As a small business owner or freelancer, it might be tempting to just use your personal bank account for all transactions. After all, it's your business, and the money ends up in the same pocket, right? Well, you might want to think twice about this one.
There are many perks of having a business bank account that don't come with the traditional personal accounts. From simply keeping your finances organized, to getting a business loan and protecting your identity, business bank accounts are definitely the way to go.
Let me run you through a few examples of what you can do with a business bank account, and why it would be of great benefit to your small business or freelance gig.
Note: If you are looking for an easy-to-use, fee-free business checking account, check out the new Bonsai Cash. Easily manage, save and spend your funds to make your business finances shine. Open an account today.
Separating your personal and business transactions is an important step to starting your small business. These special bank accounts are designed with businesses in mind, offering services focused on business owners instead of individuals.
Let's take a look at some important business aspects you can handle with a dedicated checking account.
Having clean, organized and easy-to-understand financial records is just smart business. For starters, it makes your accounting much easier. By having a separate business bank account you can easily keep track of all your expenses and send them to your accountant for tax time.
You can also track your expenses and keep your receipts organized by using an accounting software that you can link to your business checking account to automatically import and categorize your business transactions.
Keeping your business finances and paperwork organized will help you avoid problems caused by mixing your personal and business finances. This can also make it easier for you to apply for business loans, sell your business, or successfully get through an IRS (Internal Revenue Service) audit.
Nowadays, the entire world runs on credit cards. Eventually you'll have to accept credit cards if you want to expand your business. In order to do this, you need to open a merchant account which is a type of bank account that allows you to process electronic payment card transactions.
Once you open the merchant account, you will link it to your business bank account, where the funds will be transferred after the payment is processed. This way you can not only accept electronic transactions online, but also physical cards by purchasing the necessary hardware.
Alternatively, you could link your business checking account to a payment processing service such as PayPal, Stripe or Bonsai. This makes the process a lot easier, especially if you run your business completely online, since you will not need special hardware to process payments.
By keeping your business and personal expenses separate, you separate your financial obligations as well. Since your company debts will be reported on your business credit report, your personal credit will not be impacted in case of any financial hardship your business may face.
Keep in mind that if you are registered as a sole proprietor instead of a corporation, your personal assets might still be compromised in case of a business liability since you are not considered a separate legal entity.
At the same time, having a dedicated business bank account can protect you from identity theft. As a freelancer or small business owner you probably have a large amount of transactions, which can put your financial information at a high risk of fraudulent activity.
By having a separate business account, you can limit the access to your information and avoid larger damage. It's always a good idea to link your business bank account to an EIN (Employer Identification Number) so you can also restrict access to your Social Security Number.
Having a business checking account is the first step to building business credit, which is how a bank measures your business' creditworthiness. Having a good business credit score will help you get a business credit card or a loan with lower interest rates and without compromising your personal finances.
Additionally, once you establish a great business credit score, purchasing additional equipment and inventory will be easier for you by applying for credit from suppliers. If they can trust your business is financially stable and is capable of repaying debts, you won't be required to prepay for products or services purchased.
Of course, just like with your personal credit score, you have to make sure to pay your bills on time, repay your vendors, and stay on top of your self-employment taxes. This way you can build a good business credit score and enjoy all the perks that come with it.
When you run your business using a separate bank account, you are not only keeping your expenses organized, but you could also be saving some money by accurately filing your taxes. When preparing your business tax report, separating your expenses can get complicated, and this can lead to a loss in tax deductions.
People miss so many tax deductions just because they didn't have their paperwork in order, or simply couldn't tell between business and personal expenses on their bank statement.
With a business checking account, you can even use a tax software such as Bonsai Tax, to automatically identify deductible business expenses and help you maximize your tax write-offs.
Use your business checking account to pay for all ordinary and necessary costs to operate your business. This could be inventory, payroll, rent, business insurance, vendors, lenders, etc... This is a good way of staying on top of your business expense management.
To make your accounting process easier and more organized, to research what type of business-related expenses you can deduct taxes on, and pay for them with your business checking account.
Remember, depending on the nature of your business, the expenses you can deduct may be different. For example, if you run your business from home, there are certain home-office expenses that you can get a tax deduction on. The same goes for attorneys, therapists, etc.
Whenever you need funds from your business to pay for personal expenses, it may be tempting to simply use your business checks or cards, especially if you are a sole proprietor and don’t have to share the funds with a partner. But this may not be such a good idea. There are many problems addressed by a business account.
If your business is an S-Corporation or a Limited Liability Company, the legal business structure protects your personal assets by treating your business as a separate entity. However, when you use your business bank account to cover personal expenses, you run the risk of losing that protection and being held personally liable for any of your business’ liabilities.
Even under other business structures that do not protect your personal assets, you may still run a risk in case of an IRS audit. If an agent discovers you are using your business account for personal purposes, they may declare your accounting records as ‘unreliable’ and this could lead to a complete examination of your business expenses.
The best way to use your business funds for personal purposes is to withdraw the money in the form of an owner distribution or paycheck, and then deposit it to your personal account. Make sure to include this in your accounting records for tax time.
I recommend you establish a regular monthly payment, allowing yourself a wage, just as you would do with employees. This is a great way to keep consistency in your records, rather than taking out random amounts of money whenever you need them for personal use.
Take the time to figure out a fair amount that will allow you to handle your personal finances as well as business expenses so that you can easily budget and forecast your company funds.
Bonsai Cash is one of the best options in the market and it makes your business finances management a bliss. There are little-to-no opening requirements, no monthly maintenance fees and no transaction fees.
With its added 'Envelopes' feature, you can also use it as a business savings account by creating sub-accounts and have a specific percentage of your transactions automatically transferred to them. You will easily save for a rainy day, vacations, tax season, or expansion projects.
With Bonsai Cash, you can pay for your business expenses online by using your virtual card or adding it to Apple Pay for in-store payments. You can also use your physical card, which you will get in just a few days after signing up. Do business any way, anytime.
It only takes 3 simple steps to open a business checking account with Bonsai Cash:
To get started, you first need to create an account by providing your full name, country and the currency in which you will be doing your business transactions. Create a strong password, and move on to the next step.
Next, we'd like to get to know your business a bit more. Answer a few questions about what kind of work you do, how long you've been in business for and in which stage you are. This takes less than 3 minutes.
Bonsai Cash is part of the all-in-one business suite Bonsai. You will begin your 14-day free trial now by entering your credit card details.
Once you start your free trial, you will have access to everything you need to run your business. This includes automatic invoicing, customizable contract templates, expense tracking tools, tax reminders, income reports, and of course your new Bonsai Cash Business Checking Account.
Come on board, and take your freelance business to the next level.
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?