So you have started your dream business and transactions are starting to roll into your personal account, at this point you have a choice to make.
Do you keep using your personal account, mixing personal and business transactions, or start fresh with a brand new business bank account?
Legal obligations for business bank accounts differ between business structures. Though using a business account from day one is a good idea for most businesses, even sole traders businesses with very low turnovers.
Business Accounts & Personal Accounts Differences Explained
Business accounts and business accounts both work the same way in regards to transactions, cheques, debit and credit cards, overdrafts and loans.
The only substantial difference between the two is that business accounts usually charge fees for account opening and a monthly charge. Many banks offer a Fee-free period for new account holders so it pays you took shop around when opening a business bank account.
At the end of the day using a business account for your business no matter how small will be better than using your personal account. It makes differentiating your personal and business transactions a non-issue come tax season.
Can You Use Your Personal Bank Account For Business?
Sole traders can use their personal bank accounts for their business. There are no legal requirements for them to use a dedicated business bank account. They can use an existing bank account, or open a new personal account for their business.
Be sure to check your bank's terms and conditions as some banks prohibit business transactions for personal accounts.
A Limited Company is required by law to have a business bank account. LTD companies should not under any circumstance be using a personal account for their business transactions.
Five Reasons Sole Traders Should Use A Business Account
As we touched on earlier, having a business account even if you are self-employed is still recommended. Here are five reasons to reinforce that point.
1. To Make Your Tax Return Easier
When tax season rolls around, you have to tell HMRC how much money your business has turned over. There are certain 'Allowable Expenses' that can be deducted from your profits to reduce your tax bill.
When you use your bank account for personal and business transactions it can be a nightmare to split the two. Making your year-end self-assessment an incredibly time-consuming task.
2. To Simplify Your Bookkeeping
Adding to #1 having a separate bank account for your business transactions makes it so much easier to keep an eye on your budgets and cash flow.
Separate accounts give you more power over your business spending as you can truly see how profitable your enterprise is at a glance, without having to filter out all of your personal spending.
All of your record-keeping activities are streamlined when you don't have to worry about personal transactions clogging up your bookkeeping system.
3. To Look Professional
Having a business bank account allows your transactions to appear on brand and lets your customers see your business name instead of your personal name.
Imagine buying a pair of shoes from Nike and seeing 'Joe Bloggs - £80' on your bank statement.
Some people also feel unsure about paying into personal bank accounts so giving them a business bank will put their mind to rest that they are receiving a proper service or product.
4. To Build Your Credit Score
Having a business account with a credit card attached to it will allow you to build up a credit history so you can have a wider range of access to business loans and other credit options.
5. To Avoid Bank Troubles
As we mentioned earlier some banks have a clause in their terms and conditions prohibiting using your personal bank account for business purposes.
If this is the case with your bank and you are discovered using your account for business purposes you will inevitably be faced with demands to close the account and open a business account.