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A good banking system plays a key role in the effective functioning of a Limited Company. Because a Limited Company is a separate legal entity, it needs to have a separate bank account. The business bank account should be different from the personal bank accounts of Directors. In this article of "Path of Education for New Contractors" we discuss the importance of a business bank account for a Limited Company.
All business transactions, which includes both income and expenditure, should be carried out through the business account. Some examples of transactions are given below.
Most new contractors have a tendency to open a business bank account with the same bank where they have a personal account. However, a business bank account is different, and your personal bank may or may not be the best choice for a business bank account. Let's look at some factors that can help in shortlisting a bank for a business account.
Example 1: NatWest offers a business current account for start-ups. The account provides free business banking for 24 months. The account also includes a business credit card with no annual fees on the card for the first 12 months. In addition, for the first year, you get an overdraft of £500 without paying any extra fees. For businesses with a turnover of less than £1 million, there are no transaction costs for the first two years. The current account includes online, telephone and mobile banking. Among extras, the account offers a 15% discount on business insurance. A Regus membership is provided with the account, which allows 15 free visits to any of Regus' business centres.
Most banks offer similar services, so shortlist banks based on the interest rate and the extras. However, you should opt for only those extras which are essential for your business. Some extras may unnecessarily add to your costs at a later stage. For example, some banks may offer a free accounting software for first few months, but after a few months, you may be required to pay for the accounting software. Others may provide you a dedicated banking specialist, but you may not need one.
For opening a business bank account, most banks ask for your key business documents such as your Certificate of Incorporation. Additionally, they will ask for one identification document and one document verifying your address.
Example 2: To continue with the NatWest example, when opening a business bank account you will need to provide one identification document, one address verification document and some additional documents. The identification document can either be a signed passport, national ID card, driving license, etc. Address verification proof can be a signed passport, council tax bill or utility bill, among others. If you are a Limited Company, you also need to provide the Certificate of Incorporation. If you are a new business, you should provide your business plan and the forecast for cash flow.
Be prepared to wait for a few weeks before your account is opened, as in the UK, money laundering regulations are pretty stringent. There are a lot of checks before the bank allows you to open an account. Common checks include background checks, credit history check, and verification of identity. Some banks may not allow you to open a business account if your personal credit history is weak.
If you are looking for bank accounts that provide high interest, you may wish to consider the services of Contractor Financials who can assist you with opening high-interest bearing accounts with leading banks.
Once you have opened a business bank account, you can make transactions using any of the options listed below.
Bank account statements play a very important role in record-keeping of a business. Your accountants will ask for bank account statements for preparation of accounts and filing of tax returns. Bank account statements are also essential if there are any HMRC investigations. Therefore, you should ensure you maintain a proper record of your bank account statements.
To complement the bank account statements, you should also make separate notes on different transactions to avoid any confusion. When it comes to expenses, you should know who you have given money to and for what purpose. A classic example of the need for additional notes is when you transfer money to your own account. The bank account will show all transactions as money transferred to you, but it will not the show whether the transaction is a salary or a dividend. In such a scenario, notes are useful to differentiate between various transactions.
As you can see, banking plays a very important role in managing a Limited Company. You should choose your bank account wisely based on proper research and as per your exact requirements. You should also ensure proper maintenance of bank records so that you don't face any difficulties in preparing of accounts and filing taxes.
You may also find the following contractor calculators useful for your salary and tax calculations.