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Whether your business will be your full-time job, part-time hustle on the side of full-time employment or a start up planning on world domination, you’ll need to keep your finances organised.
One way to make this easier is to open a separate bank account for your business. But do you need a business bank account? It depends on how you’re operating your business.
In short, if you’re a sole trader, you don’t need a business account but you could benefit from having one. However, if you run a limited company, you must have a separate account for your business finances.
We explain the requirements for different business structures, the pros and cons of using a personal account for your business finances, and what to look for in a business account below.
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Why do I need a business bank account?
There are different reasons why you could consider opening a business bank account as a sole trader, and why you must have one as a limited company.
Sole traders and freelancers
If you are operating as a sole trader, it’s up to you whether you use a business account.
One big advantage of having a business account is that it keeps your personal transactions separate from your work payments. You might use a spreadsheet or accounting software to do your books but it’s much easier to see your business income and expenses when they are in a separate account. Otherwise, you’ll have to hunt for business transactions sprinkled in between your payments for household bills, grocery shopping, random coffees and more.
Another advantage of having a separate account is that you’ll appear more professional. This might not seem important right now, but if you later hire an accountant or if HM Revenue & Customs (HMRC) ever asks to inspect your accounts, you’ll be glad you have a separate business account.
What’s more, you may not be able to access financing options such as business loans without an account set up in your business’s name.
What are your options?
If you only expect to get a few payments a year, you may want to consider a free business bank account or one which charges per transaction rather than per month. Some providers even offer accounts designed for such limited use.
You can use a personal current account to manage your business finances as a sole trader. However, if you decide to do that, check the small print carefully ‒ the Ts&Cs for many personal accounts state that you can’t use them ‘for business purposes’.
» MORE: Guide to self-employed bank accounts
Limited companies
If you are operating as a limited company, even if you’re the only employee, your company should have a business account. This is because the company is legally separate from you and you must keep your company’s money separate from your personal money.
All your company income should go into the business account, and you can then pay your expenses and yourself (and your staff, if you have any) out of that account. Keeping company income and expenses separate from your personal money makes it easier to tally up your company’s accounts and fill out your tax return.
There is a bonus side effect to running a business account: when you manage your account well and make payments on time, you can build a good business credit score. This will come in handy in future if you need to take out a loan or get a credit card for your small business.
» MORE: Should I register as self-employed or set up a limited company?
Business partnerships or other organisations
If your organisation is set up as a limited liability partnership (LLP), it will need to set up a separate LLP account. As the business is a separate legal entity, each partner will need to keep their personal finances separate.
If you are part of a general business partnership, each partner is registered with HMRC to pay tax by filing a self-assessment tax return. The partnership must also be registered for self-assessment separately. This type of partnership does not need a specific business account as it hasn’t been incorporated and therefore isn’t legally separate from the partners. However, it is possible to set one up to keep the business finances in one place and help with money management.
Charities and community groups may not legally need a business bank account, though it may be worth having one to separate your personal finances from the organisation’s income.
» COMPARE: Joint business accounts
Can you use the same bank for personal and business accounts?
You can hold personal and business accounts with the same provider but there are pros and cons of doing this.
Here are some common reasons why people prefer using the same provider:
- Manage your money more easily
You can choose a bank where you’ll need only one login for online banking, or you’ll have only one branch to visit. - Get a discount
Your personal account provider might offer a discount or incentive to open a business account with them. - Pay yourself faster and fee-free
‘Internal transfers’ ‒ moving money between accounts with the same bank ‒ can be free and instantaneous.
But there are two big reasons why you might not want to have your personal and business accounts with the same provider:
- Get a better deal elsewhere
A different provider might offer a bigger incentive, lower fees, better services or some handy extras such as an invoicing tool, company expense cards or free foreign payments. - Protect more of your money with the FSCS
The Financial Services Compensation Scheme (FSCS) protects up to £85,000 of the money you hold in a bank if you’re eligible. If you’re a sole trader, the money in your business and personal accounts held at the same bank adds together to count towards the £85,000 FSCS limit ‒ you wouldn’t be able to make separate claims. But if your business is set up as a separate legal entity such as a limited company, then it’s likely that you can claim up to £85,000 on both accounts.
What do I need to open a business account?
What you need to do to open a business bank account will vary depending on the account provider.
Many business bank accounts have strict eligibility criteria. You might need to make an appointment at a branch, and you might be asked to show evidence of your turnover or trading history, such as your annual accounts or previous tax return.
In contrast, with some account providers you can apply online or on your mobile.
To open a business account with any provider, you’ll always need to show proof of your identity and give the name and UK-based address of your business.
» MORE: How to open a business bank account in the UK
How to choose the best business account
A good place to start when you’re looking for a business account is to decide what features and services you need. Then compare accounts which offer them.
When comparing business bank accounts, it is a good idea to keep in mind:
- any monthly costs for having an account
- costs per transaction
- the range of transactions and services available
- the ethics and values of the bank
- whether it has 24/7 customer service
- customer service reviews
- whether the account has FSCS protection
- if it allows access for multiple users
» ROUNDUP: Best business bank accounts
Dive even deeper
What is a Business Bank Account?
6 Benefits of a Business Bank Account
by Rhiannon Philps
by Peter Adams