business liability

10 Tricks to Keeping Personal and Business Finances Apart

Thursday Bram — Fri, 08 Apr 2011 21:55:25 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/10-tricks-to-keeping-pers...

It's easy for your personal finances to get tangled up with your business finances. But no matter what type of business you're running, it's a good idea to keep your personal finances separate from those of your business. For one thing, doing so will make it much easier figure what you can deduct and what you can't at tax time, and it will also make it easier to grow your business or even sell it.

Don't worry if you haven't yet separated your records into personal and business stacks; it's never too late to start.

1. Set up separate checking accounts. If you've got separate checking accounts and you are diligent about drawing on the right account at the right time, come tax time, all you have to do is review your bank statements for a clear picture. If you can manage to only use your business debit card and avoid cash, you may even be able to do your taxes and other financial reporting straight off your bank statements.

2. Keep separate shoeboxes for your receipts. You don't need to actually use shoeboxes to store receipts (in fact, something a little more elaborate is a good idea), but whatever you use should have two physically separate locations for personal receipts and business receipts. If you don't have time to collect and sort both personal and business receipts, prioritize your business receipts. The simple truth is that a tax auditor is unlikely to care much about your personal expenses, but will be very interested in your business receipts.

3. Get a credit card for the business. A business credit card will help you build up a credit history for your business separate from your personal credit history. More importantly, your credit card is one of the likeliest places for your finances to get muddled. Separate credit cards means that even if there's something a little out of reach of your business' current budget, you won't be tempted to use your own credit card.

4. Give yourself a salary and don't exceed it. If you write a check for the same amount every month from your business' checking account to your personal checking account, you can make it easier for both your personal finances and your business finances to stay on budget.

5. Set a budget for the business. Just as you don't want to pull more money out of your business than your business can afford, you don't want the business to pull more money out of you than you can afford. Many small business owners find themselves pumping money from their personal accounts into their companies whenever there's a shortfall. And sometimes it's unavoidable. But if you have a clear budget based on your business' current earnings, you can help avoid both.

6. Make sure your family and partners understand the business' status. It's important to remember that you're not always the only person involved in either your personal finances or your business' finances. Making sure that everyone is on the same page now can prevent problems later on.

7. Understand who is a business expense and who isn't. Among the biggest pitfalls in keeping your finances separate are entertainment, food, and travel expenses. It's tempting to try to write off as much as you can as a tax deduction, but the simple fact is that dinner out with family and friends will not qualify as business expenses, no matter how you arrange things.

8. Draw lines between your home and your office. Create a division between your office and your home, especially if you work from a home office. Doing so lets you claim the home office deduction as well as divvy up bills. Even if you have a home office, your business shouldn't be paying the entire electrical bill for your house, after all. At least part of that burden should fall into your personal finances.

9. Keep logs of business use. If you use a personal item, such as your car or your cell phone for business purposes on a regular basis, you should be keeping track of the split. Of course, life would be easier if you could have a separate car and a separate phone just for your business, but if that isn't possible, there are plenty of easy logging tools to use, especially for smart phones.

10. Talk to a financial professional. If you are at all concerned that you are misclassifying an expense or you're having a hard time keeping your finances separate, bring in a pro. He will likely be able to help you establish a system that works for your own individual situation.

Keeping your business and personal finances separate is important to the welfare of both you and your business. Not only can you be asked to show that they are separate when applying for a business loan, but doing so can keep you out of a lot of trouble. If, for instance, you've set your business up to limit your liability, but let your personal and business finances mingle, a judge can declare that your liability is not limited — that you and your business are effectively the same person. So taking the time to separate out your finances may seem like a hassle in the moment, but if something comes up, you'll be glad you did.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Does Your Entity Choice Provide Personal Liability Protection?

Barbara Weltman — Sat, 06 Nov 2010 20:04:48 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/does-entity-choice-provid...

