When working with entrepreneurs and small business owners, we often hear the question “does my business really need a bank account?” The answer is yes. Here, we outline some of the main reasons that maintaining a separate bank account for your business’s finances is essential from a legal and accounting perspective.
The value of incorporating a company at all is that it shields your personal assets from certain liabilities the company might incur. This is sometimes referred to as a “corporate veil.” If a third party ever sues your company (say, a bank is trying to recover a loan or someone is hurt using your company’s products or services), and that third party wins the lawsuit, the company might owe that third party money. The third party might then use a court to collect that money from your company in myriad ways, including forcing you to (1) transfer existing cash to the third party or (2) sell the company’s assets in order to generate transferable cash. In the unfortunate circumstance that your company cannot possibly generate the amount of money you owe to the third party, your company could be forced to file for bankruptcy and dissolve.
Fortunately, as an owner of the company, the “corporate veil” prevents the third party from collecting any money from you personally. The third party can only go after money or other assets owned by the company itself. In most instances, your personal assets are protected by the “corporate veil.” So, even if your company is forced to file for bankruptcy and dissolve, whatever you personally own will be your own and not subject to the company’s debts.
Occasionally, courts will “pierce the corporate veil.” This can effectively remove the protections of your personal assets outlined above. Your personal assets, such as your house, your car, and your savings, become subject to possible collections for liabilities incurred by your company.
A common reason to “pierce the corporate veil” is that companies operate as if they are not independent entities from the people who own them. If you use your personal bank account to process both your personal money and your company’s money, if you make personal and company payments from a single bank account, and you regularly use money received from company activities to pay for your personal bills or interests, it is difficult to argue that you and your company are really separate entities. If you commingle funds in this way, courts see no value in giving you the special protections the “corporate veil” provides. If you didn’t place a veil between yourself and your company, why should a third party be prevented from collecting payments from any of your joint, commingled assets?
Business owners (not business name proprietors) are fortunately provided with a “corporate veil” to protect their personal assets from certain business risks unless there is a good reason to take that protection away.
In order to ensure courts let you keep this protection, it is especially important that you;
- Create and maintain a separate bank account for your company.
- Use your company’s bank account solely for business purposes.
- Use your personal bank account solely for personal purposes.
Only transfer money between your company and personal bank accounts if you have followed the appropriate corporate formalities for doing so. If you’re not sure what to do, ask your lawyer or accountant for help. It is always better to ask for help before mistakes occur! By doing so, you can rest easy at night knowing your personal assets are safe.
How to Open a Corporate Account for your Business
Opening a corporate bank account is relatively easy, and, with modern online banking, there are many options.
In order to open a corporate bank account, you will need to provide your bank with the following documents;
- A Copy of your Certificate of Incorporation
- A Copy of your Memorandum and Articles of Incorporation (for Limited Liability Companies) or Business Name Registration Form (for Business Names)
- Your FIRS Tax Identification Number (TIN).
- A Copy of your Government issued ID
- Passport Photograph
- Utility Bill (Proof of Address)
Be sure to check for any initial or ongoing minimum deposit requirements and monthly fees or charges. And ask your bank about any useful accounting features for your account, such as ways to automatically categorize deposits, payments, or expenses online.
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