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Banking Assists
Business Record Keeping

by Greg Lam
(Vancouver, BC Canada)

Differences Between Business and Personal Banking

Differences Between Business and Personal Banking

Article Overview

This article is based on a video interview I produced with a Canadian bank account manager.

The topics I will cover in this article about how banking can help you with your business record keeping are:

  • The differences between a personal bank account and business bank account

  • Do you have to open up a business bank account for legal reasons

  • The costs of a business bank account vs a personal bank account

  • Getting credit for your business (credit cards and loans)

  • Business cheques for your business

  • Keeping business banking separate from personal banking

  • How to go about opening up a business bank account






I often come across a lot of business advice, whether in-person or online, saying that I have to do this or I should be doing that.

Every time I’ve run a business, I’ve always opened up a business bank account as I’ve always thought that’s the way you do it. I’ve also found that business bank accounts vary in pricing, depending on who you bank with.

I recently interviewed an account manager at my local credit union regarding business banking and thought I’d pass along the information, as making the right choice could make your business record keeping easier and less costly.


Personal vs. Business Bank Account – What’s the Difference?




In one sense, there really is no difference.

A bank account is a bank account, whether you call it business or personal. Money goes in and out of both.

However, an important difference between a business and personal bank account you need to be aware of are what funds can be deposited.

Personal bank accounts can only receive money in the name of the person who owns the account. You cannot receive any cheques/money orders made out to a business name.

A business bank account can receive cheques written out to the business name. You cannot receive any cheques/money orders made out to an individual’s name.

The advantage of this? It makes your business look more professional.

For certain businesses, it can make your business look small if you have to tell your customers to send payments to your personal name. It can also make your business look less trustworthy and more fly by night.

Do you legally have to open up a business bank account when running a business?



No, an unincorporated business is not required to have an official business account. Darrell Zahorsky explains in his article 5 Reasons Not To mix Personal and Small Business Banking when discussing audit trails:

It is not a requirement of the government that you have a separate small business banking account and record keeping method. It is required that all records be accurate, complete, permanent and showing a clear record of income and deductions. Providing a separate business statement and record provides a clear audit trail.


The article makes no mention for incorporated companies, but a corporation can only receive money in its name, so you would need a business bank account in order deposit funds and/or cash cheques in the business’ name. A corporation cannot open up a personal bank account.

The costs of a business bank account vs a personal bank account



Business banking is generally more expensive than personal banking. Don’t ask me why. I’ve found the same thing to be true when you consider business land lines or business internet service. Perhaps they provide a higher level of service?

In any case, business banking is generally more expensive, but like any purchase you may make, shopping around can provide a big range of different pricing. I tended to notice that credit unions had the best small business rates.

Getting credit for your business (credit cards and loans)



An odd thing that I’ve found with business banking is that for accounts, it is recommended you set up a business bank account, but for credit cards, you usually have no choice but to use a personal credit card.

The reason behind this is that a new business does not have a credit history, and without a credit history, it is hard to get credit. So, it is recommended that you obtain a personal credit card and use it only for business transactions. This holds true even for corporations.

When obtaining loan financing, you would receive a personal loan or personal line of credit as opposed to a business loan or line of credit for the very same credit history problem.

Often times, if you are incorporated and do receive a business loan, you will probably need to personally guarantee that loan. In other words, if your incorporated company goes bankrupt, the banks will be able to personally go after your personal assets to receive payment for your business loan balance. This nullifies one of the oft-touted advantages of incorporating, which is limited liability.

If you do want to get a business credit card without business credit history, another way to do this is by putting up a certain amount of funds on hold to guarantee the credit card.

Not too many people want to do that, but this might be a necessary option for small businesses that need to give the employees the use of a credit card.

Business cheques for your business



Business cheques, like business bank accounts, are more expensive than personal cheques. Be prepared to pay multiple times the amount of personal cheques.

Keeping business banking separate from personal banking



If you are not going to go the business bank account route, I would highly suggest keeping your business transactions separate from your personal transactions.

