When you run your own business, oftentimes one of the most confusing aspects of the job -especially if you are new to the experience – is understanding how to separate yourself from your business. This issue can show up in so many ways, from achieving a work/life balance and managing your time, to how you get paid and even how much taxes you owe.
With this in mind, we will offer a big-picture overview of this issue, and in future articles, we’ll drill down to some of the finer details of keeping your business and personal assets separate. Although it might not seem overly complicated or important, separating yourself from your business is a must for every business owner.
You & Your Business Are Separate Entities
The first thing to keep in mind is this: you are not your business, you are not your heart project, you are not your work in the world, or even the services you offer. Your business, heart project, work, service, and/or product may feel like it’s one and the same as you, or that it’s your baby. There may come a day, that you may not want it anymore.
Either way, this is a good thing to start thinking about now. Do you want what you are creating to live beyond you? If so, you’ll need to start thinking about it as an evolutionary entity that can grow separate from you. And whether you want it to live on beyond you or not, it needs to exist separately from you, because there are major tax and asset protection benefits for you by doing this properly.
Owning A Business vs. Being An Employee
To add perspective, let’s contrast what it’s like to run your own business with working as an employee.
The Employee Experience: As an employee, you get paid via a paycheck, taxes are deducted, and a W-2 issued to you at the end of the year. In this case, you and your money-earning vehicle are essentially one and the same.
You earn money, and you pay taxes on that money in the form of income taxes and payroll taxes, which are two separate types of taxes. As an employee, what comes to you every pay period via is yours to put into your personal financial accounts, so you can pay your bills, save, or invest. In that context, you are getting taxed on every dollar you earn.
There are some ways that you can save money tax free as an employee, such as by directing some of your pay into a 401(k), an IRA, or even a Health Savings Account, provided your employer offers such benefits.
The Business Owner Experience: In contrast, when you are earning money through a business entity that is under your control, money comes into your business, goes into your business accounts, and is first used to pay business expenses, which are deductible expenses to your business. When you deduct business expenses from the income of your business, you do not pay income taxes on that income. In this way, you can think of business expenses as a government-subsidized expenditure.
To keep your business and personal expenses separate, your business entity needs its own bank account, its own credit cards, and it needs to pay you. You then always pay your personal expenses out of your personal accounts, never your business accounts. Whatever your business pays you will be subject to income tax and possibly payroll tax as well, though there are ways to significantly reduce your payroll tax obligation by choosing the right way to structure your business entity. Be sure to talk with us regarding how to structure your business for maximum tax savings, if you have not already gotten great guidance on that front.
To the extent that your business earns more money than what’s required to cover your basic needs, you may want to consider investing to hire experienced support staff (especially a skilled bookkeeper and administrative support) to free up your time and allow you to focus on generating more revenue, better serving your clients or customers, and growing your operation. Or you may choose to invest that money in additional education or training for yourself, so you can increase the value (and price) of your services. If you have excess cash flow, you’ll also want to know how to structure your profits, so you pay the smallest amount in taxes legally possible.
Don’t Mix Personal & Business Finances
It’s important not to mix or share business and personal accounts. If you have already paid business expenses out of a personal account, or by using personal credit cards, keep careful track and document exactly how much you paid out from those accounts to your business. This payment will either be an investment in your business that you will want to track for the future, or it will be a personal loan to your business that you will want to eventually have paid back.
Talk with your CPA regarding how best to structure investments in or as loans to your business, and then we can help you properly document your decisions. Or if you need strategic support on this issue, contact us, and ask about a LIFT Business Breakthrough Session, and we’ll look at all of your legal, insurance, financial, and tax strategic decisions together.
We offer a number of systems and processes that make keeping your personal and business finances separate a snap. Not only that, but we offer additional services that make separating yourself from your business as easy and convenient as possible.
Get Clear On Your Actual Financial Needs & Goals
One of the best ways to effectively manage your business and personal finances is to first determine what you need your business to pay you at a base level, so you can pay all of your bills and other personal expenses, as well as meet your personal time and money goals. To get clear on this, we use a process called Money Mapping. If you haven’t worked with us on this yet, now is the time to finally get a solid understanding of how much money you actually need to reach your goals, rather than guessing or worrying about how much you need to earn to stay afloat.
We’ve Got Your Back
When it comes to separating yourself from your business and managing all of the different aspects involved with this process, you can count on us to provide you with the trusted support and guidance. With our help, you’ll learn how to do this in a way that not only ensures you are doing it right, but that actually adds value to your company and generates increased revenue. Sit down with us to learn about all of the different ways we can support you in this area. Schedule your visit today.
This article is a service of Stafford Law Firm, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.