Separating yourself from your business.

Entity Crisis: The Reason You Need to Separate Yourself from Your Business

Your business wouldn’t exist without you, but that doesn’t mean you and your business are one and the same. For you to maximize the benefits of owning your own company, it’s essential that you maintain two distinct entities: your business, and you as its employee. 

Thinking of your business in this way has many advantages. One, you have a better chance of achieving a healthy work-life balance. Two, it gives you the distance necessary to objectively decide how your company—and your role in it—will grow and change over time. Third, separating your business and personal assets can help you make decisions about what will happen to your business if you pass away or retire.

While these are all good reasons to separate yourself from your business, there is one that should concern you at the very beginning of your venture. Whether you’re a sole proprietor, partnership, or other organization, only a properly-structured business entity offers asset protection and tax benefits to shield your company from potential predators.

Vital Steps to Keep You and Your Business Separate

When you have the right documents and procedures in place, you’re much less likely to encounter costly problems that eat into your profits. Keeping your business and personal lives separate also simplifies your record keeping, makes paying taxes easier, and allows you to manage your assets without fear. If you haven’t already done one or more of the following, you should schedule a call with Yolofsky Law for immediate assistance.

Create a Separate Business Entity

When you establish a separate legal entity for your business—such as a limited liability company (LLC) or corporation —you’re shielding your personal assets from any business debts or losses. During formation, your business is given its own Tax ID and Employer Identification Number (EIN) that functions in the same way as your Social Security number. 

Any assets held under your own name (such as your home or car) belong to you, while any assets held by your business will be treated as if they belong to a completely different entity. However, this will only work as intended if you can prove to creditors and the IRS that you and the company are not interchangeable.

No matter what your reasoning, you should never have one bank account that you use to pay both personal and business expenses. Not only does it make accounting more confusing, but it also places you at risk of legal trouble and puts your assets at risk.

Silo Your Personal and Business Finances

Once you have your EIN, you should use it to open a checking account in your company’s name and stop using personal accounts for business transactions. This account should only be used to receive payments for your company’s services, employee payroll, or to cover business-related expenses. This way, creating an accurate record of your company finances is as easy as reviewing your bank statements.

Another way to put distance between you and your business is to apply for a company credit card. If you use your company credit card for business expenditures only and always pay the bill on time, you improve your company’s credit and borrowing power. This is vital to qualify for small business loans with lower interest rates.

The more meticulous you are when separating your expenses, the better. If you’re at the grocery store and need both business and personal items, ask the cashier to ring up the purchases as separate transactions. Make sure that your clients make checks out in the name of your business instead of your name. A little prevention goes a long way to creating a spotless financial record.

Structure Your Business Expenses Carefully

Once funds are deposited into your business account, you should first pay any tax-deductible company expenses. The government subsidizes business expenditures by allowing you to deduct them from your business’s federal income taxes. For example, if you buy an office chair through your company account and use it for business, you are essentially paying with pre-tax dollars.

It’s important to purchase items or services that will be used only for business purposes since qualifying company expenditures can be written off to reduce your tax burden. For example, if you use your vehicle for both personal and business trips, you could expense the fuel it takes to drive to a meeting and the food you order for lunch, but not the car payment. Our advisors can help you figure out which purchases are deductible and which could send a red flag to the IRS.

Establish Your Role as an Employee

Money earned through a business entity might be under your control, but it doesn’t belong to you (yet). Once your business has covered all of its expenses, it needs to pay you a salary—one you can put in your personal accounts and use to pay the bills. Every two weeks or once a month, write yourself a payroll check (or do a bank-to-bank transfer) from your business account to your personal checking account.

The simplest way to calculate your salary is to establish the minimum your business needs to pay you to cover all of your personal expenses. Accuracy is key. If you pay yourself too little, you might be tempted to pay personal expenses out of your business accounts and pay back the loan later—a bad precedent for company owners. If you pay yourself too much, your company might not survive a bad year.

More on owner/operator compensation is coming soon. Suffice to say that if you’re not regularly paying yourself a salary, then your business might just be in financial trouble. If you’re only taking profit distributions – BEWARE, things might not be going as well as it seems.

Put Your Profits Back Into Your Company

Ideally, your business will soon earn more money than it needs to cover monthly expenses. You might be tempted to pocket the extra, but remember: you’re an employee, not the corporate entity. It’s better business sense to invest your profits into the company. Consider hiring additional staff members, paying for training seminars, upping your online marketing spend, or opening a second location. Most importantly, you’ll need to know how to structure your profits to minimize your tax liability.

Let Us Help Protect You by Keeping You and Your Florida Business Separate

If you have already commingled your business and personal expenses, don’t worry. There are ways to track and document these costs so that they can be properly accounted for. Yolofsky Law provides careful, detail-oriented business strategy planning to keep our clients thriving year after year. Schedule an intro call or email us at today to learn more about your options.