This is sort of a repost, but I had to clarify my last question. I plan on borrowing money and using personal savings for a new business loan, and when I do so I will have basicilly no personal asset asside from credit cards. How will I pay my personal expensese while starting the business, do I just create my own salary for myself every month? Also, I have incorporated my business so I do not expose myself to any personal risk, if this business folds will I be responsible for that debt personally? (Aside from personal loans I take out like Home Equity loans)
Business Financing Question?
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You will find that as a small business owner, you will not be able to get financing from anyone (including credit card companies) without personally guaranteeing the money. This move by the financial community effectively removes the “protection” given to you by corporation status. In other words, plan on signing documents that will make you personally liable for any money borrowed. This includes bank loans, credit cards, SBA loans, etc.
You can pay yourself a salary from the company. Be sure to deduct the proper taxes from each paycheck. Another possibility would be to portion some of the money that you put into the company as a loan from you, the shareholder. You can then repay the loan to yourself over time without withholding taxes. In addition, you can charge your company a fair interest rate for the loan. If you are gonig to run the business from your home, there are certain tax breaks you can take for office space, expenses, etc. Other expenses, such as cell phone, internet service, fax lines, etc., can be paid for by the business. Before you take any of my advice, though, speak to an accountant to ensure that you properly document everything.
I’m in a similar situation. With the type of business I plan to start, I could go homeless very quickly. You’ve got to start your business with a “cushion” of funds to fall back on, by ensuring you have enough cash reserves to support yourself for at least a year. Statistically most start-ups fail within the first year, and among those that survive, profits aren’t realized until after the first year. As far as being personally responsible for the debt, whether the business succeeds or not, it depends on the kind of loan you get. If you get an SBA loan, you’ll be responsible for at least 15% of it. If you get a regular business loan, you’ll probably be responsible for all of it. Hope that helps.
First, if you use all your personal money for start up and don’t have any money for your personal bills, it will not matter if your incorporated. Next, you can’t borrow any money after you can’t pay your bills. Once you get behind it is all over. So incorporate first. Let the corporates borrow money to start up and operate. Borrower twice as much money as you need. This gives you a cushion and if you don’t use it thats wonderful.