Why? My biggest reason is the reconciliation process. When you reconcile your bank and credit card accounts, you’re matching the transactions on your statement with your receipts, bills and sales transactions. When you mix up your banking, there is no way to match up your transactions unless you keep all your personal receipts. This requires you account for all the money you personally receive into the bank account.

Mixing funds makes it very hard to keep clear records of your business transactions. It also makes it hard to identify data-entry errors, missing receipts or sales.

Another reason not to mix your personal and business transactions is for auditing purposes. It will make it harder for you to prove to CRA or IRS that a transaction is business related, or that it is not business related.

For example, that $200 gift from your grandparents for the grandkids may look like income whereas that business dinner may look like a family dinner and not a legitimate expense.

If you want to keep your business transactions separate from your personal transactions but don’t want to open up a business bank account, here are a couple options on how to do this:

  1. Open up a sub-account, if your bank has this feature. A sub-account acts likes a sub-folder on your computer. Everything in that sub-account remains separate. This is a free option at some banks.

  2. Open up a second personal chequing account to be used strictly for business purposes.


How to go about opening up a business bank account



Opening up a business bank account requires different / additional documentation than a personal bank account.

Each bank has their own documentation requirements, so you need to check with your own bank. There are usually additional pieces of information that you need in comparison to opening up a personal bank account.



It is your decision whether to open up a business bank account or not. I highly recommend using separate accounts to assist you with your business record keeping. Not doing so is asking for trouble. It could end up costing you more in time spent organizing and correcting your books, as well as any potential tax issues that may arise.





This article was written by Greg Lam, The Small Business Doer.com. He has posted his business plan online for all to follow and learn from, and dishes out practical advice and solutions to business problems.



Resources Used:
  1. The interview with the Account Manager at VanCity Savings Credit Union can be found at SmallBusinessDoer.com> DIY or Go Pro> Banking - Personal vs Business Banking.

  2. Small Business Banking 101 - 5 Reasons Not To Mix Personal and Small Business Banking by Darrell Zahorsky published at sbinformation.about.com> Money Matters> Best Practices. Editor: Please note that this is a U.S. not Canadian reference.

Comments for
Banking Assists
Business Record Keeping

Click here to add your own comments

Apr 14, 2011
 Will my personal credit do?
by: Chung

Hi Lake,

Been looking at your site and come to realize that you're also in the online business - as am I - so hopefully you'll be able to answer my question below.

I've just set up a business bank account for my company (incorporated).

I'm not able to get a business credit card till I've opened the bank account for 3 months.

Now I'm going to see if they can make it happen - if not, I will dedicate a personal credit card solely to expenses incurred related to the business.

Do you see any problems with dedicating a personal credit card for business expenses for the inc. company?

And 2 - do you have a list of 'legitimate' deductible expenses for an Internet business? or know where I can find one?

Thanks Lake,
Apr 15, 2011
 Reasonable Expectation of Profit
by: Lake

Hi Chung,

You should be fine using a personal credit card solely for business purposes. You will just have to remember to keep all receipts and submit an expense report to be reimbursed.

With regards to your second question on 'legitimate' deductible expenses. Use one of the search boxes located on the site and key in the phrase reasonable expectation of profit. That is the key to legitimate expenses.

CRA expects income earned online (electronic income) to be treated the same way as traditional commerce income.

You may be interested in my chat on web related outlays.

You may also want to peek at CRA's "E-commerce" link which is all about conducting business on the internet. You can find the link by going to their website (www.cra-arc.gc.ca). Look on the left hand side navigation bar for Information for> Business> ... click then look for Information For> E-commerce.

While there, make sure you take time to read / click on GST/HST and e-commerce> GST/HST zero-rated supplies (exports).
Apr 15, 2011
 Paying Business Expense with Personal Credit Card
by: Chung

Hi Lake,

So I'm going to dedicate a personal credit card for the expenses of my incorporated business - however, this brings up the question of paying off the credit card.

Should I be paying off the credit card using my personal bank account or business bank account? and why?

