While freelance can be an amazing gig, it is also quite challenging at times. You have to balance managing your time, client relations, pursuing new clients, and collecting payments. It is often difficult to find any work. “There are plenty of hours in the day”, said no freelancer ever.
It’s hardly surprising that the idea of setting up a separate bank account just for the business can seem like a right royal pain, but it can actually make things easier in the long run.
In reality, this may be an obligation depending on how your company is set up.
We will explain in this article when having a separate bank account for business becomes a legal obligation and why many accountants advise it.
Is a limited company required to have a bank account separate from the main business?
Yes, a separate account will be required for a limited-company business. Your limited company is a totally separate legal entity, even if you’re the only owner and director, so keeping the finances separate is a requirement.
Starting businesses may find this distinction to be crucial when selecting a business structure. Because the company has its own legal and financial identity, any debts belong to the business, so there’s less risk to your own individual assets if things go wrong.
That’s why, as a limited company, it’s a legal requirement to set up a business bank account for your company which is independent of your own personal banking.
Is it possible to be a sole trader in your business?
A separate bank account for sole traders is not required, unlike limited businesses. A sole trader, on the other hand, is considered a legal entity separate from a limited company.
Your personal and professional financial affairs are therefore inextricable to tax law and taxes. Unfortunately, this also means you’re personally liable if the business hits any financial hurdles, putting your own money and personal assets at risk.
But although it’s not a legal requirement for sole traders to have a separate business bank account, there are plenty of good reasons for doing so anyway.
There are pros and cons to having your own bank account
It is generally best to keep your business accounts apart. It makes it easier to track and manage the finances, so your accounts are more likely to be accurate, and there’s less risk of any errors creeping in.
Are you starting to think? We’ll show you some benefits to opening a bank account for your company.
Bookkeeping can be made easier by having a separate bank account.
Maintaining your books on time is easy when you keep separate financial accounts. An independent bank account for business can be linked directly to your bookkeeping program without your personal financial details being dragged along.
Bookkeeping data will be automatically synchronized with bank transactions. This allows you to stay on top of your finances with less work.
A better bookkeeping system is key to running a profitable business. You’ll be able to keep an eye on the finances, follow up late payments, and stay more tax efficient. This makes it easy to identify business expenses you can offset against your taxes.
Simpler tax returns
When it comes to tax return time, whether you’re filing a Self Assessment as a sole trader or a Company Tax Return as a limited company, separate bank accounts are a blessing.
You won’t need to pick through every single transaction to decipher what was personal and what was business-related. You will get more accuracy in your tax returns and are therefore less likely to be penalized.
Credibility
You can use a bank account to pay your business bills. Your business will appear established to your suppliers and clients.
Acceptance of certain bank policies
Some banks insist that you have a separate business bank account, so it’s worthwhile getting one set up to eliminate any stumbling blocks for yourself further down the line.
Better budgeting boundaries
When you divide your personal and business finances, you’ll have a clearer picture of what’s what. Your personal finances should be kept separate from the business to protect your cash flow.
How to protect your credit score for business
For loans and investments, it is important to have a strong business credit score. If your personal credit score isn’t so great and your finances are combined, this won’t stand your business in great stead.
Transactions more flexible
Business bank accounts are frequently used to transfer money. Personal accounts have more restrictive restrictions and can be withdrawn or transferred. A business bank account can give you financial flexibility to run your business effectively.
Bank card physical separation
You can also have different bank cards to help you keep your professional and personal spending separate. If you have staff with bank card access, this is especially important.
Whilst setting up a separate bank account might seem like extra effort, it’s fair to say that the benefits far outweigh any inconvenience. You could choose to use one bank for each set of finances.
Some banks offer special access to interest rates or lending facilities not available to other customers, and you’ll be able access your accounts through the same banking app. In today’s scroll-savvy digital age, that could be particularly welcome.
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