Going into Business? Keep your Personal Finances Safe

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.

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Peachy
Peachy
12 years ago

What type of professional do you talk to about starting an LLC, and about how much does it cost?

J.D.
J.D.
12 years ago

Peachy, when I started my own LLC, I spoke with my lawyer and my accountant. They gave me quick advice on what to do. In Oregon, LLCs are not expensive to start. (Just $50, I think.) But I hear the cost varies greatly from state-to-state.

InvestEveryMonth.com
InvestEveryMonth.com
12 years ago

Try to keep a business emergency fund in an interest earning account.

You don’t want to skip a mortgage payment or a payroll check. Solve this problem before your get there by establishing an emergency fund.

Funny about Money
Funny about Money
12 years ago

Will a corporation or an LLC protect a freelance writer (hmm…or, come to think of it, a blogger) from libel or slander judgments against personal assets? The most active writers I know carry libel insurance, which is expensive. But few writers think to incorporate themselves. One thing to bear in mind is that you have to file taxes for the corporation or LLC separately from your own. This means two tax forms, two sets of tax records, and two tax accountant bills. One of the reasons I sold my book-packaging business to my partner was that the accounting bills were… Read more »

ChrisBlogging.com
ChrisBlogging.com
12 years ago

Funny about Money – The main reason that I formed an LLC was to separate my business and personal assets. This way, if somebody would sue me for a writing related incident, I could only lose what I have in the business.

You are right about the tax forms; you will definitely have to keep better records and spend more time on taxes.

Dennis
Dennis
12 years ago

Great post. I think the biggest obstacle with most people starting their own business is financing and not knowing where the next paycheck will come from. Keeping everything separate and organized will really help with that.

C. Middleton
C. Middleton
12 years ago

Chris, Great post. I am an accountant in Cincinnati and I have been preaching what you are saying for years. I would just like to add one thing to your comments. If you do intermingle business and personal expenses together, you are putting your corporate status at risk. The Internal Revenue Service will check specifically to see if these comingly of funds is a habit or if it’s a one time thing. If they see it as a habit, they will peirce the corporate veil, and nobody wants that. Anybody who has questions about the Incorporation from a tax and… Read more »

Angie
Angie
12 years ago

C, I would definitely appreciate any info you could share with us about what tax consequences and responsibilities arise from forming an LLC. We’ve got a rental house and hope to have more in the future. Although we’ve got good insurance for that house, we’ve been advised that putting it in an LLC would establish a “firewall” between our personal finances and the rental finances. Also, while I’m asking, are there any circumstances that would cause someone to dissolve an LLC and revert back to a sole proprietorship (which I’m guessing is the default model for any business)? Much obliged… Read more »

RDZINS
RDZINS
12 years ago

We were advised not to start a llc right now and mostly for tax purposes. If we would start a llc we would have to pay on the wages that we paid ourselves. We are not at that point yet, we would have had to pay on about 26,000 instead when we our a sole proprietery we only had to pay on 9,000. In other words the business would have lost 17,000 dollars. When are business expenses get paid and depreciated down more(10 year depreciation), and we are showing more of a profit in the business it may pay to… Read more »

Jay Reeder
Jay Reeder
12 years ago

I think the single-member LLC is being oversold as a liability protection device. Yes, an LLC will protect your personal assets from any business debts you may owe. However, if someone wants to sue you for libel, negligence, etc, then, as I understand it, their lawyer will probably sue you personally as well as your LLC; in tort cases, the courts are very willing to pierce the corporate veil of single-member LLCs.

Any real-live lawyers care to bring a more informed opinion?

David
David
12 years ago

Good posts all around and the rental property should be put in an LLC, but the assumption that an LLC will protect your personal assets from your own actions within a business is a common misconception. Your personal assets will only be protected if an employee or inactive asset (rental property) is the cause of loss within the LLC–this is the advantage of LLC’s. But a pilot who’s private charter service is held within an LLC can lose his personal assets if he is liable for a wreck because he was the one flying.

Know The Ledge
Know The Ledge
12 years ago

Nice post, I am in the process of creating my own LLC and did have a question regarding how easy it is to put money into the company from personal funds. For example, if I start the LLC and contribute a set amount of money on startup as the only member, what would I have to do to contribute additional personal funds to the business entity?

Are there legal forms and/or any requirements for doing that? Any additional info would be great.

Chad Middleton
Chad Middleton
12 years ago

Angie: Good posts all around and I do believe you should put the rental property in an llc. It’s true though that we live in a litigous city, and any lawyer whose pockets are laced with money will try to see an LLC and the persons behind it. But its sort of like soldiers who are praying in a foxhole during war. Although, they may not believe in God, it doesn’t hurt. Just be smart about keeping personal things personal and business/rental things separate. I am going to find some stuff for you to read. As far as converting an… Read more »

DebtKid
DebtKid
12 years ago

My best tip on keeping things separate:

Beyond having separate accounts for your business vs. personal checking, HAVE THEM AT DIFFERENT BANKS. It makes it much more difficult to transfer funds when you really shouldn’t be transferring funds.

Aaron Davidson
Aaron Davidson
12 years ago

I race on a decent level, and have thought about forming an LLC that would be a small reseller of products that I use and then sponsor myself so that the business could buy product, ‘donate’ it to sponsored athletes (me), and take a deduction. Havent sat down with an accountant yet.

emilyg
emilyg
12 years ago

Those are great tips. I had a small business (a multi-level marketing thing – bad news) for a while last year, and I made the mistake of mixing personal and business expenses from time to time. I had a home office and only one computer, so even with a separate checking account, I messed things up. I used my personal credit card instead of business card, which was a mistake. I was still in college and didn’t know enough about finances to make good decisions. At least I’m done with it now, and know better for the future!

Fox Cutter
Fox Cutter
12 years ago

My small business is run as an LLC, and it was pretty easy to start up. I also used it to get a federal Tax ID for the business (which was more then I needed to do). In Washington state starting the LLC was easy, though cost about 150 dollars. I was able to do everything online and once it was done I was able to get my business license, which is $80 a year. Over all it was a pretty low expense for starting up, and it allowed me to get the bank account, which is a double bonus.… Read more »

ChrisBlogging.com
ChrisBlogging.com
12 years ago

If you dont mind paying, hire a CPA or other tax professional to help you set up an LLC. They can take care of all the forms, etc. All you have to do is supply them with the proper info; and of course pay for the service!

KT
KT
12 years ago

I have expanded quickly in my private business but find that I cannot keep up with expenses! BUT! if I do not have support staff then I cannot grow since I am only ONE person…Anyone have creative solutions besides myself working any harder. I have to say that I am only 500.00 a month over expenses at this piont. Should I cut back on staff hours at the detrimant of service? Or Go gangbusters for new clients one month and then IF I cannot get in new clients and see? Slightly anxious…

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