Thanks
Apr 15, 2011
 Separating Business and Personal Expenses
by: Lake

Hi Chung,

In my article on Audit Trails, I talk about a GAAP concept called the Business Entity Concept. Here is an excerpt from that article:

"This principle provides that the accounting for a business should be kept separate from the personal affairs of its owner. This is not to be confused with the legal concept where, if you are a sole proprietor, you are your business."

As your business is incorporated, it has a separate legal identity from your own person. CRA requires you keep records for your business.

Most CCPCs that obtain any kind of third party financing require a personal guarantee from the shareholder/director, in effect removing the liability protection a corporate structure offers.

So if you are truly going to set aside a personal credit card for corporate business ... not charging any personal expenses to it, I think for bookkeeping purposes, I would treat it as a corporate card.

I would setup a separate liability account for it called "Owed to Owner" to distinguish it from your true shareholder loans. If you are using QuickBooks, I would use a "credit card" type account to facilitate ease in reconciling.

I would have the company make all payments to this card. I would not pay the credit card debt from your personal account.

So as long as you keep all your ducks in a row, you should be fine ... but that is just my opinion as a bookkeeper. You would be well served to have this conversation with your accountant who would be familiar and aware of all of your circumstances.





P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.
Apr 15, 2011
 Getting Opinions From Different People
by: Chung

Hi Lake,

I decided to ask my account manager to apply for a biz credit card so just waiting for it to be approved :-)

I've asked an accountant previously to reading your article but I don't believe they understand my situation in terms of which expenses are expenses for Internet business.

After reading your article on the 5 different bookkeeping filing systems - I'm thinking #3 makes sense to me so thank you.

My last question is about deducting business expenses (as a sole proprietor) against my personal employment income for 2010.

In 2010, I had employment income and I was running a business the same time. The business did not make money and was not incorporated or registered with the registry of joint stocks.

Now, would the expenses from operating that business - eg. training, programs, online seminars - be tax deductible against my personal employment income?

I'm hearing Yes and No from bookkeepers and accountants ...

What is your opinion on this?
Apr 16, 2011
 Information Is Not Advice
by: Lake

Chung,

Your accountant is the best person to give you advice on this. The information on this site is for informational purposes only and should not be a substitute for advice from an accountant.

Much of the information should actually be used as talking points when holding a conversation with your accountant ... after all it is sometimes hard to have a convervation when you don't know what to ask.

That said, you need to go back and follow all the links I have given you. You also might want to brush up on these concepts:

The Business Journal

HST and eBay and eBay Income Earned Online is Taxable

CRA Intrepretation Bulletin IT-334R2 Income Tax Act Miscellaneous Receipts has this to say about hobbies:

"In order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit. Where such an expectation does not exist (as is the case with most hobbies), neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h). On the other hand, if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit; if so, the net income may be taxable as income from a business. The current version of IT-504, Visual Artists and Writers, discusses the concept of "a reasonable expectation of profit" in greater detail. Where a hobby consists of collecting personal-use property or listed personal property, dispositions should be accounted for as described in the current version of IT-332, Personal-Use Property."

I'll leave you with this thought from my chat on CRA Tax Audits:

"Remember in the Canadian tax system, you are guilty until proven innocent. Your best defense is proving due diligence through accurate and honest bookkeeping."

In my chat on Employers' Advisers I word it this way:

"While ignorance of the law is not a defense, due diligence is. This requires everything to be in writing ... otherwise your due diligence does not exist."

I hope the information here gives you food for thought and assits you in formulating the decisions you need to make about your bookkeeping and tax prepartion ... and whether you need to consult an accountant or tax specialist regarding your situation.
Apr 17, 2011
 Thank You
by: Chung

Hi Lake,

'We don't know what we don't know' and since accountants charge an arm and a leg, this site really helps get to the point of things.

Very glad I came across this site.

Thanks for all your feedback.

Speak soon,
Chung
Apr 17, 2011
 Talking Points
by: Lake

Hi Chung,

You are right. That is one of the reason I started this site ... so small business owners could have talking points to discuss with their accountant.

It's tough to ask the right questions when "you don't know what you don't know".

I wish you much success in your business.

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