While every business begins with the dream of making money, few are launched with any expertise in what to do with it. But don’t worry – we’re here to help. This monthly series will offer important accounting and financial management tips for those of us working hard, wearing many hats and wondering how to read a balance sheet.
Yes, it’s all your money. Or what little is left after overhead. But just because it all belongs to you doesn’t mean you shouldn’t formalize your compensation model and put yourself on payroll. In order to get started, consider these three things:
• Pay yourself regularly—It not only establishes a clearer picture of what the true cost of operation, it raises fewer eyebrows than large random withdrawals when it comes time to do taxes.
• Take out “reasonable compensation”—There are certain expectations about the amount you can earn for the type of work being done. If you’re starting a fresh-pressed juice business out of the back of your house and paying yourself $200,000—that’s probably not reasonable. Or sane.
• Consider the legal structure of your business—When you pay yourself and how much you pay yourself will depend on how the business is organized. It’s important to work with your accountant to determine how the business structure influences the way you get paid.
Life will be easier establishing a separate bank account for your company. While some business structures don’t require this, it is in your best interest to keep personal and business accounts separate. Here are three reasons why a separate account matters, no matter how small the business may be:
• Taxes—Come tax season, you aren’t going to want to weed through expenses to try and distinguish whether that dinner back in January was a personal or business expense.
• Credit—By establishing a separate business identity from your personal identity, it will be easier for the business to build its own credit history. This will ultimately make it easier to secure bank loans and credit cards.
• Credibility—A separate identity will help the IRS verify that your business is not just a hobby. This is important since expenses and losses related to a hobby are not tax deductible.
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