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Mistakes new business owners make - Part I

The most common mistake new business owners make

Starting a new business is a big deal and there are a lot of moving parts to manage. And if you've never started a business before, you don't know what you don't know. So, this the first in a two part post about the major mistakes I see new business owners making.

The number one mistake I see new business owners make is: Co-mingling personal and business expenses. Below are a few of the many reasons you want to avoid this.

  • Legal / liability reasons - An LLC or corporation is designed to separate your personal assets from business liability, but co-mingling funds essentially undermines that protection. If you're not actually treating the business as separate from yourself (using one bank account for both, paying personal bills from business funds, etc.), a creditor or plaintiff can argue the entity is a "sham" and go after your personal assets directly.

  • Tax and compliance reasons - When personal and business spending run through the same account, you (or your accountant) have to manually sort every transaction after the fact, and in an audit, you need to substantiate that a given expense was actually business-related, which is much harder to prove convincingly when there's no clean separation.

  • Operational reasons - If personal and business transactions are mixed, you can't get a clean answer to "what did the business actually spend on X this year," "what's our real profit margin," or "how much cash does the business actually have" without hours of manual untangling. Co-mingling doesn't just create tax risk; it destroys the data you need to run the business well.

  • It makes bookkeeping more expensive. Every co-mingled transaction has to be manually reviewed and categorized and personal transactions excluded or otherwise removed — which means more time (yours or your accountant's) spent sorting instead of analyzing.

What to do instead: As soon as you decide on an entity structure, go get yourself an EIN (even if you decide to be a sole proprietor). Next, take that EIN and go open a separate business bank account and credit/debit card, before making even one transaction in the business. This two step process sets you up for success and minimizes your audit risk immediately. And now you can connect those business accounts to your accounting software and focus on the building the business.

Next -The 2nd biggest mistake new business owners make

Got a new business and questions about how to set yourself up for success? Get in touch and let's talk.

This information is provided to assist in understanding information relevant to the determination of whether an activity may be treated as a for-profit business for federal tax purposes. Conforming with the information provided does not guarantee that the Internal Revenue Service (IRS) will agree with the classification of the activity as a business.

Final determination is based on all facts and circumstances, and the IRS may reach a different conclusion upon examination. The taxpayer remains responsible for the accuracy and completeness of all information provided and for maintaining adequate records to support their position.