What you need to ensure before you actually start dealing with the incomings and outgoings of any business is to make arrangements for proper banking facilities so that your trading process is smooth and free of hassle.
The bigger question here is: do you need to have a separate business bank account for your business or can you continue using your own personal bank account?
Sole Trader or Self-Employed
If you are a sole trader then both your personal and business affairs will be treated as one entity for tax purposes. So, theoretically you can make use of your personal bank account for company transactions so long as your bank allows it. At times, when a director is in dire need of cash, they can borrow funds from his own company.
In actuality, most banks will be adamant that you open a separate account dedicated solely for business purposes, particularly if you process a large number of transactions every month. Needless to say, you will sometimes be required to pay a monthly fee in exchange for the privilege and it will also involve extensive credit checks.
On the other hand, having a separate account will help you distinguish between personal and business expenses and facilitate reconciliation of accounts when the time for the annual self-assessment return arrives. One of the main reasons why people choose to have a dedicated business account is to appear more professional. Making payments through cheques with a business name on it instead of a personal name reflects professionalism and leaves a good impression on the clients.
As a sole trader you won’t be legally bound to have a dedicated business bank account. Another option is for you to set up a second personal bank account to use for your business. However, sole traders are known to opt for a business bank account for reasons that are mentioned below:
The terms and conditions of banks
It is very probable that somewhere in the small print of personal bank account, it states that it has to be used strictly for business purposes. If a bank finds out that a person is using the account for business, especially if there are lots of transactions or if the person is dealing with lot of cash and cheques – they may pressure the person to close his/her account and open a new business account.
Keeping Records Clear For HMRC
When one completes the formalities for a tax return, HMRC needs to be informed regarding the money a business has made. Subtraction of certain allowable expenses such as travel and office costs can be done to arrive at the total taxable profit. If personal and business costs are mixed, it can become quite a task to calculate everything accurately. A dedicated business bank account will eliminate chances for confusion and simplifies the completion of tax return.
If you wish to know more about the accounts you need to set up as a sole trader or a small business owner, get in touch with us today and we will be happy to arrange a free consultation!
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