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When to Set Up a Bank Account Business - Freelancer Guide to Banking
8
Min Read
If you are a freelancer or a self-employed person with a solo small business, then you may be wondering when to set up a business bank account - business freelancer-wise. But should you open one - and if so, when should you?
The answer will depend on the type of business that you are running, as well as your preferences and needs. You must consider all the different factors in order to make your choice.
Note: If you want to set up the best bank account for freelancers, try Bonsai Cash. There are no hidden fees or pesky monthly minimum requirements. It's easy to set up (no application process, just sign up) and you can create sub-accounts or envelopes to better organize your finances. Open a new account today.
What Is a Business Bank Account?
A business bank account, as its name suggests, is the kind of banking service that you use to conduct your business transactions, such as receiving payments, or paying for your equipment and taxes. A business account is a necessity when you register your business as an LLC or a corporation.
That being said, business accounts should also be used by freelancers offering professional services.
When your income level reaches a certain threshold and you accept payments on a regular basis, then your bank may suggest you open a separate business bank account.
Do You Need a Business Bank Account If You're a Freelancer?
If you are a sole proprietor, then the law doesn't require you to separate your personal expenses from your business account. Most freelancers start that way, so if that's your situation, it's not required.
However, while it's not legally required, it is recommended. It will help you separate your business and personal finances for taxes. It should also allow your business to run much smoother while leaving room for business growth.
On the other hand, if you are a freelancer and have a single-member LLC, then the law requires you to open a business account for your LLC.
LLCs have the purpose of reducing personal liability and increasing financial protection. So, if you attach personal accounts there, the requirements may not be met.
Reasons to Set Up a Business Bank Account
Typically, you should set up a business checking account when you want to reap the following benefits:
Legitimacy
When you are starting a business account opening process, you are setting your business on the way towards legitimacy. Basically, you will be able to do business as an authority.
You will no longer be a random freelancer offering services, but an actual legitimate institution providing professional services.
Flexibility
Many online banks will limit your activity when you are using a personal account. For example, while you may be able to accept personal transactions, you may not be able to accept credit card payments or send out invoices in the name of your business.
However, if you choose a business bank account, then those limitations will be lifted. You will be able to allow your business to grow in the way that an actual business should.
Brand Building
If you want to use your business name while providing your services, then you need a business bank account. When you are using the same account you use for your personal finance ordeals, then you may not be able to make a name for your brand.
However, if you go for proper business banking, you can build the brand for your small business. This can help improve relationships with vendors and allow you to build a commercial credit score. For all of these to happen, a reputable brand will be needed.
Ease of Payment
When you are a freelancer, you are providing services to your clients. And every customer may have their particular way of making a payment. Some may use ACH transfers, others may prefer credit cards, and so on.
As a business owner, you need to be able to cater to the possibilities of your clients. By limiting them, you may actually lose their interest in your service.
If you feel like you are losing revenue because your customers prefer different payment methods, then you may want to try business banking with an actual business account.
How to Choose a Freelancer Business Account
Time is money - especially for a freelancer. So, when you decide that it is finally time to set up a business bank account, you need to find one that caters to your needs.
As you are looking through banks accepting new business account services, search for the following features:
- Unlimited electronic deposits
- Unlimited transactions
- No minimum balance
- No monthly maintenance fees
- Proximity to locations for cash deposits
- Internet banking and mobile app availability
- No ACH, ATM, or hidden fees
- The possibility of a savings account
- The possibility of business financing
- Free visa debit card for freelancers
- Possibility of credit cards
Each business is different in its need, and you might not require all the above-mentioned features from your bank account.
However, once you decide to separate your business finances from your personal ones, the right account can actually help you save money.
Types of Bank Accounts for Freelancers
Depending on the revenue that your freelancing business gets, there are two types of business accounts that you may go for with different banking requirements. These are:
Business Checking Account
A checking account is used by small business owners in order to conduct their business transactions. This is the payroll account, where you will receive payment for your services, or pay for your supplies.
