You started a small business, or you’ve been thinking about it for awhile, and then all these questions start popping up about taxes and using personal cash, and what if it’s a bad idea etc. etc. If it’s going to make you happy, try it out and start small! Marketing for small businesses has become far more affordable than it once was with social media (and even free if you have time to dedicate to it). Here we’ll cover what you should do with your personal investment in your business, as far as taxes go.
Say No to Commingling
Having a business entity separate from your own name has many benefits, including tax and asset protection. However, one important detail that must be followed is to never commingle personal and business funds – ie. let the business pay for expenses with it’s own money.
Now, when it comes time to actually set up the business, it won’t have a bank account to pay for its set-up fees, so you will have to pay for those things with your personal funds… which then bears the question, how do we deal with the commingling?
Capital Contribution vs Loan
In your personal record keeping, you can decide to consider these expenses as a capital contribution (similar to buying stock in a company) or a loan. If you simply decide them to be a loan, create an asset account (the value of a business’s funds, investments, inventory, property, machinery etc). You can call it something like “reimbursements due from XX company” and include the expenses charged with personal money. Once the business can reimburse you, this account will have a zero balance.
When your business pays you back, it will have to record it in a similar way in it’s bookkeeping by using the same asset account name. If the business isn’t able to pay you back in the same year, you may decide to charge interest or consider it a capital contribution.
If you have additional questions about your business structure or are looking for personal or business accounting services, please contact D&M Accounting and we’ll be glad to answer your questions!