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The following is a guest post from LLC University.
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.
Most business owners have at least two bank accounts, one for their personal finances and another for business assets. From time to time, business owners may desire to transfer funds from one account to the other. The most common reason for this? Paying yourself a salary.
If you've never made a transfer like this before, you may have some questions about legal implications for your company, including implications for the taxes you owe. Let's take a moment to consider some of the regulatory issues associated with transferring money from a business account to a personal one.
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One of the next considerations is what type of business entity you have. The details of your corporate structure will inevitably have a big impact on how you handle business finances.
When you choose to operate your business as a Sole Proprietorship, it means there is no legal distinction between you and the business; your personal assets and business assets are one and the same, and likewise with your debts and liabilities. As a business owner you get to claim 100 percent of your profits, but you are also on the hook for 100 percent of losses. And, whatever profits your business generates must be declared on your personal tax return.
When it comes to transferring money from a business account to a personal account, Sole Proprietorships offer the simplest option. Within this legal structure, business owners can simply make a withdrawal any time they want, transferring money from one account to the next with no need to worry about legal or tax implications. This is what's sometimes known as an "owner's draw."
A Partnership is run like a Sole Proprietorship in many respects. The key distinction is that there are multiple owners, and they have an agreed-upon allocation of assets and responsibilities. Here owners can take withdrawals according to the terms of their Partnership, without having to contend with further tax implications.
An LLC is a legal structure that's set up to keep business and personal assets separate, and to shield the owner's personal assets from legal liability. This entails having separate bank accounts as well as having a Registered Agent in place. (To learn more about different options here, consider some Northwest Registered Agent reviews.)
In an LLC with only one owner, it's usually permissible to simply take a withdrawal as needed. In an LLC with multiple members, it's important to follow the distribution agreement that has been established between owners.
Knowing some of the specific stipulations for your business' legal structure is an important first step. Beyond there, here are a few additional considerations for any business owner looking to withdraw funds from their company's account.
When we say intermingling of funds, we mean using a business account to pay for personal debts and expenses, or vice versa. This is one of the most dangerous financial mistakes you can make, and something the IRS strictly penalizes. If you need to pay off personal expenses, first be sure you take the appropriate steps to move funds into your personal checking account.
One of the best ways to avoid intermingling of funds, and to ensure that you're doing everything above-board tax-wise, is to keep records of any transfers you make. This is especially valuable in an LLC setting, where it's especially important to keep personal and business assets distinct.
Sometimes, to maximize profitability, business owners will abstain from paying themselves a salary, at least for a season. This is not advised, as owners deserve to be compensated for their work. But when you draw a salary, make sure you're doing so in a way that's clearly mapped out somewhere in your business plan; transparency is always a good thing.
If you have a corporation, you may run into a situation where shareholders request an "advance." Loaning shareholders money from a business account is generally fine, but it's critical to create an actual written note, specifying the terms for repayment, rates of interest, etc. Also be sure to talk with your bookkeeper about tax implications of a shareholder loan.
Corporations will also need to think about paying dividends to their shareholders. Remember that dividends are paid after corporate taxation. Dividends can certainly be transferred from business accounts directly into shareholders' personal accounts. The best way to do this is to set a regular schedule and stick with it.
The bottom line: There are plenty of reasons to consider a transfer from your business account to personal ones, and just a few legal and tax implications that might complicate things. Simply ensure compliance with these best-practices as you seek to keep everything above board with your business and personal bank accounts.