Every February for the past 5 years I’ve had to export all my transactions from Mint.com into an excel file. Then I proceeded to filter out all my real estate transactions. I’m sure I got most of them but for sure there were always ones I missed.
Yes…I didn’t have a business bank account. The pain of using our personal checking account was just not bad enough to motivated me to start a business checking. I could keep track more or less.
The Problems
My wife likes to have control over the bills and finances. She has her methods and doesn’t feel comfortable with my paperless, auto bill paying methods…that’s fine with me. A couple of issues come up over and over again though…
Issue #1: What is this charge on the credit card? – Every time I’d buy something for my real estate business it would show up for my wife to see on our statement. So I would get asked about it. Even though she is fine with the purchase(s) I’d always get that Guilty Feeling. Sometimes I’d get defensive for no reason what so ever.
Issue #2: Earnings – Every time I’d close a deal or get a check from affiliate earnings it would get absorbed into our personal money. It’s easy to remember for a few weeks after that that money is for my business. However…6 months later it is damn near impossible to remember. Did I spend that money yet? This gets to be a BIG HEADACHE and can lead to some unnecessary talks with the spouse.
Issue #3: Tax Time – Like I said in the intro, I always had to pull out my real estate investing transactions for our accountant. Luckily we use one credit card and never paid cash for anything (we always paid the card off in full every month though). This made the chore not terrible. On average it took me about 2 hours to do.
Now these problems all have to do with personal items and nothing to do with liability. The more I read up on separating the personal and business accounts the stronger I feel I’ve been an idiot the past 5 years.
Liabilities
It is all about protecting your family right? Having your real estate investing business set up properly can help protect your personal assets from any business liability.
Having my business and personal finances co-mingled, I ran the risk of having my business appear like it’s not a real business. If it wasn’t deemed a real business then I become personally liable.
Keeping your finances separate makes it clearer that your business is a legitimate, viable business that is distinct from your personal finances.
For ease of accounting, the Internal Revenue Service (IRS) recommends that all small businesses have separate bank accounts, according to the agency’s “Small Business Virtual Tax Workshop.” In an audit, the IRS may look at my business to determine if it’s a business or a hobby. Having a separate bank account will make my business look more legitimate and allow you to keep business deductions.
Creating a “Corporate Veil”
From businessdictionary.com a corporate Veil is…
“A legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations. This protection is not ironclad or impenetrable. Where a court determines that a company’s business was not conducted in accordance with the provisions of corporate legislation (or that it was just a façade for illegal activities) it may hold the shareholders personally liable for the company’s obligations under the legal concept of lifting the corporate veil.”
Separating personal and business accounts is only the first step in protecting my family. I should also look into creating an LLC. I do not know how to do this yet so If someone could give me some guidance I’d really appreciate it.
How I’m Making it Easier on My Business
The steps I’m taking to make sure my business runs smoother and that I protect my family finances are all simple things. The average person could probably have all these items checked off their list in 2 or 3 days. This is what I’m doing now…
Create a Business Checking Account – I’ve discussed the reason behind this in detail above. Makes to much sense not to do it.
Get a separate credit card for business use only – Though very obvious it’s still worth mentioning. I want to make sure that all purchases and services that I use run through this credit card. Makes it so much easier to keep track of expenses.
Use a service/software to keep track of Expenses and Create Invoices – The concept of invoicing people for services rendered was foreign for me until I started this process. It’s all about keeping track of who owes you money. There are many ways to keep track of expenses and creating invoices. A few of them are…
You can also use Excel and an Invoice Template
Get an Accountant – This all comes down to the adage…Don’t work in your business, work on your business. I don’t need to be doing my taxes I just need them to get done. A good accountant that understands real estate investing businesses is a very good idea. I’ll be using my Family Accountant to start and see how it goes.
Additional Benefits of a Business Checking Account
Along with everything I’ve mentioned above there are other benefits for having a Business Checking Account.
Empower your employees – If you have employees you can allow them some level of control over your account. Purchasing, depositing and invoicing.
Separate Business Account Required for Incorporated Businesses – Simply put you can not register your business unless you have separate business accounts. This falls under protecting your personal assets. If you can’t register your business then you do not have a corporate veil to protect yourself.
Professionalism – Your business will look more professional if you send out payments/checks with your business name on it. It’s a little embarrassing to send out a check with Winnie the Poo checks and your wife’s name on it.
Anyone have any suggestions on creating an LLC?
I’d also like to create an LLC but I have no real idea how to do this. Should I use a service like LegalZoom or have an attorney do it for me? If you have any tips I’d love to hear from you…Thanks!
photo credit: faungg’s photo via photopin cc
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Comments 5
Hi, Scott. You are definitely on the right track with all these things. As far as creating an LLC, we had a business lawyer do it for us. Minimal thought and effort were required on our part, and we were sure it was done correctly. An experienced lawyer will have done this a hundred times and will quickly and easily get you up and running.
Author
Thanks for the info on creating an LLC Mike. About how much did it cost you?
I seem to remember it costing about $1,000. This included consultation and advice on setting up the company and what to include in the operating agreement, as well as creating all the necessary documents and filing them with the state. The actual state filing fees were extra, around another $100 total I think for doing it here in California. Then we have the exorbitant $800 per year LLC fee here.
Hey Scott, I’m not sure what state you’re in…but here in wisconsin, its fairly simple. I did explore the legalzoom route and then an attorney. My attorney was happy to do it, but said it is so easy, that I might be better off doing it myself. Filed the quick paperwork and paid the fee, and LLC was good to go within the next few days…
Author
Thanks Kyle. That is the conclusion that I’m coming to as well. It’s just a matter of doing it right?