How to open a business bank account

Truth is, business bank accounts, when used solely for business purposes, just make life easier. That goes double for a credit card! Let's walk through how to open a business bank account and why more than one is the way to go.

Current government regulations say that if you're operating your business as an individual or sole trader, then you're not required to have a business bank account. However, if you are operating as a company, partnership, or trust, then you're legally required to have a separate business bank account for tax purposes.

The way I look at it is that you're in business, so open a business account. 

Your business bank account enables you to track your income and expenses. You can check your cashflow at a glance and provide details to your finance professional. It's also an asset if you ever want to scale or sell your business. Presenting details from a dedicated business account looks professional and makes your financials easier to understand.

Your business must be registered and have an Australian Business Number (ABN) or Australian Company Number (ACN) to open a business bank account in Australia. You'll need the usual 100-point ID check documentation, as well as the certificate of registration of your company and details of your ABN/ACN.

Not one but three!

I always recommend opening not one but three separate business accounts: an operating account; a compliance account (for GST, PAYG and super); and a profit account.

Most banks now allow you to open “online only” accounts in addition to your main account. As the name suggests, these are accounts that you can only operate using online banking and cannot be accessed via ATMs. Use your online accounts to receive money from your main business account by way of online transfers.

This can assist with cash flow and business compliance.

The operating account

Account one is your everyday business account, or your operating account. Income from your point of sale (POS) system, e-commerce site or directly from your customers is deposited into this account. All of your expenses are paid from this account.

You will need to open your account in person at a bank branch. Ensure that your trading or registered business name is used when opening this account. If you are a sole trader the bank will use your name trading as [your business name], eg Nicole Milton trading as Sunshine Designs.

The compliance account

There's nothing more stressful than seeing your compliance obligation, eg GST to be paid, in black and white at the end of the month or quarter. When you're not prepared, the hit to your operating cash flow can be detrimental to your business – and your sanity. Planning for compliance is a game changer so make sure this second account in place from day one, ready for that rainy day.

Nickname this your “compliance” account. It's a reminder not to touch any money in it unless you're paying your compliance. 

If you’re GST registered

If you're GST registered, every time you receive income, ensure you transfer the correct percentage into account number two, your holding account. Because this account is for your all your compliance obligations, do the same step to cover PAYG and super.   

Routines like this are incredibly useful. Each time you run a payroll, for example, transfer your PAYG and super obligations to the compliance account. At the end of every week, run a GST report from your cloud-based accounting software. If you've decided to use a manual system – the trusty old spreadsheet, for example – use that to calculate the GST obligation for the week. Once you know your GST obligation for the week, transfer that as well. 

In short, your GST obligation is the full amount of GST earned for the week less the GST you've paid out to your suppliers. Of course, if you can't be bothered with the calculation, there are other ways to keep a healthy GST bank. Why not try one of these: 

• • Transfer the full amount of GST charged on an invoice as soon as you are paid; or
  • Transfer a set amount every week, regardless of what you earn. Just make sure the amount will make a dent in your compliance obligation.

If you choose the latter option, set up a weekly direct debit and be pleasantly surprised when compliance time rolls around.

If you’re not GST registered

Not everyone registers for GST. If that's you, then use the compliance account to put away a weekly “tax” amount. Again, you can calculate this amount or choose a nominal amount to transfer. Either way, set up a direct debit transfer. It's one less thing to think about at the end of the week. I promise, you will thank me at tax time. 

The profit account

The third bank account is your “profit” account. Having a profit account makes good business sense. It's like your private insurance; in this one, you're building a savings nest egg that you use if there's a downturn or when there's a genuine business emergency.

Discipline is required. I've observed many a business using their profits to scale too quickly or the owners simply start spending too much money. Having a profit account can save you from having to borrow money and might make the difference between survival or failure. 

Here are some ways to determine what you might transfer into this account.

• • Run a profit & loss (P&L) analysis at the end of every month and transfer the profit;
  • When a client pays your invoice, take 20 or 25% of the pre-GST total (so before you’ve added the GST) and transfer that amount;
  • Decide on a nominal weekly or monthly amount to transfer.

What if there is no profit? Well that's a whole other article, but if there's no genuine profit in the company, just make sure you are setting aside your compliance amounts weekly.

Why go to so much bother?

That's a fair question! Yes, the time you need to put into a start-up is huge, and if you don't have a dedicated finance team then managing one, let alone three bank accounts, may seem like too much trouble. Believe me, though, when you have your finances in order, particularly using this system, you'll be thankful you took the time to set it up. 

When used correctly, this system, can help reduce accidental spending, ensure your government obligations are paid in full and on time, and make you think twice about taking money out of the business that simply isn't there.