According to statistics almost 60% of the current UK business population consist of sole traders, who are spearheading the UK business growth. During the past year more than 200,000 new sole traders started doing business on their own, this clearly shows that many people who were previously employed as workers decided to venture into business on their own as a small business or a sole trader. To ensure their future success it is of vital importance that they start their business off on the right footing and that includes the choice of a bank account. In this article, we will look at the type of bank account that any small business owner or self-employed person is obliged to open.
The Mandatory Legal Requirements
One of the first things to understand is that the business structure you choose to operate your business under will be the determining factor when deciding what type of bank account you must use. A limited company has a mandatory requirement that a separate business bank account must be used. There is legally no obligation on any sole trader to have a separate business account and an existing personal bank account can be used for both personal and business purposes. The option also exists to open a second personal bank account which can then be used solely for business purposes.
Personal vs Business Account: How to Choose
One of the essential elements that must be in order before you start operating your business is to ensure that all the banking facilities are in order. We have already indicated that there is no legal obligation for a sole trader to have a separate bank account because a sole trader’s personal and business affairs are deemed as one entity for tax purposes. The decision now rests with the sole trader to either set up a separate business bank account or use an existing personal account. In this paragraph, we will look at some reasons why it might be a good idea to set up a separate business account. The following reasons can help you to choose the most suitable account.
Separation of records
Having a dedicated account for your business activities helps to keep separate records for your personal and business expenses. This can be very helpful when you need to provide accurate information on your tax return concerning the allowable expenses when you calculate your taxable profit. If you need to employ a bookkeeper to assist you with your financial statements or tax return, it is always a great benefit to be able to provide accurate records of your business.
Terms and Conditions of Your Bank
Many banks stipulate in their terms and conditions, that a personal account cannot be used for any business purposes. This has a lot to do with their cost structures and it is wise to establish beforehand the position of your bank to avoid any inconveniences or unpleasant issues. The flow of money, the number of both cash and cheques deposits into the account and the amounts being paid out in cash or by cheque are all indicators to banks that a certain account cannot be viewed as a personal account anymore and they will investigate it. The bank can threaten to close your account or force you to open a separate business account in particular if the number of transactions on the account indicates that the account usage is no longer purely personal.
Accurate Financial Representation of the Business
Many small business owners and sole traders will struggle to have a clear picture, of their business income and expenditures if they don’t open a separate business account. With only business-related transactions going through the account, there will be an accurate picture of the business. Cash flow is the lifeblood of any business, having separate accounts and records allow well-informed business decisions to be taken that will be beneficial to the business cash flow in the long run.
Plan for Future Growth
The aim with any business must be to grow going forward and it is wise to plan for the future by starting with a separate business account, which can be in the name of the sole trader trading as the business. This helps to give a more professional image to the business when clients make payments or when suppliers are being paid. It makes it also easier for the bank when your future financing needs might change to assess your business profile and record.
What do you need to open a bank account for a sole trader?
Some banks might need more information or documents but the following two documents would be the minimum information required from you as a sole trader, one to prove your identity and the other one to serve as proof of your address. These documents must be valid and original. The bank will also need information on your business and some personal information to ensure that the business account you select will serve you best.