Dealing with business finances can be quite an administrative upheaval. If you work for yourself, the line between business income and your own can become blurred. This is why it is very important to manage these affairs carefully. Being in control of your finances is liberating, but it is incumbent on you to abide by any legal obligations in respect of this. A failure to adhere to legal requirements can result in some negative consequences for you and your business. It is common for people to withdraw from a business bank account for personal use. However, this depends on whether you are a sole trader, or operating as a majority shareholder or director of a company you have registered. Put simply, it is possible, but only in certain contexts.
Sole trader
The laws regarding sole traders and the use of business income is different to that of companies. As a sole trader, you may take money out of the business bank account as ‘personal drawings’. However, you must remember that as a sole trader business structure, amounts taken from the business form part of your taxable income and must be declared. Whilst a separate business bank account is not a legal requirement, it is recommended so you can keep track of your business finances. Even if you have registered a business name different to your own, you may legally use an existing bank account in your personal name for your business.
Company
As companies exist as a separate legal entity, they must have a separate bank account for the business. The company will also be liable for bank fees, depending on the type of account it opens. Signatories are required for the bank account and must be over the age of 18. Accordingly, even if you are a director or majority shareholder of the company, you cannot withdraw money for personal use. The company pays a director’s wages or director’s fees, but ‘personal drawings’ are not allowed. Ultimately, company funds must be used for appropriate company purposes. The Australian Government Business website contains more information on these requirements.
Tax on business bank account for personal use
Withdrawing money from business accounts will impact your tax. Keeping records of all your transactions will help make tax time a whole lot easier. Some of the implications can be positive, and some negative. As mentioned, withdrawing money from your business bank account for personal use may constitute part of your personal income. In any event, the better you structure your business finances, the more prepared you will be at the end of financial year. If you are in the process of starting a business, it is worth reading up on the Australian Taxation Office’s business banking guidelines.
Whilst this is fairly straightforward, each business structure can be different. Accordingly, it is appropriate that you familiarise yourself with the laws applicable to your own unique situation. Setting up your business finances correctly from the outset is a valuable step to take. If you are unsure about how to structure this, it may be worthwhile consulting a business lawyer.
