Why do banks require small businesses to open a business bank account instead of a cheaper personal one?
I understand the need to separate personal finances and the business finances, be it sole-proprietorship or incorporation. I also understand that in the former it’s optional, but in the latter it is required.
What I don’t get is why do I have to pick from the bank’s selection of “business accounts” (I am talking chequing and savings accounts). Most of the times, those business accounts are more expensive than personal ones, with no extra features that would benefit a small business or contractor-type incorporation.
Can’t I just open a separate personal account and use that for business? If not, why not?
I am interested to hear the answer for both, sole-proprietorship and incorporation.
The bank won’t let you because:
Differences in required account features — Business accounts have different features (many of them legal features) that are required by businesses. For instances:
Do you want to be able to deposit cheques that are written out to your business name? You need a business account for that.
Your business could be sold. Then it wouldn’t be your business, so it wouldn’t make sense to put the business account under your personal name. The bank account and the cash it holds is a business asset and should be owned by the business, so when the business is sold the account goes with it. This is especially the case for a corporation that has shareholders, and not a sole proprietorship.
For a business, you could also, in theory, assign other people as signing authorities on the business account (e.g. your corporate treasurer), and the individuals performing that role could change over time. Business accounts allow for this kind of use.
Market segmentation — The bank has consciously undertaken to segment their product offerings in order to maximize their profit. Market segmentation helps the bottom line. Even if there were zero legal reasons to have separate personal vs. business accounts, banks would still make it their policy to sell different account types according to use because they can make more money that way.
Consider an example in another industry: The plain-old telephone company also practices segmentation w.r.t. personal/business. Do you want a telephone line for a business and listed as such in the phone book? You need a business line. Do you want a phone line hooked up at a non-residential address? You need a business line. Here it’s clear it is less of a legal issue than with the bank account, and it doesn’t matter that the technical features of the phone line may be identical for the basic product offerings within each segment. The phone company has chosen to segment and price their product offerings this way.
TL;DR
Q. Why do companies choose to charge some kinds of customers more than others for essentially the same underlying service?
A. Because they can.
You could, but the bank won’t let you…
If you’re a sole proprietor – then you could probably open a personal account and just use it, and never tell them that is actually a business. However, depending on your volume of operations, they may switch you on their own to business account by the pattern of your transactions.
For corporations, you cannot use a personal account since the corporation is a separate legal entity that owns the funds. Also, you’re generally required to separate corporate and personal funds to keep the limited liability protection (which is why you have the corporation to begin with).
Generally, business accounts have much higher volumes and much more transactions than personal accounts, and it costs more for the banks to run them. In the US, some banks offer free, or very low-cost, business accounts for small businesses that don’t need too many transactions. I’m sure if you shop around, you’ll find those in Canada as well.