An important part of owning a business is building the company’s financial profile so that is independent of your one. While this separation is important through all stages of the organization’s growth, it is most important during the five years. As almost half of all start-ups fail during these crucial years. If you end up becoming part of this unfortunate statistic, the last thing you want is your entrepreneurial endeavor to negatively impact your financial future. Taking these steps to separate your private and business finances will help secure financing for your new endeavor.
Incorporating Your Business
This is the first step in legally separating yourself from your idea. Every state has a different process. If you are working with a lawyer, they should be able to walk you through this process, but you can also find resources on your state’s official government page or by a visit to your local Small Business Administration office. There are many different types of incorporation and each has legal and tax implications. The type of company, as well as your anticipated financing, will inform which one you choose. Some financial institutions will require you to take this step to get any funding, this includes SBA loans.
Obtaining an Employee Identification Number
After you have incorporated, you will want to obtain an EIN for your venture. You need this even if you don’t plan on having employees because it also serves as your Federal Tax Identification Number. The Internal Revenue Service makes this process very simple, you can apply online and receive your number almost instantly. Then you open bank accounts and apply for SBA loans. Be sure to follow the EIN application instructions carefully and save all the relevant documentation because the IRS will not issue you a duplicate.
Opening Separate Accounts for Your Business
Now that you have a legal and tax identity for your company, you should open accounts in the name of the business. Start with a checking account, consider online services such as PayPal or Square for accepting money, and think about if you will need to apply for a loan or other line of credit. Government-backed programs, like SBA loans, will require that you show all this documentation to qualify. You may have more flexibility with private loans, but those are likely to have higher rates.
Incorporating your business and getting a tax ID number and separate accounts are good to show investors. They are also important to protect your credit scores if your enterprise does not turn out to be as successful as you plan.
Contact Rexford Commercial Capital today.
By Rexford Commercial Capital