Understandably, many small business owners or sole traders feel like company finances will be managed just fine in personal bank accounts. In truth, that's likely not the ideal banking solution for a business.
Separate Accounts Will Fare Much Better
Keeping business finances separate from personal matters is actually one of the best things to do when starting a business. The moment an ABN (Australian Business Number) is acquired, a separate business account will be opened.
Why is it crucial to open a separate business account? Here are some of the top reasons:
Opening a Separate Business Banking Account Helps with Business Tracking
Figuring out exactly where income is going can be rough if office purchases and groceries exist on the same statement. Many sole traders who don't choose to use small business accounting systems end up using how much is in the bank as their core basis.
Business ingoings and outgoings will be recorded exclusively on a separate bank business account. At that point, when expenses start to outgrow income, it will be easy to catch and address.
Opening a Separate Business Banking Account Helps Separate Funds During Tax Time
Accumulating funds in an account is easy; at some point, however, tax that was initially forgotten or overlooked will make itself known. This is an easy enough mistake to make; there's usually no tax to be paid on earnings during the start of trading. However, the year after the first tax return in net profit is lodged, a tax bill will be issued that year. PAYG instalments will also kick in at that point.
Having at least two business bank accounts will be a great way to mitigate those shocks during tax season. Of course, it's important to check beforehand if there are extra fees. The key business accounts are:
A business transaction account with a linked credit or debit card meant for expenses
A transaction account or business savings account with funds meant for covering GST and income tax liabilities
The moment those are established, it's best to keep transactions digital and not deal in cash anymore. Paying cash makes it easier for certain payments to be forgotten or, worse, end up losing vital receipts. When payments are digital through a business account, the transaction can always be backtracked later on.
This way, GST claims won't be missed out on (assuming it's been registered for). Other tax deduction claims won't be missed either.
Opening a Separate Business Banking Account Makes Accounting Easier
Keeping a business and personal bank account separate can be useful, especially if you're hoping to claim certain deductions. If you run into tax issues in the future, it could be easier to remember your expenses if you refer back to your business bank accounts. When the ATO (Australian Tax Office) asks for information or does an audit, it will be easier to comply, too.
Conclusion
For small business owners or solo traders, having one bank account for everything seems simple. However, it can end up complicating things. Opening a separate business banking account makes accounting easier and helps separate funds during tax time, among other benefits.
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