Keep your business and personal finances in different buckets.

Keep your business and personal finances in different buckets.

Small business owners often live, eat and breathe their businesses.  They become one with their businesses like Buddhist monks try to become one with the universe.  They have no life outside what they do for a living.  But when I say, “you are not your business,” I don’t mean that in a psychological or metaphysical sense.  I mean it in a legal sense.

If you are incorporated (which you should be, no matter how small your business), you are not your business.  Never forget that.

That means:

  • Your contracts should be in your business’s name, not your own.
  • Your leases should be in your business’s name, not your own.
  • Your business property and intellectual property is owned and titled to the business.
  • Your business keeps separate books and banks accounts.
  • You get a pay check, dividends or owner’s draw.
  • You don’t take personal shopping trips on your business MasterCard.
  • You never pay your employees out of any account other than your business account.

In short, you need to keep your business affairs and your personal affairs separate.  Pretend like your business is your employer, if that’s easier.  If you are a corporation and your business is profitable, in fact, you should be drawing a paycheck just like any other employee.

Why does this matter?  Well, if your business gets into any trouble (your business tanks, you get sued, you have a heart attack, your business catches fire, you become a Buddhist monk and give up all worldly possessions), then you want to be able to shut down or maneuver the business without it ruining your personal life and finances.

Here’s an all too common example: you run a restaurant, let’s say.  One of your patrons slips on a banana peel and cracks their skull.  You get sued.  But your insurance has lapsed because you didn’t pay the premium last month because sales were down and you were hoping to catch it up this month.  Now what do you do?  If you are incorporated, your ability to leverage the case and defend yourself is much greater (even if you threaten the nuclear, “I’ll bankrupt the business and you can go to Hell” option).

But if you are your business, if you are not incorporated or you have so intermingled your personal and business affairs that not even the accountants dealing with Enron’s bankruptcy could figure it out, then it isn’t just your business that is on the lawsuit chopping block, it’s also all your wordly possessions.  If you are in a community property state like California, your spouse’s worldly possessions are also on the block.  And that is the kind of thing that can stay with you for a life time.

So take a little time to audit your legal documents and your corporate papers and make sure that everything is in order.  Keep your books meticulously separate.  If you have any questions about the legal status of a contract, lease, account, your corporate books, or a business law issue, an attorney can help you fix this up without too much trouble.  But that little bit of trouble now is well worth it in the long run.

Because, trust me, it can happen to you.

Alicia Dearn

Alicia Dearn

CEO + Trial Lawyer at Bellatrix PC
Ms. Dearn gives sharp and insightful legal counsel to entrepreneurs and employers so they can advance their businesses fearlessly. She fixes legal problems.
Alicia Dearn