Incorporating your closely-held business is one of the best strategies you can use to shield your personal assets from liabilities that might arise in that business. If, however, you fail to keep your business and personal finances separate, a person who has a claim against your business can break through the barriers that are created when you establish your corporation.
The tax attorneys at Rosenberg Martin Greenberg, LLP in Baltimore recommend that you consult directly with your attorney for legal advice on how to structure your corporate entity and to organize your business and personal finances to maintain the necessary separation. The following guidelines will provide background for your consultation with your lawyer.
Form and Maintain your Corporate Entity Properly
Whether you form a corporation, partnership, or limited liability company, you need to adhere to the rules and required disclosures of the state in which your corporation will be established. Consult with your attorneys and financial advisors to determine which entity is best for your business. Your attorney can verify that your corporate entity is properly registered, that it has adopted the necessary by-laws or operating agreement to govern its management, and that it has issued stock or interests to its owners and elected board members and officers under your state’s laws. Your attorney can also verify that you file all required annual renewals and pay franchise and registration fees to keep your corporate entity in good standing.
Apply for an Employer Identification Number with the IRS
A business’s EIN is akin to an individual’s social security number. The EIN is a unique 8-digit identifier that you will use in corporate tax filings and other financial documents, including payroll and employment records for your business’s employees. Recent changes in U.S. tax laws might make it advantageous for your incorporated business to qualify as a closely-held S corporation. Your business will need an EIN if your attorneys and tax advisors recommend that you seek S corporation status.
Open a Business Bank Account
All of the income and expenses for your business should be processed through a separate business bank account that you open under your corporate entity’s name and with its EIN. You should never pay for any personal expenses out of that bank account, and you should keep all financial activity of your business wholly separate and apart from your personal expenses, even if you are the sole owner of your business and you operate it out of your residence. Most commercial banks require businesses to maintain minimum balances and to process a certain amount of monthly transactions to avoid banking fees. If you cannot maintain the minimums that a commercial bank might require, look for a smaller local bank or credit union that has more flexible terms for business checking accounts.
Establish a Credit History for Your Business
Talk to vendors about establishing business purchase accounts that allow you to procure supplies on payment terms, and pay all vendor invoices promptly. After a short time, your business’s payment history will help it to qualify for overdraft protection, bank loans, and credit lines that are secured entirely by your business’s assets and receivables. Maintaining credit within your incorporated business will reduce the temptation that you might feel to finance its operations with your personal credit. If you do need to use your personal credit for any part of your business, consult with your attorney and financial advisors to draft an agreement that reflects an arms-length transaction between you and your business.
Call Rosenberg Martin Greenberg for Advice on Separating Business and Personal Finances
The tax and business lawyers at Baltimore’s Rosenberg Martin Greenberg, LLP will provide the specific advice you need to set up the best corporate structure for your business and to establish and maintain separate financial structures that isolate your business and personal finances. We advise businesses of all sizes in Baltimore, Annapolis, and throughout Maryland, Delaware, and the entire mid-Atlantic region. Please see our website or call us to schedule a meeting with one of our tax and business attorneys today.