Life After Start-up: Shifting Financial Risk from Personal to Business

It’s right of passage for entrepreneurs.  We move heaven and earth, turn over every stone and beg, borrow and steal (not really) to make our business a reality.   And that’s what it takes.  There are no entrepreneurial fairy godmothers standing by to grant our every wish. But as your business grows and becomes viable, you need to go back and clean up the begged, borrowed and stolen (not really) lose ends.  Artists remove pencil lines, quilters clip stray threads and builders remove guiding strings.  So it is with business owners.  Your business is growing and it’s time to clean up any stray start-up messes. Have you: –   Put business expenses on a personal credit card? –   Borrowed money from family or friends? –   Personally guaranteed a lease? –   Signed for a business vehicle? –   Intertwined your business and personal finances? There are two main reasons you want to look at these issues, one is the upside and the other the downside.  On the upside, a business that is tied to the owner is difficult, if not impossible to sell.  A business needs to stand on its own both from a financial perspective.  How can a purchaser assume your personal credit card payments?  The business needs its own line of credit, unsupported by your personal finances. This leads us to the downside.  If the business were to fail, will it take you down with it?  Credit cards will sue you, not the business.  The car lender will pursue you, as will the landlord.  Having the business stand on its own feet financially allows you to prosper and build assets personally without having them be at the mercy of the success of the business. Remember, a corporation or LLC will protect you from liability that is entered into by the corporation or LLC only.  If you have obligated yourself personally as well, you and all of your assets will be liable.  That’s why Donald Trump can file bankruptcy over and over again.  His bankruptcies are all business, not personal.  He keeps his personal fortune very separate.

A Cautionary Tale

As a financial solutions attorney, I see clients that had successful business for years – many very very successful – and those business have hit a speed bump that is fatal.  The clients that break my heart are the ones that never considered shifting the risk to the business when times were good.  Now they are facing a personal lawsuit for a commercial space that’s multiple six figures and their homes, their assets and their family’s savings is on the line.  Don’t let that be you.

What You Can Do

The biggest key is mindfulness.  As each of your financial decisions are made, (commercial lease renewals for example), you want to build in the separation.  Make this a point of negotiation.  As your business grows, use only credit for which the business is liable.  Don’t ever take on that personal liability again.  This is not a shift that can be done in one day.  It takes place over time, but when it’s done, you are completely free of your start-up liability. Going forward, ask yourself the following question as you take any financial action, “Can I shift this risk?”  “I become a bit more like The Donald?”  Your business and your personal finances will be much healthier. Emily Chase Smith is an attorney who specializes in financial solutions for entrepreneurs.  She gives practical advice and inspiration to bridge financial gaps and get you back in the game.  Emily can be found at EmilyChaseSmith.com and @EmilyChaseSmith. Image Credit: Shutterstock.com