Bank Account queries

[rico]

Hey

I'm in my last year of uni and as a sideline i'm setting up a small business. Basically as a learning tool as i don't intend to take a salary or withdraw money for personal reasons. All money will go back into the company.

I want a new bank account to keep funds seperate from my normal bank account. However i'm getting conflicting advice as the best way to do this.

Business Bank Account

This sounds like the best to me. I won't be paying income tax on any of my earnings through the company as i won't be taking a salary. It will obviously look much more professional to clients too. My local bank will give me a year's free banking too to get started.

Second Personal Bank Account

None of the fees related to business bank accounts, but i'll have to declare ALL earnings for tax (bar the £4k tax free). I don't like paying tax...

Rico trading as ????

Similar to personal bank account i assume.


Sooo.... any advice? I'm a firm believer in learning by doing, so even if this doesn't make me any cash it will be a great learning experience for the big bad world post uni.

Thanks for any input

[davidd]

I guess the best advice is to have a quick chat with an accountant. I'm sure Eric will be along in a mo

D

[Eric Mc]

The nature of the bank account you are using has no bearing WHATSOEVER on whther you need to pay tax or not. If you are running a business - and that business is making a profit - you will be liable to Income Tax (and possibly National Insurance as well - Class 2 and Class 4). It doesn't matter whether the money is banked in a business account, a private account or not even banked at all.

With that out of the way, a little of the basics as to what is taxed when you run a business:

If you are running the business under your own name you are deemed to be a Sole Trader. Sole Traders pay tax based on the profit of the business, not what they draw personally from it. Therefore, if the business made £10,000 and you drew £6,000 to live off, you pay tax on the £10,000.

If you run the business as a limited company, THE COMPANY pays tax on its profit. Companies pay Corporation Tax as opposed to Income Tax.
If you draw money for yourself out of the company, you personally will be liable to Income Tax on that amount. How much tax depends on the amount you draw and whether you have paid yourself by means of a salary (i.e wages) or through a dividend. Companies can deduct salaries as business costs when arriving at their trading profit for Corporation Tax purposes. They cannot deduct dividends. Companies usually have to register for PAYE so that the PAYE and National Insurance on wages (including the director's wages) can be paid at the correct time.

Hope I haven't confused you too much.



>> Edited by Eric Mc on Wednesday 8th September 16:11

[rico]

Very interesting reading. Thanks.

I'm going to see an accountant once im up and running to confirm a few things.

So in your opinion... would it be better to set up a business account or just get a secondary personal account?

[insurance_jon]

Lloyds TSB give you 1 year free, 2nd year 66% discount and third year 33% discount if that helps, plus their charges are based on turnover so if you not making a lot you don't pay a lot. I hope that helps.

And by the way he is right, you pay tax on your profits no matter what account you put them in!

[rico]

insurance_jon said:

Lloyds TSB give you 1 year free, 2nd year 66% discount and third year 33% discount if that helps, plus their charges are based on turnover so if you not making a lot you don't pay a lot. I hope that helps.

I'm probably going with HSBC. The local branch have always been very helpful with personal accounts for me and my family. I'll check TSB though

insurance_jon said:

And by the way he is right, you pay tax on your profits no matter what account you put them in!

Brds

[Eric Mc]

Unless you are planning on running a reasonable sized business, I'd try and get by with a second personal bank account. There should be minimal charges (if any) and you might even pick up interest if you can keep the account in credit.

[rico]

What sort of turnover would constitute a 'reasonable size business'?

Also, not that i intend to do wrong, but that will leave my liable instead of Rico Ltd?

Quite enjoying the learning process though

[Eric Mc]

Regarding bank accounts, I would consider abusiness with a turnover (i.e. Sales) of over £20,000 to be "reasonab;e".

The question as to how much tax you would pay operating as a limited company compared to a simillar sized sole trader is one of the most common questions I get asked, and quite a complicated one to answer. A general rule of thumb is that you would pay less tax using a limited company and paying yourself through dividends rather than salary compared to a sole trader. However, there are tax and legal restrictions on what directors of companies can do regarding paying themselves and you can't always draw income out of a company just when you feel like. The admin costs of acompany are much higher as are the tax and legal compliance matters.

I would shie away from a limited company scenario until the business is well established and turning over at least £40,000 to £50,000.

[simpo two]

I think the first question you should be asking is not 'what bank account' but 'what trading format'. These are Limited Company, Partnership and Sole Trader. Sole Trader may not sound sexy but it's by far the simplest. From the accounting point of view the key thing is to keep 'business money' away from private money - IMHO all you need is a second current account. Boring I know, but simple is usually best.

This only falls down if you want the account to bear a trading name, in which case you have to do a bit more exploring.

[Eric Mc]

Using a "Trade Name" is no big deal. There are no real restrictions on trade names and they do not have to be registered (despite the fact that some scam merchants might try to persuade you otherwise). The only way a trade name might be blocked is if it caused offence to someone or it clashed with a pre-existing trade name and the person using the pre-existing trade name objected.

However, if you want to open a bank account using a "trade name", the bank would probably insist that you opened a bona fide business bank account.

As Simpo said, initially, keep things simple.

[rico]

Thank you ever so much for the advice. Having it all explained in simple terms makes it a lot easier to work through.

If we ever meet you can all have a beer on me

It seems the following is the way forward:

1) second current account for business money
2) set up a 'trading as 'blah'' so clients don't think they're writing cheques to me personally
3) register my company's name at companieshouse.

That sound about right?

Then see the accountant when i make my first million!

Thanks again...

[simpo two]

rico said:

Thank you ever so much for the advice. Having it all explained in simple terms makes it a lot easier to work through. If we ever meet you can all have a beer on me

Please post to...

rico said:

It seems the following is the way forward: 1) second current account for business money 2) set up a 'trading as 'blah'' so clients don't think they're writing cheques to me personally 3) register my company's name at companieshouse. That sound about right?

(1) is OK
(2) unlikely: a bog standard current account is unlikely to let you have an account in the name of 'Rico Enterprises' etc. Hence you wouldn't be able to pay in cheques made payable to 'Rico Enterprises' and when you pay your suppliers it won't say 'Rico Enterprises' either. (However I *do* have this facility, pay no bank charges and get a business chequebook with my trading name on it... mail if interested)
3) If you're a sole trader you won't have a Company so you won't need to register anything. Just notify Inland Revenue when you start trading. And consider VAT registration if required/beneficial (that's done by HM Customs & Excise not IR)

This is the easy bit

[Eric Mc]

Companies House is for Limited Companies only. You do not have to register with them unless you are setting up a Limited Company.