This type of account will offer you access to debit cards that you may use to withdraw money from the ATM.
A checking account will not have daily minimum business checking requirements, but some may yield interest if you have a balance up to a certain amount.
Business Savings Account
Once your income begins to grow, you may want to consider opening savings accounts as well. Typically, these accounts bear interest - so, you will be able to make your money grow in the long run.
Depending on the financial institution, you may be able to open a separate bank account for saving goals such as taxes or business equipment. One example would be Bonsai Cash's envelope budgeting system that allows you to set money aside for various business expenses.
Documents Needed for a Bank Account for Business
Usually, financial institutions will require a set of documentation in order for you to open a business bank account. If you already have the following documents, then it might be a sign that you should set up a free business checking account:
- Full name
- Unique Taxpayer Reference (UTR) Number or Employer Identification Number (EIN) (some banks don't require an EIN to open a business account)
- Registered business address
- Projected annual turnover
- Business contact details
You need the above documents if you are a sole proprietor. For LLCs and corporations, you may need extra documentation, depending on the bank that you are going for.
The application process takes around 10-15 minutes, once you submit the documents. However, it is the processing of the account that usually takes the most time.
Depending on the bank that you go for, it can take from one week to up to four weeks until the account is approved. This is why you need to read the requirements of the bank that you want to use.
Based on the bank, the business account itself may not be an issue - it's all about the time needed for the first deposit to reach your account. Keep both internal and external factors in mind when creating an account.
Personal Bank Account vs. Business Bank Account?
If you have a sole proprietorship and your business has not been incorporated (LLC, C-corp, or S-corp), then you may use a personal account to conduct your business finances.
That being said, if your freelancing business took speed and you have incorporated your business, then you may want to consider using a business bank account instead of a personal account. Read more about a business vs personal account here.
This way, you will be able to protect yourself from being personally liable - you will also protect the integrity of your company.
Bonsai Cash: Best Bank Account for Freelancers
Choosing the best business checking accounts might not be that simple. There are many that you may consider using, but the Bonsai Cash account is one of the most popular options. It features a number of automated functions that streamline your payment process.
Bonsai Cash allows you to connect your account to a physical debit card, a virtual card, and Apple Pay as well. It also helps you with your accounting and money management problems, as it allows you to create envelopes.
Envelopes are like sub-accounts for your business checking account. In the end, it solves both your checking issue and the savings one.
Not to mention a new business account is guaranteed--so no applications or credit checks. Bonsai is a free business account, which means that you will not have to pay transaction fees, monthly fees, or maintain a certain monthly balance. If you have just started your freelancing business and still have a relatively low cash flow, then Bonsai will help you out. Check out the best freelancer bank account here.
The Bottom Line
Business accounts are required by the law when you start a certain type of business, but that mostly depends on your status. That being said, even if the law does not require it, you should be set up the moment you see regular revenue.
Plus, it will help you keep your finances organized - something that can be quite difficult if you use your personal banking account for this purpose. So, we hope that now you know when to set up business bank accounts as a freelancer.
What Defines a Verbal Contract?
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.
When is a Verbal Agreement Legally Binding?
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:
- Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
- Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
- Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
- Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.
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.
How strong is a verbal agreement 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.
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get started nowWhen are verbal agreements not enforceable?
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:
- The sale of real estate or vehicles
- Real estate leases lasting longer than one year.
- Property transfer following the death of the owner.
- The case of a party agreeing to pay debt for someone else.
- Any contract that requires more than a year to fulfil.
- A contract involving and exceeding a specified amount of money (which varies by state).
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.
How are Verbal Contracts Enforced?
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?
How can you prove an oral contract?
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.
Written vs Verbal Contracts: What's the Verdict?
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.
Say hello to digital contracts
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.
Benefits of written contracts
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.
Create Professional Contracts with Bonsai
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?
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