Is it a legal requirement to have a business bank account? Despite many believing it is, it actually is not. There is no actual legal requirements on a specific bank account, though your accountant and financial advisors will usually say it is helpful. Whether you are operating as a sole trader or a limited company, having all of your overall financial transactions in one place is extremely sensible. Preparing a business annual set of accounts is a legal requirement for Companies House and a business bank account helps that process.
In this article, we will explain the pros and cons of having a business bank account and explore the legal requirements when it comes to how you manage your business’ finances.
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Can you use your personal account for your business?
Whether or not you can legally use your personal bank account for your business will depend on the structure of your business. Whilst there is no legal requirement for a business operating as a sole trader to have a separate business account, it is highly recommended to do so.
You’ll also need to check whether using a personal account for your business complies with your bank’s terms and conditions. If your bank discovers that you’ve been using your personal account for your business without authorisation, your account could be shut down.
Read on to discover everything you need to know about business bank accounts.
What is a business bank account?
Just like a personal current account, a business bank account allows you to pay in and withdraw money as and when you require and is used solely for your business transactions. But is it a legal requirement to have a business bank account? The simple answer is no, but it is usually a very sensible choice, and in many cases, accountants will almost insist upon it to support their role.
There are business accounts available that allow additional functionality such as facilitating card payments, creating your invoices and running your payroll. You may also be able to have a business overdraft and credit card from your business bank account.
Although many business bank accounts advertise themselves as being free, this is rarely the case. Most business accounts charge a monthly fee, although this may be waived for the first few months as a sign-up incentive.
What does the law say about business bank accounts?
First of all, let’s look at what the law says about business bank accounts. Is it a legal requirement to have a business bank account for your business in the UK?
Does a sole trader need a business bank account?
If you operate as a sole trader in the UK, there’s no legal requirement to have a separate business bank account. HMRC state that you should record your business transactions separately to your personal transactions, but this doesn’t mean that you need separate bank accounts to operate legally.
However, having a separate bank account for your business will make filing your tax return far quicker and easier, as you’ll be able to clearly see your business transactions. Although this doesn’t need to be a specific business account, you’ll need to check the terms and conditions attached to personal bank accounts as some may state that they cannot be used by businesses.
Does a freelancer need a business bank account?
Freelancers are typically registered as a sole trader with HMRC. As long as you are trading as a sole trader, there is no legal requirement to keep a separate bank account, although it can help you to keep your business and personal transactions separate and make it easier to complete your tax return.
If you decide to register as a limited company, you will be legally required to open a business bank account as your business will then be regarded as a separate legal entity. It’s worth considering this when deciding whether to operate as a sole trader or a limited company.
Does a limited company need a business bank account?
A limited company is legally required to have a separate business bank account. This is because a limited company is a separate legal entity with its own legal obligations and finances. Profits are retained by the company and may be paid to shareholders as dividends.
If you own a limited company that has been registered at Companies House, your business will need its own bank account. This is because your business is not linked to your personal finances so needs to remain completely separate.
How do business bank accounts work?
Business bank accounts are very similar to personal bank accounts. However, there are some fees that you need to be aware of.
Firstly, most business bank accounts charge a monthly account fee, simply for having the account open. Monthly fees typically range from £5 – £15. You’ll need to think about whether this fee is sustainable long-term for your business before signing up.
You may also be charged transaction fees for card transactions, paying in cash over the counter or cashing in cheques, so it’s important to read the terms and conditions carefully before choosing a business bank account.
Many banks will offer free business accounts for the first few months, meaning that there are no fees to pay. However, this usually only lasts for 6-12 months so make sure you understand the future fees before making the commitment.
Pros and cons of business bank accounts
Although business and personal current accounts have many similarities, there are a few differences that translate into either pros or cons.
When you’re trying to decide whether to open a business bank account, it’s important to weigh up these advantages and disadvantages. This will give you the information that you need to be sure that you’re making an informed decision that is right for your business.
Benefits of having a business bank account
The benefits of opening a separate business account for your business finances include:
Separation: A business bank account enables you to keep your business transactions completely separate to your personal finances. This can make it easier to see how much money you have both personally and in your business, as well as saving you valuable time when it comes to filing your tax return.
Build a credit rating: Opening a bank account in your company name can help to build the credit rating of your business. This can come in useful later down the line when it comes to applying for a business loan or taking out a credit card.
