Why bother with a business bank account when you can use your personal bank account for free. Right? Wrong. You are better off with a business bank account.
If your business is a Limited Company then it is a legal requirement to have a separate business bank account. It’s as simple as that. You need to open one.
Sole trader and partnership businesses do not legally need a separate business bank account, but here are 7 reasons why it is helpful:
1. A Business Bank Account Looks More Professional
Customers will be re-assured that you are not squirrelling their money away in a personal bank account, as it can give the impression you are trying to avoid taxes. Which you’re not. So make sure you look like you mean business.
2. It’s Simpler
You need to focus all your efforts on running your business. This means you haven’t got hours and hours to waste the year end digging through all your personal transactions to work out which ones were for the business. A separate business bank account just makes running your business much easier.
If you are ever unlucky enough to have an Inland Revenue inspection, HMRC will need to see your bank statements. If the bank account with your business transactions is a personal one, they have the right to start digging through all your personal transactions.
Worse than that, expenses you thought were for the business and deductible for tax may be re-categorised as personal expenses. A good example is bank charges if you go went overdrawn. Whose fault was that? The business who pays in money, or you personally when you made withdrawals which were not for the business? If HMRC considers that some of your expenses are personal and they can add them back for tax and your tax bill will be a lot bigger than you thought. You may be liable to pay penalties and interest too.
4. Control Over Your Cash Flow
Seriously, how can you really have full control over your business cash flow if all your personal transactions are muddled in with the business transactions? Do you honestly know who has paid and who owes you? Separate bank accounts give you a complete perspective on your cash flow and your business.
5. Is Your Business Viable?
Taking this one step further, you would not be the first person to keep your business transactions in your personal account because your business needs constant cash injections. There is a real danger you may be masking the reality that your business is not making money. Which means it is a hobby not a business. Separating business from personal transactions will help you evaluate whether your business is really viable.
6. Keep The Bank On Your Side
It is an understatement to say that most if not all banks take a dim view of personal accounts being used for business. If you check the small print you will probably find you are in breach of the bank’s terms and conditions. In the short term this may mean that they intervene and require you to open a business bank account anyway. And in the long term, small businesses have a habit of growing. Which means you might need finance down the line. So wouldn’t it be helpful to have the bank manager on your side?
7. You May Be Missing Out On A Deal
Many banks are offering free deals for new businesses. Shop around and you may discover that your business bank account doesn’t cost as much as you think.
By Claire Georghiades FCA, Co-Founder of Accounts Resource, reproduced with permission.