Do you need a separate bank account for your business?

If you’re starting up, do you need a separate bank account for your new business?

The answer depends mainly upon the type of business structure you choose to work under.

Here we look at the banking options for limited companies, sole traders, and employees of umbrella companies.

Banking for limited companies

As a limited company director, you are a separate legal entity from your limited company. Your liability – as a director – should anything go wrong is limited, hence the term ‘limited liability company’.

Due to this legal separation, you must set up a separate bank account for your company.

All of your company’s business transactions should take place within a business account, and be kept distinct from any personal transactions.

Banking for sole traders

Unlike an incorporated business, if you are self employed (working as a sole trader, or within a partnership), your business income and personal finances are not legally separated.

As a result, there is no legal requirement for you to set up a separate bank account for your business.

However, in practice, it will always be beneficial to separate your business and personal income and expenditure.

If you set up a bank account for your business, it will always be easier to reconcile transactions, especially if – like many small business people – your bank account is linked to online accounting software. This is particulary true when it comes to submitting your annual self-assessment.

It also presents a professional image if payments are made to a business name, rather than your personal account.

It is worth noting that if you do decide to create a new account for your business, your bank’s terms and conditions may probit you from simply opening a second personal account.

A dedicated sole trader business account could be the best solution.

Banking for umbrella company employees

If you are a professional contractor, and sign up to an umbrella company, you become an employee. Unlike the self employed and limited company business structures, all of your business-related transactions are handled by the umbrella – a third party.

After the umbrella receives income generated by your client work, they will make deductions for tax, pension contributions, their margin, and other pre-agreed costs.

As the umbrella company handles all of the business transactions on your behalf, you only need to maintain your personal bank account to receive your net take home pay.

Opening a business bank account

The business banking marketplace has never been busier. Alongside the major high street names, there are also a number of popular alternative options out there, such as Tide and Cashplus.

There are plenty of genuinely free business bank accounts, although the ‘free’ period tends to be limited to 18 or 24 months for the more established names.

Take a look at our tips for choosing the best bank account for your business.

Last updated: 6th August, 2022

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