A lot of new freelancers and small business owners ask: does a sole proprietor need a business bank account?
Well, no--you do not have to legally have a business checking account. You can use your personal checking account for any business transactions if you are not incorporated.
Although you may not need to have a separate business bank account as a sole proprietorship...there are several reasons lawyers and accountants strongly recommend having a different account.
In this article, we'll review why having a separate business bank account (before your business grows) is a smart decision to make.
Note: If you want to set up a business checking account at no cost, then try Bonsai Cash. Our easy-to-use business bank account is a great way to save, spend, organize, and manage your business funds. Connect it to Bonsai Payments or other sources to get paid directly to Bonsai Cash. Sign up today.
One of the first things you should do when starting a business as a sole proprietorship is to open a business checking account. As a general rule, using one to keep your business's money and records separate from your personal banking is always a good idea. In fact, the IRS recommends keeping separate business and personal accounts for easier tax management.
We'll dive deeper into exactly why you should consider a separate bank account below.
A separate personal and business finances account helps with sorting out expenses when tax season comes around. After all, you'll want to see a clear distinction between personal expenses and business-related ones to prevent confusion with the IRS.
A business bank account does just that. It sets clear lines of business and personal finances separate.
When tax time arrives, you'll be able to see detailed records of business expenses like rent, vehicle, insurance, business loans, and restaurant or business meeting costs. If your expenses are mixed with personal bank accounts, it could be a major headache if you get audited by the IRS.
You can collect receipts in the account, as well as write checks for expenses much easier than if you’re attempting to do it all through a personal account.
Not to mention, having your business and personal assets separate will protect both your personal and business credit score.
As a solopreneur, you know the importance of professionalism for your small business. Just like how you would create nice-looking business cards, a sleek website, or a clean logo, using a business bank account to handle transactions or payments makes you look like a legitimate business. Having business accounts builds trust with your clients and suppliers.
If you were to open a business bank account, you'll be able to accept credit card payments. Since it is not a commercial account, with a personal bank account, you cannot accept credit cards.
Having the ability to accept credit cards seamlessly will help you grow your business quicker.
By opening a business bank account, you'll build a credit history or a relationship with a bank. By having a prior history of business credit, you'll be able to qualify for small business credit cards and even get approved for business loans.
Note: If you form a Limited Liability Company, corporation, or other separate legal entity, then you must get a business bank account. Otherwise, you could risk your personal savings account/assets from litigation by not having separate bank accounts.
Some business owners may decide to mix their personal bank accounts with business purchases. Here is a list of disadvantages if you don't make a separate account.
We highly recommend not using your personal account for your business. Opening a business bank account is a very small investment that will save you time and money in the long run. Running into issues with taxes or audits from the IRS are some of the problems you could face by not keeping separate bank accounts. Here's our list of recommended business checking accounts to open.
Bonsai Cash is among the best business bank accounts for sole proprietors. Most banks offer to waive monthly service fees if you meet certain funding or minimum balance requirements. Online-only banks like Bonsai Cash, however, waive monthly maintenance fees.
Discover some of the key benefits of opening a business bank account with Bonsai.
If you want to prepare for the future growth of your business, set up a business bank account today.
We'll quickly go over the steps to open a sole proprietorship bank account with Bonsai Cash. As of right now, only select users in the United States qualify to use Bonsai Cash.
In this next section, we'll walk you through step-by-step how to open a business bank account online with Bonsai Cash.
Click here to begin the process to open a business account.
Enter your full name, password, country, and currency to create a business bank account with Bonsai.
After you create an account, you will be prompted to answer some questions about the work you do.
Add your billing information to get access to our all-in-one freelancer product suite and Bonsai Cash.
Now that you started your free trial, you have everything you need to manage your finances, from payment to tax time and further.
On top of opening business checking accounts to keep your business finances separate from your personal ones, here are some other strategies you can use.
An employer identification number or EIN is a nine-digit number assigned to your business by the IRS. It is an identifier used to track your business's tax returns. An EIN would allow you to file your business's income tax return, open a business bank account, apply for a business credit card, and establish your business entity type
Opening a credit card that you only use for your own business transactions is a great way to separate personal transactions from business ones.
The same principle for opening a business checking account applies here. If you are able to separate your company expenses on a dedicated card, then you’re really distinct on business documentation for expenses.
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?