How entangled should your personal and business finances be? For many small-business owners, the line is blurry, which can put them in a precarious situation when things go south. Here, WSJ's personal finance team answers some common questions to help business owners through these trying times.
My business is in serious trouble due to COVID closures. How should I be prioritizing expenses?
Start by thinking about the nonnegotiable, primary expenses. For many, this includes paying employees and vendors, and taking into account the cost of goods. Without these taken care of first, you can't sell anything, said Steve Denny, co-founder and lead adviser at Innovative Business Advisors in Missouri. Once the primary expenses are taken care of, move on to addressing your lease and utilities. These expenses can often be negotiated or deferred. Check with your landlord to find out if you can defer payments for a period. Mr. Denny also recommends business owners look at their debt schedule to see if it's possible to get deferrals on existing debt as well.
Malik Lee, a managing principal and advisor at Felton & Peel Wealth Management Inc., reminds his clients that in tough times it's not uncommon for your personal or business credit to get hit. In many cases, he suggests trying to attack business credit first, because you want to consider focusing on the credit that you get the majority of your loans from.
I've been paying my staff and business expenses from my personal accounts. Should I continue doing this?
Paying your business expenses from your personal accounts is a "terrible" idea, as it opens the door to possible personal liability, says Nina Kaufman, a lawyer in New York City who specializes in advising small businesses. Stop doing it immediately, including using personal credit cards. Many small-business owners form a business entity such as a limited liability company to protect against their personal exposure. But protection isn't absolute, she says. With the privilege of liability protection comes the responsibility to run your business in a professional way. This means having a separate bank account for the business and properly accounting for personal expenditures.
Paying business expenses directly from your personal accounts can make you vulnerable to a creditor's claim that you weren't running your business properly and therefore your personal assets should be open and available for collection.
In addition, if you're running part of your business from your personal account and part from your business, it's difficult to know if your business is profitable.
If you're paying these expenses from personal funds because your business isn't generating enough money to pay them, you need to ask yourself some hard questions about the viability of your business before you get further down the road, Ms. Kaufman says. The IRS could declare your business to be a hobby, in which case, you may need to pay more in taxes and penalties to overcome all the deductions you've been taking. Paying business expenses from personal accounts also makes for a more complicated tax picture—especially when the underlying bookkeeping isn't clear. This can cause your accountant to spend more time advising you, preparing your tax returns and ultimately cost you more.