Do not mix business and personal expenses. You should keep them as separate as possible to avoid issues if you ever get audited. One way to easily separate your business from personal transactions is to open a business bank account.
You can open a business bank account for any business type.
The common business types are:
- Sole Proprietorship – an unincorporated business owned by an individual
- Partnership – an unincorporated business that is created between two or more people
- Corporation – a legal entity that is separate from its shareholders
- Not for Profit Associations/Organizations – associations, clubs, or societies that are not charities and are organized and operated exclusively for purposes other than for profit
What you need to open a business bank account
This may vary from one bank to the other, so you need to check with your bank what they require before you go in. In most cases, you will need the following, depending on the business type:
- Sole Proprietorship – Trade name registration or copy of your Master Business License (not required if you are operating strictly in your own name); government issued personal identification of the owner
- Partnership – Registered Declaration of Partnership or partnership agreement (where provincial law does not require registration); trade name registration or Master Business License; government issued personal identification of the owners and authorized signatories
- Corporation – Articles of Incorporation; trade name registration; government issued personal identification of the owners and for the authorized signatories
- Not for Profit Associations/Organizations – Articles of Association/Incorporation; if no formal registration exists, you will need a document providing evidence that the individuals opening the bank account have authority to do so on behalf of the association; government issued identification for the authorized signatories
- You should deposit all cheques and cash received from your business into your business account.
- Try to pay business expenses by cheque/EFT/or direct debit. If you have a business credit card, you can also use it to pay for business expenses.
- Avoid taking out cash and paying bills by cash. It is very difficult to account for cash.
- Any unaccounted cash withdrawals are usually treated as owner’s withdrawals for personal use, so you end up being taxed on them on your personal income.
What happens if you pay for business expenses using personal funds?
- If you end up paying for business expenses using your personal account or personal funds, make sure to have a proper system to reimburse yourself.
- Prepare an expense reimbursement form that will list the business expenses you paid for personally, attach the receipts and invoices, and write yourself a cheque from the business (or do a direct funds transfer).
- Make sure to enter the expenses and the cheque/bank transfer into your business’ books. The expense reimbursement form should be retained with the business.