Setting Up a Banking Account as a Self-Employed Person: Your Ultimate Guide
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| Photo by Antoni Shkraba production |
Understanding Self-Employment Banking
A crucial initial step in self-employment is a dedicated banking account for your business finances. Even if your business isn't officially registered with the CIPC, you should still treat it like a formal business entity. This means you would have another bank account in your personal name you'd use only for business income and expenses.
Personal vs. Business Accounts
If you're running your own business, you might be asking yourself, "Is it necessary for me to have a dedicated account for my business operations?" Yes you do. The moment you start making money on the side, or have an extra income, it's crucial that you open a separate bank account only for your business. Every sole trader or freelancer should at least have two bank accounts: one for business and one for personal.
It can be with different banks, or you can have both accounts with the same bank. Some banks do have accounts specifically tailored for sole traders. One of the requirements is that you must not have a registered business.
Just to remind you again, a sole trader is anyone who has a side hustle. Even if you earn a salary and make some extra money with a hobby, selling products or delivering a service in your spare time, you are a sole trader.
Legal Requirements
It's crucial to understand that different countries and regions have varying legal requirements when it comes to banking for self-employed individuals. In South Africa, for instance, while it's not always mandatory to have a separate business account, it's often recommended for tax purposes and financial clarity.
As an accountant, I can not stress enough how difficult it is to organise the finances of a self employed person who only has one bank account for business and personal expenses. It's messy, chaotic and very frustrating to try and figure out the transactions on bank statements, if you don't separate your funds.
Your Checklist for a Successful Business Bank Account Opening
Choose a Suitable Bank
Once you've decided to set up a dedicated account for your business, your first step is to choose a bank that caters to your needs. In South Africa, you've got several options at your fingertips. Banks like FNB, Standard Bank, Nedbank and Absa offer a range of business banking services tailored for self-employed individuals and small businesses. Take your time to compare their offerings, fees, and customer support before making your decision.
You want to be with a bank you feel comfortable with and that will guide your on your business journey. Look for the banks that offer training and support in the forms of workshops, seminars, funding. and tech benefits. We live in a world where so many things can be done online, and you want a bank where the systems are working most of the time. Realistically, there might be down times, but it mustn't be to an extent that it's affecting your income negatively.
Ask what payment options are available that that will make it easier to make and receive payments. Customers want different payment options that are convenient and easy, ask about the requirements to qualify for these services before you sign up. Explore the options your clients can use that will make it easier for them to pay you. Running a business is about getting paid on time, and the more flexible your payment options are, the easier it will be for money to flow into your account.
Gather Required Documents
Once you've selected your bank, it's time to get your paperwork in order. Typically, you'll need to provide:
- A valid form of identification (ID)
- Proof of address not older than three months
- The nature of your business
- Proof your business address, if you’re not operating one from home
- Your South African tax number
- Bank statements of the last three months, if you're opening an account with a different bank where you don't have a personal bank account
Remember, requirements may vary slightly from bank to bank, so it's always a good idea to check with your chosen institution for their specific list of required documents. Some banks, like Tymebank and Bank Zero allow you to open an account using only your cell phone. You're going to need a smart phone with a fairly good camera to take a selfie, that will be used to verify your identity with the Department of Home Affairs.
Always check with your bank about any extra requirements they might have to ensure a smooth account opening process.
Benefits of a Separate Bank Account for a Sole Proprietor
Financial Organisation
One of the biggest perks of having a separate bank account is the organisational bliss it brings to your financial life. No longer waste time sifting through personal finances to isolate business costs! With a separate account, you'll have a clear overview of your business income and expenses at all times. You'll also have a much better picture of the flow of money in your business.
The key is to treat your business as a formal one, even if it's not registered. Never view your side hustle as a by the way experiment where you don't have to track your money.
As accountants we know it's your money, and we're not trying to dictate how you spend it. We are trying to build systems that will make it easier to receive payments, track your money and pay less tax. We want to see you succeed and grow your business; the right accountant can propel your business to new heights. But it really depends on what you do with our advice and recommendations.
