ll definitely need to safeguard your banking reputation.
The best way to do this, of course, is to set up a relevant business banking account that you can call your own.
In doing so, you’ll have peace of mind knowing that you’re operating under the right conditions provided by your bank—all while gaining the benefits exclusive to a business banking account.
- You Can Apply for Loans and Credit Lines
Banks and other financial institutions typically require business owners to possess a business bank account before handing out loans and credit lines to their businesses.
This is because having a business account can help lenders (like the bank) gauge your ability to pay back your loan.
You can typically access a loan with favourable interest rates and terms if you have a good credit history in your business bank account.
Conversely, if you only have a personal account, banks will likely not lend anything out to you as they cover the risk of you potentially defaulting on them.
Many businesses run on borrowed money to kickstart their operations.
If you also need to go this route, applying for a business bank account, building up a good credit history, and requesting a loan is a good way to get your business going.