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Opening a business bank account

 

Everything you need to know for company formation

The task of handling customer invoices, payments for supplies, wage bills,  plus a host of other fiscal responsibilities is hardly the most glamorous aspect of being an entrepreneur. Whilst this is an inevitability when running a functional and profitable business, there are numerous methods of simplifying these crucial tasks. Especially for a small business owner, opening your own business bank account can be a big part of making financial management as straightforward as possible.

So how  exactly can a business benefit from a dedicated bank account? What does setting one up involve and what should you look for in an account provider? This guide aims to help you find out.

Does my business require its own bank account?

First things first: is a dedicated bank account an absolute necessity for your business? The answer really depends on what form your business takes — e.g whether you are operating as a sole trader, partnership or through your own limited company.  With that in mind, it’s worth taking a closer look at these different types of business to see how your structure can affect the banking arrangements you need to put in place:

Sole traders and partnerships

If you operate as a sole trader or under a partnership there is no distinction between you and your business for legal and tax purposes. Under these structures, your business is not seen as its own financial entity, and as such, there’s no rule which says you have to open a separate account for it.

That said, there could be practical difficulties involved in using your personal bank account for business purposes. For one thing, it’s worth checking the terms and conditions of your existing bank account. It’s typical for these to stipulate that the account is for personal use only; if a large volume of transactions starts to appear in your account records, your bank may require that you open a business account in any event.

Additionally, the company choosing the right name can certainly help to get your business noticed and  give the right impression to customers — it’s why many sole traders opt for a separate business name rather than their personal name. However, using a personal account can cause difficulties here: if cheques and other payments are made in the name of the business rather than to you personally, they cannot be cleared into your personal account.

So although the law does not require a sole trader or partnership to have a business account, for practical reasons, it makes good sense.

Companies

A limited company, for tax and legal purposes, is regarded as its own entity — it’s beholden to its own set of tax laws and obligations independent of your own. Consequently, there are set procedures for withdrawing profits and depositing money into a company legally, which you can find out more about in our guides to company finance.

On a practical level, all of this means that even if you are the sole director and shareholder of your own company, you cannot dip into company funds as and when you wish. As such, although there is no specific law which stipulates that a company must have its own bank account, setting one up is necessary on a practical level for two very important reasons.

Firstly, it helps you to avoid accidentally breaking the rules regarding company finances. If your personal and company finances are all mixed together in a single ‘pot’, it becomes very difficult indeed to keep track of who the money belongs to. If your personal funds happen to be running low but the company is in credit, you might inadvertently find yourself illegally borrowing from the company without having set up a formal company loan; this can result in financial penalties if picked up by HMRC.

Secondly, if your business is selected by the tax man for a routine audit, having a dedicated business account in place makes the process far easier. It’s much simpler for the tax assessor (and is less likely to raise alarm bells) if your bank statements relate solely to your business without the situation being muddied by personal transactions. For you, it generally means having to deal with fewer queries about individual statement entries.

As a separate point, the principle of ‘limited liability’ is one of the main reasons why many entrepreneurs opt for a company structure. Since a company is a separate entity, this principle allows for the liabilities (e.g debts) of the business to rest with the company, rather than its owner. As such, it can be a useful tool for drawing a clear line between ‘business’ and ‘personal’ finances.

However, if personal and company funds are held together in the same bank account, that distinction becomes blurred.  Should the business unexpectedly run into difficulty, the absence of a company bank account could make it harder for you to avoid being held personally liable for unsecured business debts.

So for sticking to the rules, for being able to show that everything is above board, and for maintaining that clear distinction between you and your business — setting up a dedicated bank account is vital for any company owner.

The wider benefits of setting up a business bank account

In addition to helping you keep your finances in check, a specialist account can benefit your business in other ways, too.

Setting up an account means you’re starting a business relationship with that bank. In other words, you are making your introduction as an up-and-coming business owner. In the early days, your needs might be simple and the volume of transactions relatively low; however, in future your business might benefit from extra help to maintain cash flow, such as extended overdraft facilities or a loan. The fact that the bank knows you — and has seen your business grow — can make it easier to access these facilities.

