How do I manage my business money vs personal money?
I recently received my LLC for my business and was able to open my business checking account. Now I have to figure out how to pay myself. When I get my check from my contractor, should I deposit it all into my personal account and then put in the money I need to pay my subcontractors and business expenses into my business account?
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Business income goes into the business account, so you can pay the business bills, including sub-contractors and yourself. Always keep business and personal money separate, or it will be difficult when you come to sort out your tax bill, business accounts, etc. – Steve Jones 11 years ago
5 Answers
What no one mentioned yet is the why. You need to do this because the point of an LLC is to separate liability from yourself and your company. You're "piercing the veil" if you deposit business checks. This removes the separation of liability and you pretty much are nothing but a glorified "Doing Business As." Your best bet is to not make any other personal withdrawals except your salary (either 2 weeks or monthly, whatever suits you).
It's actually pretty easy, you need to keep two different accounts - one owned by yourself (personal) and one owned by the LLC (company).
As littleadv said, the basic rule is that all business transactions go through the companys account. This will have (depending on your jurisdiction) the advantage that you do not have to give tax auditors access to your personal bank account.
At the end of the month (or whenever it suits you) you make a personal draw from the companies account into your own. Note that this is completley different than 'paying yourself a salary' as it's often paraphrased. Any expenses that you might happen to make out of your pocket or personal account can be booked via a Cashier/register account against personal drawings.
One downside with having two accounts is that you need to ensure liquidity on both of them - but that's something you'd have to do anyway.
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Generally it is a bad idea to have expenses "out of your pocket". You need to separate yourself and the company, have a company checkbook, a company credit card, and pay everything company-related with them. It has to be something exceptional that you would pay out of pocket, and if so - reimburse yourself exactly as you would expect an employer reimbursing you: by filling a form, explaining the expense, attaching the receipts, and writing a check from the company account to yourself. – Littleadv 11 years ago
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@littleadv: You're totally right. What I had in mind is the exceptional case when you have to, and in this case I would handle it in the same way. – Johannes Rudolph 11 years ago
When you get a check from a contractor, DO NOT deposit it into your personal account. Deposit it into your business account. Pay your subcontractors/business expenses etc. everything from your business account. You can make transactions from the business account to your personal account, and these transactions can be for paying salary, withdrawing profit, or reimbursing business expenses that you might have made from your personal account.
You can think of it like this: If you worked for a very large company, say IBM, and you received a check for some work that the company did, would you deposit it into your personal account? Even if you were the CEO, you wouldn't do that (must...resist...Enron joke). You deposit it into the bank account of the business and receive a salary for your work in the company.
LLCs are a state by state classification of business. The Federal Government can recognize an LLC as a sole proprietorship or a corporation. If you file the paperwork to have the LLC recognized as a C-corp, you are structurally the same as IBM, albeit much, much smaller. Even if you chose to be seen as a sole-prop, it's a good idea to keep business and personal funds separate, as others have noted.
