You work hard for your money, right? You’ve spent countless hours building your business to what it is today. Yet, in one swoop, it could be all gone…along with all of the money in your bank account. Wait…what?!
It’s true. It blows my mind to think there are business owners out there who don’t separate their business and personal finances. Want a quick and extremely painful way to lose everything you have? Then keep using your personal bank account and credit cards for your business. Even if you have separate bank accounts, you should use a business structure like an LLC that provides you with protection from someone going after your personal assets.
Setting Up Your Business as an LLC
Creating an LLC (or Limited Liability Company) can move you from a sole proprietorship — which offers no protection — to a business structure that gives you the legal protection you need along with some other benefits.
In the event that your business is sued or has outstanding debts and/or liabilities, an LLC takes your personal assets (such as your bank accounts, home, car, etc.) out of the equation. The only way a judge can rule that your personal assets are on the line is if you “pierced the veil” of your business — by not running your business legitimately and not following the guidelines in place (with fraud, for example, or by mixing business and personal funds). As long as you follow all regulations and guidelines for your LLC and keep your business in good standing, you have nothing to worry about, and your personal assets will be protected.
When you set up your LLC or S Corporation, you will want to file for a business EIN as well. Think of this like a social security number for your business, which you can use to open business bank accounts, etc. This helps keep you and your business even more legally separate, since you won’t be using your personal information on important financial documents. Remember, the whole point of setting up your LLC and operating your business separately is to keep finances from mingling — you want a decisive line in the sand separating them from one another.
Keep Your Personal Finances Separate From Business Finances
As mentioned earlier, the only way to truly protect yourself from someone potentially gaining access to your personal assets is by having dedicated business systems in place. This means you need to have a business credit card, business checking account, business savings account and business EIN. The key is to NOT have any of your personal information or finances attached to your business — separate everything!
After you’ve legally filed your business entity, head over to your bank and ask to set up a business savings and checking account. If you’re an LLC looking to pay yourself, you can easily transfer money from your business account to your personal account by picking up the telephone, visiting the branch, going online or using the bank’s app. Just ensure you properly document the transfer as a member or owner withdrawal when you decide to pay yourself.
It’s ideal to have both a business savings and checking account, so you can make at least a little interest on your business funds. Keep enough money in your business checking account to handle all expenses, and transfer the rest into the business savings or your personal account (paying yourself).
A business credit card is also a great idea as it allows you to charge expenses rather than pay with cash or use your personal credit card (which is never recommended). You can shop around for the best business credit card, and many have points and rewards programs you can take advantage of.
Finally, when you sign contracts, ensure the contract states your business name and not you personally. You will need to sign your name ON BEHALF of the company, but make sure the contract is an agreement between your business and another business. If you happen to sign a contract as an individual and not your business, it takes the company out of the equation in terms of liability — it all rests on your shoulders. Not a good situation to be in!
If you’re unsure how to set up your LLC or any business structure, Incfile is here to help. Once your business is up and running, we can also help with managing your business and ensuring it stays in good standing. When tax time rolls around, our tax professionals at Incfile can help you file your business taxes, too!