One of the concerns for business owners is how their personal finances can affect their business. Let’s take a closer look at the different types of businesses and how your personal finances can be affected by each.
Sole Proprietorships are the most common type of business. They are the least regulated by the government and do not require a FEIN (Federal Employer Identification Number), rather the owner uses their own social security number. The advantage is that it is cost effective and easy to set up. The great disadvantage is that the owner’s finances are directly at risk to the sole proprietorship. If there is a judgment made against the business, the personal assets of the owner can be compromised.
Limited Liability Companies are the combination of a partnership and a corporation. It provides you with the tax advantages of a partnership and the non-personal liability advantages of a corporation. You can also choose whether you want to be taxed as a sole proprietor, corporation, or partnership. Also, there are many less formalities than in a corporation and you can set it up with partners, members, trusts, or non-resident aliens. All in all, there is little or no risk to your personal assets when operating under an LLC.
Corporations are the most complex form of business and require the most regulation by the state. The disadvantage is that there are strict by-laws to adhere to and the fees to incorporate can be high. If the structure is not closely adhered to, the company may lose some its benefits of incorporation. Also, profits can be subject to double taxation depending on the distribution method. The advantage is that there is protection of personal assets under a corporation and usually it is limited to the amount of money initially invested by each partner.
Limited Partnerships exist where you may need several partners, some of who will be named “limited” and some who will be “general.” The limited partners are considered investors and have no other input of control over the business; whereas, the general partners actively manage the company. The advantages to this type of business are that the limited partners have no personal liability of assets. This may make it easier to find investors. The disadvantages of limited partnerships are that they are highly regulated by government; however, they still do not require nearly as much paperwork as corporations. Also, general partners as subject to full personal risk unlike the limited partners.
How will bill consolidation affect my business?
There should be no negative affect upon your business if you choose to consolidate your bills. However, the positive affects will include: increasing cash flow by only having one payment per month as opposed to several throughout the month, increasing time management, and hopefully a lower interest rate.
5 Things You Should Do to Protect Your Personal Assets if You Own a Business
Have a business account. It is imperative that you keep your personal finances separate from your business. If you don’t do this, there are many cases where that can open you up to personal liability should something go wrong. If you have to borrow between accounts, you must always keep accurate records and pay it back.
Keep accurate records. Make sure that you have a software program in place, such as Quicken or Quickbooks to keep track of income, expenses, and personal investment. This will also help you to generate profit and loss sheets and year end reports that will be required by your accountant.
Hire an accountant. Businesses are tricky and unless you are an expert on the matter, you’ll need to hire one. Things must be done properly in regards to yearly reports, state guidelines and licenses, tax filing, etc. Not adhering to the rules for your particular business can result in steep penalties and personal liability. The cost of hiring an accountant will far outweigh the potential problems you will avoid by not doing so.
Obtain insurance. Liability insurance will be one of the most important purchases you make as a business owner. Depending on the type of business you have you will need to determine what kind of insurance you have to purchase. Especially as a sole proprietor or general partner, you will want to make sure that you have insurance considering your personal assets are at full risk.
Incorporate or form an LLC. Although it may seem like a hassle and you may think problems will never arise, it really is the best option. There are few businesses that are risk free when it comes to personal liability. It’s not as hard as you think, in fact, this video will show you how you can form a business in four easy steps.
Business Support Organizations
www.business.gov – This is the official business link to the U.S. government. Click on your state to find resources on how to start and operate your business according to regulations.
Business in a Box – 1-866-383-4100 This is a great place to create and print legal business documents and templates quickly.
www.allbusiness.com –A variety of small business advice on every topic imaginable.
IRS Small Business Center –1-800-829-4933 Here you will find a wealth of knowledge about small business, taxes, and being self-employed.
One of the concerns for business owners is how their personal finances can affect their business. Let’s take a closer look at the different types of businesses and how your personal finances can be affected by each.