The legal lowdown on when your personal bank account will and won’t do as a place to stash your contracting cash.
If you’re looking to run your IT contracting business as a limited company, you might be wondering whether you need a separate bank account.
You might also have questions. Is it illegal to use your personal account for your company finances? Are the rules different if you set up as a sole trader instead of a limited company – also known as a Personal Service Company?
Well, you’re not alone, writes Aiste Krevneviciute, an acting vice president at Tide. These are all common questions that new directors ask about limited company bank account rules.
Does a UK limited company need its own business bank account?
Yes. When you set up a limited company by registering with Companies House, you create a new legal entity (called a “legal person”) that is separate from you (a “natural person”).
As a director of your own limited company, you’re legally obliged to keep your personal finances separate from those of the business.
In practice, the only way to achieve this is by opening a separate bank account in your company’s name.
What if I’m the only director and shareholder of my limited company?
The same rule on having a separate bank account applies.
Even if you are the sole director and shareholder of a limited company, the company’s money does not belong to you — it belongs to the company.
The limited company can pay you a salary, expenses and benefits, and it can lend you money. The company can also pay you a dividend.
But the obligation to separate your personal and business finances remains.
Can a limited company have more than one bank account?
Yes, more than one bank account as a PSC is absolutely possible.
Put another way, there is no limit on the number of bank accounts your limited company can have.
You might choose to open a business savings account with your current account provider, for example, or have multiple business current accounts with different banks.
Can you use a personal bank account for business in the UK?
For sole traders, the answer is easy: yes, you can use a personal bank account to run your sole trader business.
When you operate as a sole trader, there is no legal or financial separation between you and the business. The business’s money belongs to you, and you can use your personal bank account if you want to.
However, it’s often recommended by business and tax experts that you keep your personal and business accounts separate.
Such a separation helps to simplify your accounting and tax filing while lending itself to clarity on your financial well-being personally compared to your business’s financial well-being.
Banks may require sole traders to not use a personal account
Additionally, be aware that many banks prohibit the use of personal accounts for business activity.
Your bank may close your account, or require you to open a business account if you breach its rules.
To avoid a nasty surprise, check the account’s terms and conditions before you get started.
Legal duties when banking as a limited company…
For limited company directors, the legal duty is to ensure the business has ‘separate finances from your personal ones.’
So in theory, if the account was solely for business usage, it could be a ‘personal’ account and not a ‘business’ account – i.e. the account type (in terms of what the banking provider categorises it as) shouldn’t matter.
Practical and HMRC considerations of business banking
In practice though, it’s unlikely that a bank would open a personal account under a business’s name.
HMRC also had a clear stance on this issue.
In a post on this issue, earlier this year, HMRC said: “You are required to open a business bank account to comply with the legal duties of running a limited company.”
What are the benefits of having a separate business bank account?
Even if you weren’t legally obliged to keep your personal and company finances separate, it would still make good business sense to do so!
Indeed, many sole traders choose to open a business bank account even though they’re not required to by law.
Here are the three main benefits of having a separate bank account for your business:
1) It presents a trustworthy and professional appearance
Clients and suppliers need to know your business is safe to work with.
Carrying out business transactions from your personal bank account can weaken your credibility or even just your appearance of credibility.
A business bank account gives a stronger sense of professionalism, commercial awareness, and trustworthiness.
2) It builds a business credit history and credit score
When you apply for business credit, lenders check your business’s credit score to see how likely it is to repay.
Without a bank account and transaction history in its own name, a limited company can struggle to build up a good credit score — which can affect its ability to borrow.
3) It simplifies bookkeeping, annual accounts and tax returns
As a limited company director, you have a legal duty to file company accounts and a corporation tax return each year.
Tracking your balance, cashflow, profit and loss — and avoiding errors in your filings — is much easier when you have a dedicated business bank account.
Business accounts of today do much more than just stash cash
Lots of company owners and sole traders often ask – ‘What’s the best business account?’
Well, we can only really talk about ourselves with confidence, not least because providers’ offerings tend to change.
At the time of writing, our business current account includes an array of built-in tools to help you run your enterprise — whether it’s incorporated or not. But who knows; maybe you’d prefer to do all your business’s invoicing, expensing, accounting, credit score tracking, loan applications, and savings, yourself, individually and manually!
If you open a Tide business account, ITContracting visitors can get up to £150 cashback. Find out more here.
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