Business bank accounts aren’t always a necessity for companies conducting official business – it all depends on a few factors.
The only type of business that is legally required to have a business bank account is a limited company – that’s true pretty much all over the world, but it’s always a good idea to double-check based on where you’re based.
But, there are other factors to consider too, some of which are more practical. For instance, small companies that aren’t looking to scale up any time soon and aren’t working with large amounts of money may not need all the services offered by a business bank account.
Business bank accounts to consider include:
However, a business that is bringing in and paying out a lot of money or is hoping to secure a business loan, for instance, should definitely consider switching to a business account.
Ultimately, it all comes down to the specific company in question.
But, whatever the case may be, most companies do eventually make the switch, especially after experiencing growth, and when that does happen, they need to transition from using a personal bank account to a business bank account.
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What’s the Difference Between a Personal and Business Bank Account?
The main difference between personal and business bank accounts is the fact that any individual can have a personal account, whereas in order to have a business bank account, your business needs to be officially registered.
Of course, after that, it’s all about the difference in purpose and services offered.
- Purpose: A personal account is for an individual’s personal use, whether daily or long-term (that is, cheque or savings). A business bank account is for businesses to be able to handle business transactions and finances.
- Name: A personal account is held in the name of an individual and a business account will be registered in the name of the business in question.
- Transaction Limits: Business bank accounts tend to have higher transaction limits than personal bank accounts.
- Services: Personal accounts offer basic banking services (like withdrawals, online banking, deposits and so on), while business bank accounts offer more extended and specialised services – things like invoicing, credit opportunities, payroll management, merchant accounts and more.
- Fees: Personal accounts tend to have lower fees compared to business bank accounts as the latter offers more extended services than the former.
- Opportunities for Credit: Companies with a business account have potential access to loans and business lines of credit, but if you only work through a personal account, you won’t necessarily be able to get a loan for your business.
- Tax Reporting: A business bank account will offer features to help you report certain information for tax reporting purposes, and on an even more basic level, all your business finances will be in one place, so it won’t be difficult to organise everything during tax season. That is, you won’t have to separate your business and personal finances.
- Ownership and Access: Only account holders can access a personal account, whereas with a business account, companies can name multiple people as “authorised users”.
- Legal Protection: It may seem convenient to have all your finances in one place, especially if you have a small company. But if anything goes wrong and you end up in some kind of legal trouble, your finances will be linked (both business and professional), meaning that all your money will be at risk. If your funds are separated, this won’t be the case.
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9 Steps to Transitioning from a Personal to a Business Bank Account
There may always be differences in the requirements for setting up a business bank account depending on where you’re based, but we’re going to give you a general list of the eight most important steps to transitioning from a personal to a business bank account.
1. Officially Register Your Business
The most important requirement for having a business bank account is being an officially registered business, so this is step one – register your business in the appropriate form, whether that’s as a sole proprietor, an LLC, a corporation or whatever else.
You’ll need to provide documentation f your registration – including your business name, tax identification information and all your other registration details – to open the bank account.
2. Find the Right Bank and Account Type
Most, if not all, the preparation you do is going to depend on the specific type of account you intend on opening, as well as where you’re opening it and the bank you choose to work with. So, it’s time to start looking around, evaluating banks and considering different types of accounts.
Make sure you take into account (pun intended) features like bank fees, transaction limits, payroll services and more so that you can find the best option to suit your needs.
3. Gather All the Necessary Documents
In addition to the proof of your business registration, you’re going to need other documentation including personal identification, tax identification, an operating agreement (depending on the type of business) or a partnership agreement (if you’re in a partnership).
4. Open Your Business Bank Account
Once you’ve chosen the bank and account type and gathered all the documentation you need, you can go ahead and open the account.
5. Move Your Funds
With your business bank account now open, it’s time to transfer business funds from your personal account to your new business account. Make sure you double check all aspects of the account when you do so and don’t leave anything behind.
6. Notify Clients and Update Payment Methods
Contact all your clients and anyone who ever needs to make payments to you and inform them of your account change, providing them with your updated account details.
Also, make sure you go and change your account details wherever you may have listed them, whether that’s on your website, forms or anything else.
7. Close Your Personal Account/Stop Using Your Account for Business
Now that everything is set up, your funds have been transferred and everyone knows you’ve switched accounts, you can start operating by means of your new business bank account.
Make sure you stop using your personal account for anything business-related as soon as you make the transition, because if you use both – even for a short period – your finances can get confused, and you may also end up confusing clients.
8. Set Up Your Business Banking Features/Services
With everything up and running, you can start getting into the details of setting up the features you’d like to use, because business bank accounts have a lot more to offer than personal accounts do.
You don’t have to do everything at once, but it’s a good idea to try to start getting set up as soon as possible so you can really take advantage of all the services at your disposal.
9. Notify Your Accountant/Financial Planner
If you have an accountant or a financial planner, make sure you notify them of your switch – although, it’s more than likely that they would’ve been involved from the beginning. If not, however, don’t forget to inform them.
