Before starting your small venture, you may have heard countless times how important it is to separate your personal and business finances. It is one of the good practices to remember before carving out your brand name in the business industry. Whether you are managing a growing side hustle or a sole proprietor of a developing enterprise, separating your finances is of utmost importance.
However, there would be times where mixing the two funds can be quite tempting. Because, why not? It would simplify your banking transactions and would score you great rewards from all those expenses—a win-win situation.
Managing your Funds
Combining your funds is not a sin. However, as your firm grows, you would find that mixing bank accounts might lead you to face financial problems in the long run. Simple matters such as tax reporting, legal affairs, account-keeping, and tracking your private earnings will result in a complicated mess.
It is never too late to disconnect your business funds from your savings. The things you have personally paid for (equipment, facility) for your enterprise will not go in vain. When you put money into your company, it can be accounted for in two ways:
Lending your money
Company and private finance tend to overlap with each other, especially for start-up businesses. If you decide to keep your books clean and separated, you could file the personal money used for business purposes as loan money. Get a competent attorney to draw up the paperwork and make it a legal agreement with defined terms—interest rate, repayment terms, and the consequences for an unpaid loan.
Making it a formal loan helps keep it an arms-length transaction—a business transaction without a conflict of interest. Documenting all your loan transactions will protect you from potential tax implications that may arise. Tax implications depend on the structure and entity of your organization. It can be a C corporation, S corporation, or a flow-through entity.
Investing your money
Another option is to put your money into your company as an investment. For sole proprietorship, writing a check or depositing cash into your company’s bank account will do the trick. The invested money will be classified under the owner’s equity account, as well as in the balance sheet. For partnerships, the same procedure applies, but the funds will be classified as a distributive share.
For other business entities, you must follow a process to avoid legal troubles that may come in the future. For corporations, an excellent way to invest is to buy stocks in your business. Provided that there are only a few stockholders in place, you can purchase and own most of your company’s stock.
Although both options have their pros and cons, investing is much riskier for most entrepreneurs and businesspersons. If your company goes into a liquidation bankruptcy, the investor’s chance of getting back their money is slim to none. The reason for this is because of the policy that makes creditors come before investors in a bankruptcy proceeding.
Loaning your money into your enterprise makes you a creditor. Equipped with the proper loan documents, you have a big chance of getting paid when the unimaginable happens.
In all technicalities, your business and personal funds are all yours. But, a business endeavour is tricky and complicated. Especially when it comes to financial circumstances, it is best to establish and arm yourself with legal contracts and entities.
Before lending or investing your money into your firm, it is best to seek the counsel of legal advisors and tax professionals. Discuss all your options and factor in your current financial standing, individual tax, and business structure. Most importantly, make the agreement legal by putting it in writing. If you want to know more about this, you can always contact our team. We can give light to the situation by offering expert advice – for free! And for more quick updates and tips from us, you can either subscribe to our YouTube Channel or follow us on Instagram.