Tax Compliance For Sole Proprietors
When tax season rolls around (and trust me, it always comes faster than we expect), having a separate business account can be a real lifesaver. It makes it much easier to track your business income and expenses, simplifying the process of filing your tax returns and potentially saving you from headaches down the road.
What many sole proprietors don't understand, is how long it takes to prepare messy books BEFORE you can file your taxes. Some have not filed taxes for years, they have no accounting system and they've been mixing their finances. It will take time to sort out the mess they've created; the more time it takes, the more they'll pay. You're not just paying to see the numbers of your business; you're paying for the time it took to organise your finances.
There's also a very high chance that you'll pay more taxes, because there is no proof any business expenses. You pay less tax when you can subtract your business expenses from your gross income. So many sole traders throw away petrol slips and invoices from servicing their cars. Worse yet, instead of using their cards for these expenses, they withdraw the cash, which makes it even more difficult to track expenses, and it will be recorded as drawings.
Many sole proprietors, who work from home, also don't know that they can claim a portion of the electricity as an expense. But just like everything in business, it must meet certain requirements.
Becoming tax compliant is very expensive for any business if you started off with a poor foundation, whether it's a sole trader or a registered business. Always think like a boss and be mindful about how you spend your money. It could mean the difference between success and failure; profits and losses.
Legal Considerations
While using a personal account for business purposes isn't illegal in many places, including South Africa, it's important to consider the potential legal implications. Mixing personal and business finances can make it challenging to prove your business expenses in case of an audit. It's always a good idea to consult with a financial advisor or accountant to understand the best approach for your specific situation.
One of the disadvantages of having a bank account in your name might be the perception that you're not running a professional business. But if you deliver a good service, or sell a good product, there are very customers who actually care what type of bank account you have.
Best Practices for Self-Employed Banking
Record Keeping
It is crucial to keep detailed records. Make it a habit to record all your business transactions, including income and expenses. This practice will save you countless hours (and potential headaches) when it's time to file your taxes or review your business performance.
Regular Reconciliation
Set aside time each month to reconcile your bank statements with your financial records. This habit will help you catch any discrepancies early and ensure that your books are always up to date. Plus, it's a great way to keep a pulse on your business's financial health!
Separating Personal and Business Expenses
Keep your business transactions separate from your personal ones as much as possible. Consider using a dedicated credit card for business expenses or setting up a separate savings account for your business income. These small steps can go a long way in maintaining financial clarity.
Setting up a bank account as a self-employed person doesn't have to be a daunting task. The key is to stay organised and maintain clear financial records. Remember, what works for one self-employed individual might not work for another, so don't be afraid to experiment and find the system that best suits your needs.
As you embark on your self-employment journey, keep in mind that your banking setup is just one piece of the puzzle. Stay curious, keep learning, and don't hesitate to seek advice from financial professionals when needed. Here's to your success in the exciting world of self-employment!
Feeling stressed about your business finances? We can help. Reach out to us.
FAQs
- Q: Can I use my personal bank account for business transactions in South Africa?A: Yes, you can use your personal account for business transactions in South Africa. However, it's often recommended to have a separate business account for better organization and tax purposes.
- Q: How long does it take to open a business bank account in South Africa?A: The process can vary, but typically it takes 1-2 weeks to open a business bank account in South Africa, depending on the bank and how quickly you can provide all required documents.
- Q: Do I need to register my business before opening a business bank account?A: While it's not always mandatory, many banks prefer that you have a registered business before opening a business account. However, some banks offer accounts for sole proprietors without formal registration.
- Q: Can I have multiple business bank accounts?A: Yes, you can have multiple business bank accounts. Some self-employed individuals find it helpful to have separate accounts for different aspects of their business, such as one for income and another for expenses.
- Q: Are there any tax benefits to having a separate business account?A: While having a separate business account doesn't directly provide tax benefits, it can make it easier to track business income and expenses, potentially leading to more accurate tax reporting and deductions.
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