This relationship can also make it easier to access specialist advice. Banks tend to have dedicated business managers in house, including advisors who specialise in helping startups and small businesses. Your bank can help you in other areas too, such as putting you in contact with accountants and legal advisors as well as helping you to access accounts management and payroll software, as well as a wide variety of other support services and SaaS solutions.

On a practical level, one of the challenges of running a business involves keeping track of cash flow, seeing who has paid you and wo customers. As a sole trader, for instance, it means you don’t have to ask clients to make cheques payable to you personally even though you are trading under a different name. A business account can help you reassure customers of the legitimacy of your business, especially for a relatively unknown startup.hen, and making forecasts for future income and expenditure. A dedicated bank account can make this a lot easier. With online access, you can view your account details from anywhere and set up alerts to inform you when payments have arrived and if your balance has fallen below a certain level.

Keeping a business-only account means that this financial ‘snapshot’ of your business is as accurate as possible — without personal transactions distorting the picture. It can also speed up the process of preparing business accounts; you know that all items of income and expenditure can be found in one place, so listing them all becomes straightforward.

Your business account can also help you to give the right impression to customers. As a sole trader, for instance, it means you don’t have to ask clients to make cheques payable to you personally even though you are trading under a different name. A business account can help you reassure customers of the legitimacy of your business, especially for a relatively unknown startup.

What to look for in a business bank account

When it comes to personal accounts here in the UK, we’re used to ‘free’ banking. Business bank accounts work differently; after all, the volume of transactions for a small business tends to be higher than for an individual. With a business account, you are effectively being provided with a service to help keep your business on track; hence, there tends to be a charge for that service.

Consequently, you should expect to pay a small monthly fee for your business bank account along with fees for certain types of transactions. There is however good news on the charges front for small businesses in the form of free introductory offers. For instance, Barclays offers free business banking for the first 12 months after company formation, and this includes access to startup experts for advice on getting your business off the ground in the early days.

It’s worth looking carefully at the charging structure of various accounts to see which ones offer best value, depending on your preferred way of doing business. Let’s say you are running an ecommerce business, for instance. Here, virtually all the money you receive is likely to be through online payment. As such, it might make better sense to opt for a plan with a higher monthly account fee, but which carries no charge for electronic payments. By contrast, if you deal mostly in cash and cheques, a mixed payment plan might suit you better.

As a general rule, electronic payments attract lower charges than old-fashioned cheques and other forms of assisted payment (they are less complicated to process at the bank’s end). To help keep banking costs as low as possible, it’s definitely worth investing in ways to enable this such as portable card readers and online payment facilities on your website. It also makes life easier for your customers; after all, entering a card number is much less hassle than hunting for a cheque book.

Overall, online banking can make day-to-day admin much easier. If possible, it’s worth asking to see a sample online account to ensure it’s easy to use and you can make sense of it. Of course, not everything can be done online, and it’s often useful to be able to speak to an advisor — especially if something unexpected crops up in your business. As such, it’s worth paying particular attention to banks that have a local presence in your area to make sure you have access to to that face-to-face service should you need it.

Setting up an account: how to access a fantastic introductory deal

Applying for a business bank account is a straightforward process. In terms of personal details, banks generally request proof of identification and of your residential addresses for the last three years; you’ll also be asked to provide details of your wider financial arrangements such as mortgages and regular loan repayments.

You’ll need to provide information about your business, too. This generally includes details of your turnover, expenses, and investment you have put into your business since company formation. The bank will also require confirmation of your trading address and registered company address if you have gone through a limited company formation.

You may also be interested to know that The Formations Company has teamed up with Barclays to deliver a special offer designed to help up-and-coming companies. Open a business account with Barclays within 90 days of forming a company with us and you’ll benefit from £50 cashback in your new business bank account. Find out more about our exclusive deal here, and get exactly what you need to start your new account on the right track.

For more information on anything to do with company formations, all you need to do is head over to our Help Centre to discover an array of content tailored for you.