Personal Savings

Using personal funds to finance your business

At one time or another most business opportunity seekers have had to put some of their own money into the business they were staring or growing. The reasons for this vary – startup requirements or cash flow - but often, there just is no other source of funds. Whatever the reasons, make sure you do it right.

Implications
How you and your company interact says much about the way you run your business. To some, too much intermingling of personal and business funds suggests the company is not on a sound footing and not being run “professionally”. To the IRS or Revenue Canada, intermingling of funds is a prime reason to consider your business a “hobby” instead of a bonafide business practice.

Keep you and your company separate.

You can provide funds to your company, but if you do so, clear define and document exactly what is happening. Did you provide funds as a capital investment? If so, did the company issue you shares in return? And how did you value the shares? Did you loan funds to the company? If so, is there a clear promissory note that documents the transaction? It should always be clear – especially to the tax authorities – exactly where you stop and your company begins.

Offering security.

Many times, a business owner may collateralize a business loan with personal savings. If this is done make sure the difference between the entities is clear – the loan is to the business, the security is from you. It won’t necessarily make a difference to the bank on the downside, but it will matter to the tax authorities.

When in doubt…

If ever you are unsure about how best to manage a transaction between you and the business, talk with your accountant. He or she can suggest appropriate ways to achieve your goals without unnecessarily exposing you to undue risk. You may also consult other professionals you meet through our b2b social networking site!