Business Banking 101: Why Using a Personal Bank Account is a Disaster

Some small business owners downplay the importance of having a separate business bank account. They wrongly believe that having relatively modest business operations doesn't quite warrant keeping personal banking and business banking separate.

But doing this is like sitting on an armed bomb. It might work for some small businesses for some time. However, eventually, there will be problems. The risks of using a personal account for business transactions are simply too significant, and everyone needs to safeguard the company and their personal assets.

The only way to avoid financial catastrophe is to switch to a business account immediately. So, keep reading to learn why you should, too, and how you can do it.

Keeping business and personal accounts is the key to proper financial management

New entrepreneurs are cautious with their limited finances when trying to get their businesses off the ground. It can be quite tempting to dip into personal accounts for business purposes, and vice versa. This is a common mistake among some entrepreneurs. While this approach may seem convenient at first, it can quickly become a financial labyrinth with adverse consequences.

But by embracing the practice of maintaining dedicated business accounts, entrepreneurs can unlock a multitude of benefits that lead to more effective financial management and long-term business success.

For starters, a business banking account helps you separate your personal and business assets and limit your liability. So, if your business gets sued or goes bankrupt in the worst possible scenario, your personal savings and property will get some level of protection under Singapore's insolvency law.

You also get to enjoy special financial services on your business account, such as low-cost international fund transfers, advanced expense tracking, and payroll management. These benefits are specially geared to make business finances run smoothly and are not available on personal accounts.

But the above reasons are only the tip of the iceberg. There are several more reasons why a business account is an absolute necessity for entrepreneurs in Singapore.

Legal and liability concerns

The ramifications of using personal banking account for business transactions can be quite serious. Every business operating on Singaporean soil has to follow the letter of the law, and not opening a separate business account can open an ugly can of worms down the road.

Commingling of funds and potential legal implications

One of the main risks of using personal accounts for business is the commingling of funds. This means mixing your personal and business finances in the same account. This can create confusion and ambiguity about the source and usage of your money. There are two potentially major risks that can arise from the comingling of funds:

Violation of corporate veil

The law requires LLC (limited liability company) and Pte Ltd (private limited company) companies to maintain a clear distinction between personal and business accounts. This is called the "corporate veil" in business law speak.

The corporate veil protects you from being personally liable for your business's debts and obligations. However, if you use your personal account for business transactions, you may be seen as disregarding the corporate veil and acting as one entity with your business. This can expose you to personal liability if your business faces lawsuits, creditors, or tax authorities.

Breach of fiduciary duties

If you have business partners, Singaporean law expects you to act in their best interests. This is called a "fiduciary duty.” Using your personal account for business purposes can get you red-flagged for breaching your fiduciary duties. A disgruntled partner will have a field day accusing you of misappropriating funds, diverting profits, or engaging in conflicts of interest.

Difficulty in accurate tracking

Another major drawback of using personal banking for business is the difficulty in accurately tracking your business expenses, taxes and deduction. This makes it easier for inaccurate bookkeeping to occur and miss out on important receipts or invoice that you need to support your transaction.

Having a business banking account can help you maintain accurate records, enabling you to better manage your cash flow, budgeting, and forecasting activities better.

→ How to open a business account

Complications in income and expense segregation

Besides having difficulty in accurately tracking your business finance, merging your personal and business finance leave your income and expenses muddled. Finding a record will be like finding a needle in a haystack. This can result in inaccurate audit adjustment, findings, or recommendations.  You may even face legitimacy questions and validity. This is due to inaccurate audit which detrimentally impact your financial position and reputation.

In addition, compliance is another significant roadblock you can run into. You may erroneously table a business expense under personal overhead. Some of these may be subject to GST or other taxes. You will be seen as withholding tax and may have to face fines, sanctions, or legal action.

Lastly, payment-related disputes are another major concern. It can be hard to resolve these disputes amicably in the absence of clear and accurate records. If you lack the evidence or documentation to support your claims or defences, enforcing your rights or remedies will be challenging if the other party refuses to cooperate or comply.

Professionalism and credibility

Mixing personal and business finances can lead to a myriad of issues, particularly in terms of professionalism and credibility.

