A lot of people daydream about starting their own business. But if you launch a company and debts pile up or an irate customer decides to sue you, you could wind up declaring bankruptcy and other fun stuff. There's a simple way to prevent your business from destroying your personal income, of course: Keep your business and personal expenses and records separate.
But if you're bootstrapping a business with your personal bank account, and especially if you don't have a lot of the green stuff, you know that can be much more complicated than it sounds.
Still, you want to keep your personal income as far away as your business revenue as possible. How? Here's some advice from a few entrepreneurs and business experts.
Keep a separate bank account for your company. Opening a business account at your bank is best, but "at a minimum, open a separate personal account and run income and expenses through this," says Holly Isdale, who owns Wealthaven, a financial planning and consulting firm, and splits her time between New York City and Bryn Mawr, Pennsylvania.
She adds that if you're spending money on multiple businesses or ideas for businesses, you might want to consider separate accounts for each. "Not only does it provide a good way to track income and expenses for the activity, but it also allows you to keep different ideas separate, which is helpful if you end up getting collaborators, investors or partners at some point down the road."
Most people will need one business account, and they need to keep a separate personal account for a variety of reasons, says Don Mercer, a senior vice president of the small business group at Bank of the West, headquartered in San Francisco. The main reasons, he says, are:
-- Simplicity. "It's much easier to track and follow your business expenses in one account rather than having to reconcile across multiple accounts," Mercer says.
-- Refinancing a loan. Say you've bought a lot of equipment on a credit card for your business, and you can't pay it off, so you'd like to refinance for a more favorable long-term loan. "The lender would want to know that the debt they are refinancing has been used for business purposes," Mercer says. "That's difficult to do if you pay for business supplies on that card in the morning and the movie tickets for the family that night."
-- The documentation will make it easier to bring in an investor. If your business takes off, you may need more money, quickly, to hire an employee or buy more inventory. "Whether that investor is a family member, a partner or a bank, they are all going to want to know that the investment opportunity you are giving them is both smart and sound ... The evidence you will be asked to provide are the very financials you established when you started your business to measure your success and profitability," Mercer says.
But if your accounts show business expenses mixed in with movie tickets and other personal purchases, you won't look like a serious businessperson to anyone who sees your records -- even if you are or aspire to be.
Consider hiring a professional. You don't have to hire someone full time, especially if you can't even pay yourself yet. But "hiring a bookkeeper who works a few hours a month is a big help," says Noah Chaimberg, who last October launched heatonist.com, which offers a line of gourmet hot sauces.
Through a referral, Chaimberg hired a bookkeeper in February to get help with his taxes. "It was really important to me that I could find someone I could trust. In my past jobs, I've had teams of people to track budgets and spending and take care of paperwork," says Chaimberg, 31, who lives in Brooklyn, N.Y., and previously worked in digital marketing. The finances of his business started to overtake his time, and regardless, "I realized that I didn't have a grip on the finances," he says.
The bookkeeper was able to get a grip on Chaimberg's finances in part because he kept his records in order (yet another argument for keeping your personal and business accounts separate). Chaimberg pays $35 an hour for the bookkeeper's services, and while she worked about 15 hours the first month, he has needed her services for fewer hours a month ever since.
"At the end of her setup phase, we got on the phone and walked through the entire financial picture. I saw where the money had gone," Chaimberg says. Most of it went to inventory and shipping materials. Chaimberg slowed down for a while on broadening his product range and focused on selling.
Decide how to structure your company. Hiring an accountant or a lawyer is also a good idea, says Joe Gerard, an assistant professor of management at the College of Business at Western New England University in Springfield, Massachusetts. He recommends finding one who specializes in small business. Gerard adds that the person you work with will likely suggest setting up your business as a sole proprietorship, partnership or limited liability corporation, which will dictate everything from your risk and liability to how the Internal Revenue Service will collect your business taxes.
"[An accountant and a lawyer] will know those setup details most effective at protecting your financial assets in your home state because taxes, permits and insurance rules and regulations vary from place to place," Gerard says.
As a general rule of thumb, if you operate as a sole proprietorship, there isn't a significant separation between business and founder, says David Shepherd, an adjunct professor of entrepreneurial finance at the Neeley School of Business at Texas Christian University in Fort Worth, Texas. But he says that can make a lot of sense in the beginning: "A startup may be so small and have so few assets that it isn't yet concerned about being sued, is not going to raise capital and doesn't expect to have a tax problem for a while."
Proceed slowly. Once you get your business moving, you'll understandably be excited and will naturally want to see a lot of progress. You know you have to spend a lot of money to make money, so you may well break open your 401(k) or start taking out loans to run your business. You're certainly entitled, and it's true that many businesses succeed because the founder wasn't afraid to take risks.
But being prudent -- especially while you're still feeling your way -- isn't a bad thing, either. "I've learned a bit from watching some close friends struggle with their business," says Sid Savara, who runs a personal development consulting business in Honolulu, Hawaii. "I only risk money I can afford to lose -- real cash I have on hand. The downside to this is my business does grow slowly and steadily, but the upside is I don't have to worry about personal and business finances going up in flames at the same time."
Having to hold a "going out of business" sale is one thing, but having to sell your home would be quite another. As Savara says, "I never bet the house -- literally."
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