If you are a small business owner or an independent professional service provider, it may seem easier to maintain a single account where all revenues are credited and all expenditures (personal as well as business) are debited. However, separating the financial aspect of your business from your personal finances is important. This is not only beneficial for protecting your personal assets but also makes it easier to maintain records for taxation purposes. You should open a current account only for business banking.
Here are five reasons why opening a separate account for the business is advisable.
- Provides a corporate veil
Several owners form a limited liability company (LLC) to shield their personal assets against any issues that may occur in the business. This is often referred to as a ‘corporate veil’ because it differentiates the owner from the business. As a further protection of your personal assets, maintaining the distinction of personal and business finances is recommended. Opening a current account is beneficial to achieve this objective and maintain the corporate veil.
- Prevents taxation issues
Having a combined business and personal account is complicated. This makes it difficult for you to organise the accounts in the right manner while considering taxation. You do not want to take the efforts of sorting through all the bills for the year to determine the expenses that are allowed to be deducted from the business income. Therefore, maintaining separate accounts helps in streamlining the various transactions, which reduces your efforts while keeping your accounts legal.
- Improves business legitimacy
As a business owner, it may seem unprofessional when you pay your vendors with a personal cheque. Your customers may also find it a little uncomfortable to pay you in your personal name. Although, this may not actually break the deal, it may affect the business. When you undergo the process of current account opening, your company will be positively perceived by your clients. This would help increase your business and revenues.
- Creditworthiness
Your creditors or lenders may prefer checking your credit worthiness prior to offering you such facility. Maintaining a separate account for business is beneficial for this purpose. Your bank may either issue a letter or the creditors may check the same using inter-bank connections.
- Overdraft facility
One major advantage of a separate account for business is the availability of an overdraft facility. In the case of a shortfall in your account balance, the bank offers a short-term service to allow you to overdraw. The bank may or may not levy interest on such facilities. Most of the personal savings account holders do not enjoy any overdraft facility.
Although as a sole proprietor, you are not legally required to have a separate current account, having one for the above reasons is useful. A distinct account helps you to prove the tax authorities (if the need arises) that you are running a business and related expenses are deductible.
Opening an account
The entire procedure for online current account opening is simple and quick. The documents required for opening an account primarily depends on the type of your business. You may easily find this information on the bank’s website. The procedure to open an account is completed within a few days after submitting the necessary documents.
A current account has many benefits over a savings account. Increasing competition among banks has been beneficial for business owners. Banks offer several value-added services at no costs, which make it advantageous to open one such account for your business.