First impressions matter a lot in business. Presenting a professional image instils confidence and reassures stakeholders that your company is committed to excellence and operates with integrity. By having personal banking and business banking accounts, you send a clear message that you are a serious entrepreneur who values professionalism.

This clear separation between the two ensures that your financial commitments are solely tied to your business. It lets you present precise financial statements, balance sheets, and income statements that reflect your business's true financial position. You improve client perception of your business and also instil confidence in your investors. You show them your commitment to maintaining clear financial boundaries, which can positively influence client perceptions and enhance your brand's reputation.

Total Control on Financial Visibility and Tracking

Using a personal bank account for business transactions can quickly lead to complications and hinder your financial visibility. It will be difficult to gain a clear understanding of your business's financial health. Tracking income, expenses, and cash flow becomes challenging as personal expenses intertwine with business transactions. This leads to confusion and potential errors.

Establishing a dedicated business bank account offers several advantages that streamline financial management and promote organised records. Consider the following benefits:

Financial Transparency

With a dedicated business banking account, you can easily distinguish personal and business transactions, ensuring financial transparency. This clarity allows you to track your business's income and expenses accurately, enabling informed decision-making and comprehensive financial analysis.

Streamlined Bookkeeping and Reporting

Business banking simplifies bookkeeping and financial reporting. You can generate accurate financial statements, such as balance sheets and income statements, with ease. This organisation enhances your ability to provide stakeholders, including investors, lenders, and business partners, with reliable financial information, fostering trust and confidence.

Enhanced Cash Flow Management

Keeping personal and business accounts separate provides a clearer picture of your business's cash flow. You can monitor cash inflows and outflows more effectively, identify trends, and make informed decisions to optimise cash flow management. This increased visibility allows you to seize opportunities and proactively address financial challenges.

Income Tracking

A dedicated business account ensures that all business-related income is deposited into a single account. This simplifies income tracking, making it easier to calculate revenue, monitor sales trends, and analyse the financial performance of your business accurately.

Expense Management

With separate accounts, tracking and categorising business expenses become seamless. You can easily identify deductible business expenses, streamline budgeting, and simplify financial planning. This organised approach saves time and minimises the risk of overlooking critical expenses.

Cash Flow Monitoring

A dedicated business bank account facilitates proactive cash flow management. By separating personal and business finances, you can monitor cash inflows and outflows specific to your business. This visibility allows you to anticipate cash flow gaps, make timely payments, and leverage opportunities for growth.

Tax Advantages

Using a personal bank account for business transaction can lead to unnecessary clashes with the taxman.  As mentioned above, using your personal account for your business finance makes it more challenging to track and report income and expenses separately. Not only is It tedious and time-consuming, separating your business expenses from personal ones are also not foolproof. Identifying deductible business expenses amidst personal transactions can trigger audits and penalties and damage your business's reputation.

Maintaining a dedicated business bank account offers numerous benefits that simplify tax reporting and deductions. For example:

• Tracking and categorising business expenses become significantly easier.
• Your business income is clearly documented in a dedicated business bank account.
• This clarity simplifies income tracking and reporting, enabling accurate tax filings.
• A dedicated business bank account allows you to optimise your deductions, minimising your tax liability and maximising your financial resources.

In addition to tax-preparedness, many jurisdictions require businesses to maintain separate accounts for tax purposes. By adhering to these regulations and establishing a dedicated business bank account, you ensure compliance and avoid potential penalties or legal consequences.

→ Get in touch for more information

Making the switch to Business Account

If you're hunting for a simple and convenient way to manage your business finances, your search ends with Grof Business Account. It's a one-stop-shop for managing payments, transfers, and accounting, with features like $0 fee business account, expense tracking, and easy bill payments.

You can streamline your business processes and manage cash flows easily on your own, without hiring a whole team or visiting any premises. You can enjoy free onboarding with no monthly fees and no minimum balance required.

Sounds too good to be true? Well, it's not.

Grof Business Account is the ultimate solution for solopreneurs and small businesses who want to scale their businesses with Grof but not the workload. To learn more, visit here.

Ready to get started? Sign up now and transform the way you do business with Grof.

‍