There is a great deal to consider when setting up a new business. Questions of funding, budgets, and legal documents are just some of the things necessary to consider. One of the most critical things to keep in mind is how to manage your money.
One of the most common questions when starting a business is ‘do I need a business bank account?’.
For some, the answer may seem easy. They may be prompted to simply use their existing personal account. They’re only saving themselves the hassle of opening up another account. This would surely seem to be no issue, right?
Wrong.
There are many hidden issues that can run you aground by not opening a separate business bank account. There are, for example, different legal requirements for different types of businesses, and different terms and conditions for personal accounts that you could break.
There are apparent complexities to business banking one may not consider on the first glance. Despite this, there are also many independent benefits to opening a business-specific bank account to consider. This article will help you steer clear of the obstacles and reap these benefits.
What is the Difference Between a Business Bank Account and a Personal Account?
A personal bank account and a business bank account are very similar in essence. Both can have money paid in or withdrawn and cheques cashed, for example. The main difference is that business accounts, understandably, are specifically for businesses, charities, companies, or societies.
A business account is also more likely to offer a bigger array of services than would be offered on a personal account. Some examples of this would be things like a business credit card, taking card payments from customers and facilitating business loans.
According to UK company law, a limited company must have a separate business account, as it is a distinct legal entity. Therefore, a business must have its own bank account to comply.
To clarify, this separate account does not specifically need to be a business one, but it does need to be distinctly separate from your personal finance account. This is due to the fact that there is a legal requirement to keep your personal and business finances separate. These finances are not linked.
This is not the case if you are self-employed (a sole trader). You do not necessarily need separate bank accounts to operate legally. However, HMRC explain that you should record your business transactions separately to your personal transactions for taxation purposes.
Something to also consider is that certain bank accounts may have certain terms and conditions. For example, some personal accounts cannot be used for business reasons. Make sure you check this before you decide. This will avoid breaking the terms of service and potentially being penalised with the closure of your personal account.
Another key difference between personal and business accounts is cost. Personal bank accounts are usually free to open and to operate, unless you have a fee incurring overdraft. But it is likely that you’ll be charged a monthly fee for your business account. Some transactions can also incur fees, but you may be able to offset some of these charges against profits for tax purposes.
The Benefits of Having a Business Bank Account
It may seem easier to just use your personal account. However, there are many helpful benefits to owning a dedicated business bank account.
It helps separate work and life. It helps you distinctly see what belongs to you and what belongs to the business. It keeps your personal accounting private, as it can afford you privacy for business tax audits or investigation.
It can make you appear more professional. It means your customers are interacting with something representative of your business, rather than you personally.
It helps organisation and efficiency. Barclays cites a study by Intuit Quickbooks, stating that UK freelancers and sole traders spending 15 days a year sorting company expenses from their personal bank accounts. With a business bank account, there is no need to sift through all of your transactions. You can see all of your business transactions clearly and easily. This makes keeping track of business revenues, spending, and recording transactions easier.
It gives you access to lending and finance. It helps you build up a solid business credit history in order to get access to loans or finance. There are many banks or loan companies that require you to have a business bank account in order to take out any loans for your business. This is true for both small and large businesses alike, and something to keep in mind.
It makes paying taxes and tax audits easier. Because everything in the account belongs to your business, you know exactly what you have to calculate your taxes. By making sure you’re paying the right amount of tax, you can also file tax returns quicker. When you calculate the profit, tax rules allow for certain expenses to be deducted from your business income, and a business account helps to identify these expenses.
It makes tax audits quicker and easier and less likely to bring about penalties The tax audit will be quicker, easier and less likely to lead to penalties if you can provide accurate, up-to-date information when the inspector visits.
In Conclusion
Whenever you are handling different streams of income, it is highly beneficial and recommended to have a business bank account. It will serve to keep you organised, make you more efficient and save time in the long run to separate your finances.
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Here at Count, we can help you get set up with your own business bank account. Feel free to contact us here today!