A business bank account work very much like a personal account. However a business account allows you to keep all your business transactions seperate to your personal money.
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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.
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 a number of plus points to having a business account.
Keeping things clear for HMRC purposes
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.
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.
It’s also worth checking your bank’s terms and conditions as It’s likely that somewhere in the small print 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.
If you still decide you don’t need to have a business bank account just yet, 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
Business bank account vs. Personal 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.
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 also 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) however, many banks offer an initial fee-free period of one to two years when you first open the account. As a general rule, the more transactions you make on the account, the higher the charges are likely to be.
Most if not all High Street Banks offer a business banking service so it’s advisable to shop around until you find one that meets your needs. A good starting point is by researching the options online. While you cannot open a business bank account online for the majority of the major banks, your initial application can be made on your selected bank’s website.
Opening up a Business Account
For businesses setting up a bank account in the UK, the process is relatively straightforward as long as you comply with the eligibility criteria. Make sure you have the following documents to hand when you open your account:
- Proof of ID. All named company directors will need this. You can use a passport, national ID card or photo driving license.
- Proof of address. This can be a utility bill, or recent bank statement.
Alternatively, use a council tax statement.
The following details of your company will also need to be given:
- Full business address (including postcode)
- Contact details
- Companies House registration number (for limited companies and partnerships)
- Estimated annual turnover
In some cases, you’ll need to prove your own personal financial situation, with documents to show you have a clean credit and banking history.
Most banks will require a meeting in person before granting you access to a business account. You will be required to provide the documents listed above, and also provide photographic identification and proof of address for all directors and any substantial shareholders.
Be aware that the bank will also need to meet face-to-face with at least one of your company representative’s in the UK to sign a bank mandate so the business bank account can be opened.
It can take anything from three weeks to three months for a bank account application in the UK to be approved and meetings to be arranged, so make sure you factor this time into your business planning process
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