Some business owners choose to place their personal funds into their company to try to reduce the funding needs of a startup. It can be a great way to avoid taking on more debt, but if you don’t do it right, you might risk the company. It is critical to account for the funds properly, allowing you to track the amount of ownership you have in the company. There are a few steps to consider.
1. Ensuring there are Separate Bank Accounts
It is important to separate your personal and business bank accounts. And if your company has a legal entity, such as LLC, you will be protected from liability relating to decisions you have made. Even if you have an LLC, if you combine business and personal financial accounts, you might no longer have that protection, and it might cost you in the future. If your personal and business accounts are currently the same, now is the time to open a new account. There are free ones out there that let you deposit checks, schedule transfers, and make payments as needed. Many don’t even require minimum deposits, making them perfect for startups.
2. Funding the Business Account
You’ll need to transfer some funds from your personal account to the business one so you can have funds that belong to the company. Before moving the funds over, think about how much you will need for your various expenses and ensure that you move that amount over. That way, you won’t need to account for the full amount of funds more than once.
Of course, being able to move the necessary funds over is dependent on you having them in your personal account. You will want to ensure that you have enough funds for your business ahead of time. One way of doing that is to sell your life insurance policy for a lump sum payment. You can review a guide on how to sell your life insurance policy for cash with apexlifesettlements.com so you have more funds for your company.
Another way of using your personal funds for the business is to use a consumer credit card. They are relatively quick and inexpensive methods of getting the necessary funding. Plus, if your credit card offers rewards, you can benefit from those. You can use them either as a business or an individual. Still, if your startup is newer, you will likely need to personally guarantee it. But one of the benefits of going this route is that there are often lower interest rates than with a loan from the bank.
They are also an excellent way of building your credit, and with the rewards programs, you might end up getting back a percentage of what you have spent, depending on the category. But if you were hoping to put a large balance on the card to pay back later, you will need to have great credit to qualify. Otherwise, the company might charge you high interest rates on the balance. And you can’t use a credit card for everting since not all merchants accept them. Plus, other expenses, such as payroll, is unable to be paid using your credit card, so do your research before making a decision.
3. Recording the Money
Since it is your own funds going into the company, you will need to understand how to account for that in the books. It will be either a loan or equity. Many times, business owners put this down as contributions, which is equity. That means you are not owed anything by the company, but have invested in its success. In return, you have more ownership. Remember, the way you record this transaction will determine your accounting, as well as whether you get anything back at a later time. Even if it doesn’t seem important now, it is critical to record everything between your accounts and the business so you will continue to have the same legal protection against mistakes. After accounting for these funds, you will want to double check that everything is right. If you are using accounting software, it might have already been done, but ensure that the full amount of your deposit is now in the right place.
4. What to Consider When Using Personal Funds
Many people start companies thinking they will certainly be successful, but many will soon fail. If you are using your personal funds, think about whether or not you can afford to lose them if the company goes under. Be realistic about whether you will be successful, and consider your industry as well as any competition. If you are unsuccessful, you could lose retirement funds, personal assets, or other savings you have invested. It is also best to realistically consider how much you will need to get off the ground and turn a profit. Make sure you put enough into the startup, but you should also not put too much of your personal assets in.
You will also want to think about the legal structure of the company. It could be a sole proprietorship, LLC, corporation, or partnership. Many times, they begin as partnerships or sole proprietorships before becoming corporations or LLCs. One of the advantages of a corporation or LLC is that they will keep you safer from being personally liable for the obligations or debts of the company.
Still, there are more formalities to follow when you have a corporation, making it harder to place your personal money in. For instance, if you have a corporation, you will use corporate ledgers to record your transaction and issue shares. Plus, if you have a personal investment in a corporation, you have a taxable dividend.
One of the reasons so many companies start as partnerships, sole proprietorships, or even LLCs is that it is much easier to move around your personal funds when they are most needed. Plus, an LLC offers nearly the same legal protection that a corporation does. Of course, you will need the help of an attorney if you are thinking about setting up an LLC.