Going into business for yourself can be a fun, enjoyable, and profitable experience. Still, you need to keep your personal finances safe no matter what career move you are making. If you're not careful, you could jeopardize years of hard work and savings. This isn't to say that you should stay away from starting your own business, but you do need to be particularly careful about several things.
When I decided to leave the corporate world for a career in freelance writing, many people thought that it would negatively effect my finances. And for good reason. There are thousands of stories of people who tried to branch out on their own, but who ended up losing everything in the long run. I used three strategies to ensure that I wouldn't be the next person to join this group.
Keep your business and personal finances separate
This may sound easy, but if you're not careful, you could start intertwining the two without knowing it. This makes the IRS cranky. The simplest way to avoid this is to open a separate bank account for your business venture. Sure, this will take you some time at your local branch, but in the long run it is a step that you do not want to avoid.
By keeping your personal money separate from your business, you can continue to live in the same manner as always. The only change will be funding your personal accounts from your business as opposed to a paycheck from an employer. Is this a big change? Sure. But if you want to start your own business, it's one that you need to make.
Consider incorporating or forming an LLC — sooner rather than later
As a freelance writer with no employees, I never gave this any thought. Over time, I eventually looked into forming an LLC (limited liability company), and within a few weeks everything was in place. It took me a year to realize the benefit of doing this, and in the end it was one of the best business decisions I ever made.
There are many reasons to create a formal business entity. From a financial standpoint, it helps to keep your personal finances safe. For example, if you are an LLC and get sued for bad business practice, the only things you can lose are the assets of the company. While this is never a good thing, it will protect your personal finances. On the other hand, if you are not an LLC (or other entity), your personal assets — such as your home — could be attacked in a lawsuit. Obviously, this is just about as bad as it could get.
The best way to avoid this potential complication is to speak with a professional about forming the proper business entity.
Don't put your business expenses before your personal expenses
This mistake could cause a lot of trouble. Many people run into this when they attempt to expand too fast. In the end, they're forced to decide which bills to pay first. You never want to be in a situation where you have to choose between paying your mortgage or paying your employees. It is essential to first cover your personal expenses, and then take care of your business. As mentioned above, make sure you expand at a pace you are comfortable with. This is the only way to ensure that you never stretch your resources to a breaking point.
There are times when you will be scared of opening your own business. When I took the leap, I had no idea where the next payment would come from. But as long as you line up all the details, you should be able to follow your dream while also keeping your personal finances safe and sound.