Whether you’re legally obliged to have a business bank account depends on your business structure, but having a business bank account can be a good idea for most businesses, even freelancers and one-man-bands.
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When you’re considering whether to open a dedicated business account, the first thing is to understand if you’re legally obliged to do so. This depends on whether you’re operating as a sole trader or setting up a limited company.
If you’re not sure which business structure to pick, check out our article on the difference between a sole trader and a limited company.
I’m a sole trader: do I need a business bank account?
As a sole trader, you are not legally required to have a business bank account. Legally, you can use your personal bank account for both business and non business transactions or you can set up a second personal bank account to use for your business. However, there are several reasons that setting up a business account may still be a good idea. These are some of them.
1. Your bank’s terms and conditions
It’s likely that somewhere in the smallprint of your personal bank account documents it says that your account should be for personal use only. If your bank realises that you’re using the account for your business - particularly if there’s a lot of money passing through or you’re handling a lot of cash and cheques - they may threaten to close your account and tell you to open a business account.
2. To keep things clear for HMRC
When you complete your tax return, you need to tell HMRC how much money your business has made. You can subtract certain allowable expenses (travel costs and office costs, for example) to calculate your taxable profit. If your personal costs are mixed up with your business costs because you use one bank account for both, it can be difficult to make these calculations accurately. Having a dedicated business bank account makes it much simpler to complete your tax return.
3. To look professional
Having a dedicated bank account can make your business appear more professional, as clients can make payments to an account held in your business name rather than your own name. Some clients don’t like making payments into non business accounts.
I have a limited company: do I need a business bank account?
While it’s advisable but not compulsory to have a business bank account if you’re a sole trader, if you’ve set up a limited company it’s mandatory to have a dedicated bank account for your business, as your business is legally a separate entity.
Business bank account vs. personal bank account
Like a personal bank account, a business bank account can offer cash and cheque handling, a debit card, and an overdraft facility. As with your personal account, you’ll be able to set up direct debits and standing orders. Having a business account also paves the way for your business to borrow money, get a business credit card, and take card payments from customers.
The main difference between a personal and business bank account is that you’ll usually pay fees for a business account. Most business bank accounts charge a monthly fee (starting at around £5 - £8) and then additional fees for certain transactions like depositing cheques. However, many banks offer an initial fee-free period of one to two years when you first open the account.
Check out our article on the best UK business bank accounts for 2016 for a comparison of accounts offered by some of the major banks, including information about the fee-free periods.
When do I need a business bank account?
If you don’t yet have a business bank account, you may need to set one up as your business grows. For example:
- If you’re planning to incorporate your business as a limited company.
- If your business is processing a lot of transactions.
- If your business income and expenses are getting complicated and you’re concerned about accurately completing your tax return.
- If you want to take out a business loan or get a business credit card.
- If you want to take card payments from your customers.
This article does not constitute legal or financial advice. Please speak to your bank or seek professional help if you’re not sure whether you need a business bank account.
What’s your experience of business banking? Tell us in the comments.