Do I need a business bank account?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
22nd February 2021
5 minute read
There are many things to think about when operating a business day-to-day, not least how you’re going to organise the company finances. That’s where a business account comes in handy.
It can help you keep your company money separate from any personal accounts, meaning that you can trace everything that comes into the business, and goes out. In that respect, a business account is incredibly useful, but that still doesn’t mean it is mandatory.
If you have a much smaller start-up business or you’re a sole trader, you might not feel that having a business account is necessary when all the profits will end up in your personal account anyway. So, the question remains: do I need a business account?
To clear up this conundrum, we’ve put together a short guide on the reasons for getting a business account and whether or not it is applicable for your business.
How does a business account work?
Getting a business account is just like having a current account, but with benefits and features that appeal much more to business owners. These include an overdraft, online banking, cashback and a dedicated business manager in-branch you can speak to for support and advice.
The other thing to consider with a business account is the fact that you will have to pay account maintenance fees, as well as other fees depending on the terms of the account, on a monthly basis. This can put a lot of sole traders or small businesses off, especially early on in their business venture, as it can cut into their profits and make it more difficult to get the business off the ground.
While new business owners might choose to go for a start-up bank account, there are also no credit check business accounts that will appeal to fledgling owners who may have had problems in the past when paying off debts.
Is it a legal requirement to have a business account?
In most cases, no. The only situation where it is a legal matter is if you run a limited company. In this situation you are required to have a dedicated business account, since you need to legally separate your personal and business interests.
For all other business types, you will find that whilst it isn’t a legal requirement, it is still a good idea, if only to have an organised business account you can track easily.
Do I need a business account?
Before you start applying for a business account, try and ask yourself the following questions:
What type of business do you have?
For the most part, whatever business type you have, having a dedicated account to organise your finances is a good thing:
- Sole Trader
- Start-up or Small Business
- Limited company
For most business types, a business account would be a useful asset, as you are creating an area to keep company funds secure and separate from any other finances you may possess.
It would only be in the case of a freelancer or consultant where a personal account would still suffice, as this might fulfil a certain percentage of your income along with another job that will pay you as an individual.
Do you run your business full-time?
This is possibly the most important factor when deciding whether a business account is completely necessary for your requirements.
- Full-time - If you have set up a small business that takes up all of your time, chances are you will draw your income completely from that entity and will therefore need a business account to keep yourself organised.
- Part-time - On the other hand, if you only run a business venture on the side of a regular full-time or part-time job elsewhere, this might only represent a smaller proportion of your full income. This means that if you only earn a small amount as a small business or a freelancer, business accounts might be a bit redundant.
As a rule, if your business makes up less than 50% of your total earnings, you can still get away with using a personal account. If it grows to the point where you want to quit your old job and go full-time with your business, that is the time to apply for a business account.
How large is your business?
You might be reluctant to get a business account if you feel like it is not large enough, but in the end, it makes practical sense to do so once it’s grown to a certain size.
The size of your business will normally dictate how many separate expenses you need to cover, how many employees you need to pay and how much you need to invest in infrastructure, amongst many other things.
Generally, if your business grows bigger than just you, in that you need to employ other people and pay for premises, it’s time to get a business account. If you are still a one-man band and do not require an office or other physical premises to operate out of, then you can still get away with a personal account until it grows any bigger.
Sensible reasons to get a business account
Aside from the current state of your business and how big or small it is, there are also a number of sensible reasons for getting a business account that might apply to you:
- Keep organised – especially if you are a sole trader, it can be difficult to juggle so many tasks, which is why having organised account is all the more important. This is important to track old payments and keep tabs on how much is coming in and going out of the business
- Get paid – this is important on two counts. You need a place for your customers or clients to pay the business, and a place where you can also draw your income from. Any complications in this can leave you out of pocket and struggling to keep your business afloat
- Reclaim VAT – you can usually reclaim VAT on anything from travel expenses to utility bills at your place of work. Having a business account makes it easier to pinpoint and collate these expenses
- Pay tax – before the end of the tax year business owners will have to make sure they have paid the necessary tax they owe to HMRC. To make sure you are paying the correct amount of tax and aren’t underpaying or overpaying, a business account can help you track the amount of income you’ve taken every month
- Highlight issues – as a business owner you want to be able to keep track of whether your business is growing year-on-year, or suffering in decline. Having a business account will ensure you have a clear picture of your finances at all times, so you can highlight issues and make incremental changes to improve how your business is running
- Get support – one of the most beneficial features when joining a new bank or building society, especially for small businesses, start-ups or sole traders, is to have the support of a dedicated business manager to help you organise your company accounts efficiently. Get your questions answered and avoid any financial pitfalls as your business grows
It doesn’t matter what industry you happen to work in, whether it’s manufacturing, retail, construction, IT or otherwise, organising your money is vital. This is why for the most part, a business account is the most sensible way of organising your company finances.
Compare business accounts
Making the decision to start your own business is not one to be taken lightly, though with the right business plan and desire to succeed it could be one of the best decisions you’ve ever made. The last thing you need is for you to undermine your progress and have a disorganised set of accounts to deal with come the end of the financial year.
Have a look though our range of business bank accounts by using the link below.