Professional appearance: A business account can give you a more professional appearance, with your business name appearing on cheques and your debit card. This can help to give customers more trust in your business.
Disadvantages of having a business bank account
The disadvantages of opening a separate business account include:
Fees: Most business accounts will incur a monthly fee. This fee usually sits between £5 and £15 per month, but fees do vary between banks. You may also be charged a transaction fee, depending on the account. Many banks attract businesses with the promise of 6-12 months fee-free, but the fees apply after this time, so be sure to check the terms and conditions before opening an account.
Separation: Although separation from your personal finances is an advantage, it can also be a disadvantage. Having a separate business account means that you’ve got another bank account to manage, meaning that you’ve got twice the number of statements, passwords and debit cards.
How to choose the right business bank account
Most high-street banks offer business bank accounts, along with many online-only banks, but how do you know which to choose The most important thing is to fully research the options available so that you can choose the right option for your business.
It can be tempting to look for the cheapest business bank account, or the business bank account with the lowest fees, but there are other factors that you will also need to take into consideration.
For example, think about how you’ll access the bank. Do you plan to regularly deposit cash in person” If so, you’ll want to choose a bank that has a branch located near to your home or business address.
You might also want to think about whether the bank has an app that can be accessed from your mobile phone. Some apps will allow you to deposit cheques on the go, whilst others may allow you to take card payments from customers.
It’s also important to read customer reviews to make sure the bank you choose is known for its great customer service. Customers are usually quick to leave a review if their experience isn’t up to scratch, so put this to good use by checking Google, Trustpilot and Facebook for reviews.
Weighing up all of these factors can help you to choose the business bank account that is best suited to your business’ needs.
What do you need to open a business bank account?
You might be wondering what you’ll need to be able to open a business bank account. If you are a sole trader, you’ll need photo ID such as a driving licence or a passport, as well as proof of your current address. This could be a utility bill or a bank statement.
If you want to open a business bank account as a limited company, there are a few more things that you’ll need. As a limited company, you’ll need to provide details of your company’s registration at Companies House, along with your VAT registration details.
It’s best to check with the bank you’re opening an account with so that you can make sure you’ve got the right documents ready to open your business account.
Should you open a business bank account?
For limited companies, you are required to open a business bank account to comply with the legal duties of running a limited company. However, for sole traders, the choice of whether to open a business account is completely personal.
Keeping your business and personal finances completely separate can help you to keep track of how much money is in your business and save you valuable time when it comes to filing your tax return. However, business bank accounts typically incur a monthly fee, increasing the costs of running your business.
Related questions
Can I use my personal bank account for my small business?
If you’re operating as a sole trader, you don’t legally need to have a separate business bank account. However, having a separate account can help to keep your business and personal finances separate, as well as making it easier to file your tax return at the end of the year. You’ll also need to check that you aren’t breaking the terms and conditions of your bank account by using it for your business, or you could run the risk of your account being shut down.
How do small business owners pay themselves?
If you’re a sole trader, the profit that your business earns is legally your own as you are the same legal entity. Sole traders typically pay themselves through an owner’s draw. This is simply transferring money from your business bank account to your personal bank account. You can choose how much to pay yourself – it’s one of the perks of being self-employed. However, you’ll also need to make sure that your business is financially stable as you’ll be personally responsible for any debts.
Should I leave money in my business bank account?
It’s always a good idea to have a small amount of money in your business account to cover future expenses. If you’re a sole trader, the money in your business account is legally your own so it’s worth considering whether to transfer any excess money into a savings account or whether to invest it. Remember that as a sole trader, you will be personally liable for any debts that your business occurs, so you’ll need to make sure that you leave enough money in your business account for any business expenses.
Summary – Is it a legal requirement to open a business bank account?
Whilst generally there is no legal requirement to open a business bank account, you often should do it anyway. Sole traders are under no legal obligation to open a business bank account, whereas limited companies must have a separate bank account.
Having a separate business bank account can help you to manage your personal and business finances more easily, seeing exactly how much money is going in and out of your business each month. It can also help to speed up the process of completing your tax return – something that every business owner wants!
If you do decide to open a business bank account, make sure that you weigh up your options and read the terms and conditions carefully. There’s nothing worse than jumping into a decision that you later regret.