If you have ever started your own business, you may have done so to secure your financial future as much as to bring a great idea to market. It is important to understand that at first, your own personal finances may impact your company’s bottom line as well. Let’s take a look at how your personal financial health can influence the financial health of your business.
You May Take Distributions to Pay Personal Expenses
While you are entitled to pay yourself a salary for services rendered to your business, excessive distributions can leave little cash to expand your company. If you have to withdraw 100 percent of your company’s profits to finance your own lifestyle, there won’t be money left over to pay a dividend to shareholders or hire new employees. This could keep you stuck in the startup stage for a long time.
Early Business Loans May Be Made to You Personally
Even if you have decided to incorporate your company, banks and other lenders may grant loans or extend lines of credit based on your personal creditworthiness. For instance, a credit card used to run your business may be considered personal debt, which could make it harder to get the amount of credit that you need. Without a steady source of capital, you could face liquidity issues within your organization, which could make growth hard if not impossible.
Clients and Others May Sue You Personally
If you do have a lot of money or valuable personal assets, those could be vulnerable if you are sued by a client or customer. In some cases, you may be held liable despite being a corporation if the plaintiff can prove that there is cause to pierce the corporate veil. This means that your home, car and other property may be liquidated to pay the judgment against you. It may be in your best interest to buy a large enough insurance policy to protect yourself and your belongings from liquidation.
Personal Finances May Limit How You Market Your Company
When you lack funds, you may only be able to buy ads on small websites or on the second or third page of Google searches. You may not be able to fly or drive across the country to meet clients, go to trade shows or otherwise network with clients or investors without the funds necessary to do so.
While your corporate and personal lives may be separate, your financial situation on one side can impact your personal situation on the other side. Therefore, make sure that you will have enough money to pay your bills and run your company before you quit your day job or decide that you are entitled to a larger salary.