When you set up a business you must keep your financial records in order. And that means you may need to open a business bank account.
If you are a freelancer or a sole trader, you are not legally obliged to have a separate account. However it is considered good practice, especially as your business grows.
Limited companies are classed as separate entities to the people who own them (see how they differ here) and they are legally obliged to open a business account.
Sole traders and business bank accounts
Sole traders and freelancers can use a personal bank account for business. It isn’t a legal necessity to have a business bank account, but there are reasons why it might be helpful.
1. Check the small print
If you check the T&Cs (Terms & Conditions) of your personal bank account it could state that it’s for personal use only. When you are setting up your enterprise, chances are the amount of business transactions are fairly few and far between.
The problem may arise when you start getting busier as the bank may realise you are using the account for your business. If the bank discovers you are in breach of your terms and conditions, they might choose to refuse your custom or change the terms of use.
2. Make life simple
If you have one account, it will be difficult to trace your business transactions when they are mixed up with everyday spending, such as groceries. As well as making your own paperwork easier, having a business account will make your records easier to track. This not only helps you, it helps your accountant and HMRC. For example, it is easier for your accountant to trace ‘allowable expenses’ to calculate taxable profit. Mixing up business and personal accounts also makes it more difficult to calculate tax returns accurately.
3. Better for credit
As your enterprise grows, you may require new equipment, tools or stock. If you need a loan (whether from your bank or another lender) it may prove difficult to show the true financial health of your business if you use one account. It can also look unprofessional.
4. Look the pro
With a business bank account, you will look more professional. When clients come to make payments, they will feel like they are dealing with a business rather than an individual. Also, some clients can feel nervous paying into personal bank accounts.
Limited companies
If your business is a limited company you legally require a business bank account. A limited company is a separate entity to an individual, so payments must be made to and from the business, even if you are the only employee.
There are many banks and types of account, the best for you may vary from bank to bank. Do your own research before committing yourself. So make sure you know how much transactions will cost you before opening an account.
If you are starting a business or thinking about expanding and need advice, you may be able to access free support from our PEAT Project. Contact us today for information.
