If you are running a business, having a separate bank account for your business is key to avoid mixing your finances.
You don't want to intermingle your business funds because it can cause problems later if you run into any trouble with the IRS. Since sole proprietors are their business, they often mix their personal and business bank account. But what's the difference between a business bank account vs personal bank account? Which one is the best option for you to use?
Below we'll look at the key differences between business bank accounts vs personal bank accounts to compare the benefits and help you choose the best one for your trade.
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First of all, what is a business bank account?
A business bank account is an account that is created specifically for business banking. It is used to manage the cash flow and profits of the company. As the owner of a small company, you may be looking to open a business bank account to keep your finances separate from your personal accounts.
Owners separate their personal accounts from their professional accounts which are used only for business purposes. All of your work-related transactions and expenses will be done on these accounts whereas your personal finances will be handled in your personal bank account.
When opening a business bank account, you'll typically be able to open a checking account and a savings account depending on your financial institution.
Business checking accounts and personal checking accounts are fairly similar. Both types of checking accounts are used for your normal banking transactions. Just like you would with a personal checking account, on a business checking account you can withdraw money, write checks, and make payments through a debit card or Automated Clearing House (ACH) payments.
The biggest difference is that your business checking account will be used for your transactions related to your work. This is key because it will keep all of your related expenses in one account that is easy for you to keep track of on a bank statement.
It will be easy to monitor your expenses and income since it will be completely separated from everything else.
Another important difference is the fees associated with the checking accounts.
Most personal checking accounts are free to open with a bank or credit union. Depending on several factors such as your daily minimum balance, direct deposits, and more, you can have your checking account fees waived.
A business bank account will typically have higher fees than your personal checking account. Also, the minimum requirements to have these maintenance fees waived will generally be a bit higher.
Similar to personal savings accounts, a business savings account will be used to help you set aside some money.
Both, a personal savings account and a business savings account, will help you store your money while also earning interest on it. This will help your money grow even more depending on how much money you have deposited and the interest rates offered by your bank.
Another similarity is that they can both be used as a source for overdraft protection. Sometimes accidents happen and you mismanage your finances. If you overspend on your company’s checking account, some money can be pulled from the savings account to cover the transaction. This will save you from getting hit with overdraft fees for spending more money than you have in your checking account.
Business checking accounts tend to have higher fees than a personal checking account.
The monthly fees will depend on the bank or credit union you open your account with. Also, there is the possibility of having these fees waived.
When opening a business bank account, you should check with your financial institution to explore possible ways to be free from those account charges.
Common ways to escape these fees include maintaining a daily minimum balance. If the checking account has a certain amount of money in it each day, then you can be excused from the maintenance fees.
You can also avoid the fees by spending a minimum amount of money on your business debit card. Having consistent transactions is another criteria that you can meet so that you don't have to pay the fee.
Another way that you can waive the fee is through direct deposits. If the checking account has a lot of direct deposits and a steady stream of cash flow coming in, then your business checking account can be eligible to not be charged the service fees.
Lastly, it is worth noting that some banks and credit unions will offer free accounts for small businesses. A small business checking account will usually be free, depending on the institution, however, the guidelines will usually be a bit stricter.
So, double-check with your bank or credit union on their guidelines for business checking accounts before opening your account.
Generally speaking, it is better to have a business bank account.. In fact, the Internal Revenue Service (IRS) recommends you open a bank account specifically for your organization.
This is because business bank accounts generally provide tax benefits along with other benefits that we'll cover below.
Depending on the structure and type of company that you are operating, you may be able to use a personal bank account as a business account.
If you are operating your organization as a sole proprietorship, then you can use your personal bank account as a business account. Technically, a sole proprietor doesn't need to open a business bank account. You are running your operations under your name. There is no difference between your personal finances and your business finances. The option to use this type of bank account is up to you, but not required by law.
If your company is organized as a corporation or a limited liability company (LLC), then you are not able to use your personal account as a business account. Per the government, an LLC requirement to open a business and personal bank account in order to separate the finances.
This is because of the way that a corporation and LLC are structured. A corporation and LLC are not eligible because you are operating your business as a different legal entity from yourself. Because the structures separate you entirely as a different entity, you must also create different business checking accounts that separate the transactions from your personal ones.
You can open a business bank account with the same bank as your personal account, however, it must be opened under the name of the company and those funds can only be used for business spending. You are not allowed to mix it with your personal transactions under this account.
So, if you are not required by law to open a business bank checking account, why should you consider opening one?
There are a lot of different benefits to having a business bank account versus a personal one.
The best way to separate business and personal taxes is with a business bank account. Having a separate business bank account is that you are able to organize and keep track of all of your finances. Since these checking accounts will be used only for business transactions, you will be able to clearly see all of the income and cash flow related to your company.