When you set up a business, you may opt to incorporate or become a limited liability company (LLC) so that creditors can only look to the business, and not your personal assets, to satisfy their claims. This entity choice, however, only goes so far in providing protection for an owner's personal assets. There are certain situations in which an owner can continue to have his or her personal assets at risk because it is part of usual business practice or because of improper conduct by the owner.

Personal Guarantees

In order for a small business to obtain a loan, an owner is usually required to give his or her personal guarantee. This means that if the business fails to pay what it owes, the lender can look to the owner to make the payments. If the owner fails to do this, the lender can pursue collection action against the owner and ultimately obtain the owner's personal assets, such as a home, car, and savings account.

An owner's guarantee typically is required in these situations:

Commercial Loans

For example, in the case of a SBA-guaranteed loan, anyone owning at least 20 percent of the business is required to guarantee the loan.

Credit Cards

Obtaining a business credit card may depend on the owner's credit rating as well as his or her personal guarantee.

Leases

Landlords generally ask that an owner personally guarantee the lease.

Car Loans

If a vehicle is purchased by the business and the purchase is financed, the finance company will need the owner's personal guarantee.

Looking Beyond the Entity

A corporation is a separate being in the law; it can sue and be sued. However, creditors can disregard the corporation and look to the owner when the owner fails to treat the corporation as a separate being. This is called "piercing the corporate veil." (A similar action can result for LLCs.)

This can happen when an owner is careless about where corporate income is deposited — into the corporate account or directly into the owner's account. Similarly, paying corporate expenses from a personal bank account rather than the corporation's bank account can be used to show that the corporation is disregarded by the owner, so the creditor can look to the owner to satisfy the obligation.

What to do to avoid this result:

Keep Corporation Finances Separate from Owner Finances

Use a separate bank account and separate business credit card.

Hold Regular Board Meetings

Under state law, corporations usually are required to hold at least an annual meeting to approve compensation of officers for the coming year and other actions.

Maintain Corporate Minutes

Having a meeting isn't enough; put in writing any decisions by the corporation on actions it takes.

Trust Fund Liability for Certain Taxes

An employer must collect both income tax withholding and the employee share of Social Security and Medicare taxes (FICA) from employee wages and pay them to the government. If the employer is a corporation or LLC and the business fails to pay these taxes, an owner, officer, or even a bookkeeper in the right circumstances can be personally liable for 100 percent of the taxes. In the tax law this person is called a "responsible person."

Whether a person is a responsible person depends on various factors. No single factor is determinative. According to the tax law, these factors include:

The contents of the corporate bylaws.
The ability to sign checks on the company's bank account.
The signature on the employer's federal quarterly and other tax returns.
The payment of other creditors instead of the United States (such as paying vendors and suppliers).
The identity of officers, directors, and principal stockholders in the company.
The identity of individuals in charge of hiring and discharging employees.
The identity of individuals in charge of the firm's financial affairs.

One recent case illustrates the point. Joseph was the owner, president, and sole officer of a corporation. As the sole corporate officer, he was the only person who had the authority to write checks and pay the corporation's bills, taxes, and creditors. He had an obligation to withhold income and FICA taxes ("trust fund taxes") from the wages of the corporation's employees and remit the withheld taxes to the government, but he failed to do so. The court held him liable for the trust fund taxes. He didn't have the cash, so the government placed a lien on his home — his only asset. (His attempt to transfer the home to his wife to prevent this result was voided.)

A Better Way

Make sure that the business pays trust fund taxes before paying other bills. When there isn't enough cash to pay taxes and other bills, consider obtaining debt-restructuring assistance from a company such as Corporate Turnaround, so vendors will continue supplying goods and services with partial or delayed payment while the business pays its taxes in full and on time.

Final Word

Owners of corporations and LLCs should understand their obligations and restrictions so they can continue to maintain their personal liability protection to the fullest extent possible. When in doubt, talk with an attorney who is knowledgeable in this area of law.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: