Running a small business is a big responsibility. If you are the sole proprietor of a small business, you want to do everything in your power to avoid even the appearance of financial impropriety. Experts, including local employment attorneys, generally agree on key principals toward that end.
Do Not Commingle Your Small Business and Personal Accounts
There are plenty of sound reasons to keep your small business and personal finances separate:
- It could otherwise lead to some unpleasant interactions with the Internal Revenue Service;
- It is a way to acknowledge on a psychological level that separate accounts are to be used for specific—personal or business—expenses, and the two types of expenditures are not the same;
- Transactions will be easily organized and accounted for; there will be no need to scratch your head and wonder if a particular expenditure was for business or pleasure;
- It is easier on your accounting bill because it is more straightforward;
- Your personal financial information will remain private;
If You Want to Get Cash Out of Your Small Business
There are plenty of smart, legal ways to get cash out of the company if that is what you want to do. Avoid having the company write out a check to pay for your personal lawn service, or creating questionable invoices to pay for personal expenses. Instead, use strategies to get money out of the company that indicate that you are coloring within the lines. These methods provide evidence of the legitimacy of your financial decisions, help the company budget flow because payments to you are anticipated, and leave a clear paper trail delineating financial transactions. Consider any of the following:
- Paying yourself a salary;
- Paying yourself a distribution or dividend (if you are an S-Corp) with a company check;
- Opting for regular owner draws, as opposed to indiscriminate withdrawals if you own the company solely;
- If you are in a real crunch for cash, taking out a shareholder loan that has traditional terms related to interest, due date, and non-payment penalties.
If You Get Caught With Sticky fingers
In the aftermath of messy financials that point to the misuse of business funds, you could be facing a number of ugly consequences:
- A sullied reputation;
- Consequences associated with accounting documentation that does not square up;
- An IRS audit, for which you will have to supply invoices, receipts, and other documentation supporting your contentions;
- Additional income tax burdens;
- Penalties and interest on the newly configured tax liability;
- Changes in your personal tax liability;
- Being targeted for future IRS attention.
Keep Your Small Business Financial House in Order
Running a small business is a big responsibility. Making sure you handle the financial aspects properly will save you headaches and a lot more. Is your business in Sonoma County, Mendocino County or Lake County California? For help in managing the legal and ethical end of small business financials, schedule a confidential consultation with the experienced Santa Rosa business law team at Beck Law P.C.. Beck Law P.C., is located at 2681 Cleveland Avenue, just south of the Empire College School of Law and north of Coddingtown Mall.