You won't have to sift through all of your transactions to figure out which transactions were related to your work and which were personal expenses. This makes it significantly easier for when it is tax season. You will be able to easily identify and deduct business expenses when you file your taxes to the IRS.
So, it is a good idea to open a separate checking account to consolidate all of your business banking activity from your personal expenses into one account.
Another great benefit that a business checking account provides is professionalism.
With your own checking account titled under the name of the company, you will add a level of professionalism to your company. People will feel more at ease about completing transactions and making payments to a legitimate company rather than an individual's name.
When writing your own checks or even receiving payments, the name of your small business will be what your customer sees.
Also, having a separate account for business will help you limit your liability. If you are a corporation or LLC, you are required to separate your personal and business checking accounts. However, if you choose to do this as a sole proprietor, you still get some liability benefits.
As you constantly operate, you are at risk of fraud and theft. If a thief was to get their hands on your account, they would have access to all of your personal funds and personal assets. However, if you detach your business's checking account from your personal account, then you are able to protect your money. A thief would only be able to reach the funds in the account for your business and not your life savings account.
Even if the thief accessed the funds in your work account, you would still be covered since your checking account is still insured by the FDIC (Federal Deposit Insurance Corporation).
Another key benefit of having separate accounts is allowing your company to build business credit. If your account is separated from your name, then it will build its own credit as an individual entity.
This means that you and your company will have separate credit scores. This will open more opportunities for your company. As your company grows credit, it will be eligible to open business credit cards and small business loans.
Business credit cards and loans can be used to cover additional expenses that are required to grow your company to the next level. A credit card and a loan can be used to acquire more equipment as your company grows.
Having a separate credit card for your small business will help you spend the cash that you need while also protecting your personal credit score. That is because the amount of money spent on your company card will not have an effect on your utilization ratio. This is when creditors penalize your credit score by calculating how much credit you've used in comparison to how much credit you've been granted.
A big business loan can also help you obtain property so that your organization has a building to operate out of. These loans will usually be much higher than a personal loan if you were working out of your personal banking account.
Lastly, a huge benefit for opening a business checking account is being able to add your business partners as authorized signers on your accounts. Unless it is your spouse, some people may feel uneasy about adding their associates as authorized signers on their personal checking accounts.
Authorized signers are people who have access to the funds in the checking accounts and can conduct transactions with the funds in the account. Your business partner will need to be able to do this in order to help manage the cash flow of operations and work-related activities. However, if it was your personal checking accounts, then they would have complete access to all of your personal funds.
So, it is a good idea to keep business operations independent from your personal life.
To open the best business checking account, there are several things to consider.
You can choose to open your checking account with the same bank or credit union that you have your personal checking accounts with if you trust and enjoy the services provided by that institution.
You should also consider shopping around for the financial institution that provides the best perks for small businesses.
Depending on the bank or credit union, they will provide different interest rates for your business savings account.
You should think about opening a business account with an institution that offers a high interest rate on their savings accounts.
As you deposit more of your savings from your business checking account, you have the potential to earn even more money while it is held aside for safekeeping. Consider opening your business accounts with the institution that pays you the most to save your money.
Merchant services accounts help companies accept various forms of payments. When operating your organization, you will need other payment methods available besides cash and checks.
Merchant services allow your business to handle credit and debit card payments. You will need this if you want to process any card transactions.
When opening your business checking account, you should consider which banks provide the best incentives for signing up with their merchant services.
When choosing the best bank account to sign up for, you should review the account fees.
You should compare the fees that different banks charge for having a business checking account. This will help save you money by avoiding unnecessary costs.
Just because a bank may have high service fees, it doesn't mean that it is the worst option.
Remember to compare the account guidelines to see at which banks you can be more likely to have the fees waived.
In order to have your business running smoothly, you should ensure your bank does not restrict your operations.
Some business bank accounts will have certain restrictions that can affect your company.
Some common limitations are cash deposits and transaction limits.
If your company deals with a lot of cash or large transactions, then you need to open your account with a bank that allows for this. Some banks may restrict how much cash can be withdrawn or deposited over time. Be sure to double check that your business will not be controlled by these limits.
Opening a business checking account is fairly easy once you've decided which institution you want to go with. To open your checking account, you just need to provide the necessary documents about your company to the bank.
The required documents include:
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It is free to use and easy to get started with since there are no minimum balance requirements.
Bonsai Cash allows you to use Bonsai Payments which lets you use physical and digital debit cards to handle payments for your business.
These debit cards can be used to make purchases and can even be used at the ATM to withdraw up to $300 every day.
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A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?