Why Business Owners Should Keep Business Finances Separate from Personal Fundsby Neeraj Bisaria SEO Exec.
Entrepreneurs often fund the costs of running a business out of their personal bank account – particularly during the startup phase when revenues might not be high enough to meet current expenses and debt obligations.
Writing a check from your personal account may be the easy thing to do, especially when a vendor arrives demanding payment for goods or services you bought. But it’s not a good business practice to follow, especially if you want to grow your company. There are several reasons why small business owners should separate their own personal finances from those of their business right from the get-go.
Business Liability Should Stay with the Business
The biggest reason why you should try to stop charging business expenses to your personal bank account is the most obvious – when you pay for something from your personal account you have the responsibility to pay for it!
Many small business owners choose to form a limited liability corporation (LLC) for this reason when undertaking a new venture. By choosing an LLC as the business format, a business owner takes an important measure to avoid being held personally liable for the debts of the company. In fact, personal asset protection is the top reason for establishing an LLC.
LLCs are basically a way of protecting business owners. If the company goes belly-up, in most cases you won’t have to pay business debts from your personal assets. The chief difference between an LLC and a sole proprietorship is that sole proprietors risk having unlimited liability for business debts, lawsuits, and other financial obligations. Meanwhile, by definition, forming an LLC provides a business owner with limited liability.
However, if you mix your personal money with your corporate assets, a judge might rule that you have “pierced the corporate veil” and thus find that the business and the owner are one and the same. If a business owner has not demonstrated corporate separation, it is possible that a judge could rule in favor of the business’s creditors during bankruptcy proceedings.
Forming an LLC and keeping personal money separate from business expenses are critical in this regard. Incorporating allows an entrepreneur to operate without worrying about losing his or her home or other personal assets due to obligations the business has to take on. Other benefits of creating an LLC are tax benefits, enhanced credibility when applying for business loans, brand protection, and perpetual existence.
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Created on Aug 3rd 2018 05:56. Viewed 190 times.