How To Pay Yourself When Self-Employed
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When you’re self-employed you probably want to get paid.
So you think you should pay yourself.
At least a little somethin’, amirite?
You are the business owner after all!
I mean, you do have bills to pay.
Unless you live with family or are taken care of I guess!
But let’s stay on point here lol.
How do most people take money out of their business for personal expenses?
By writing a check and taking it to your financial institution to deposit.
Or doing a mobile deposit.
Or simply transferring money whenever they need it.
Some people I have worked with have made transfers as many as 3-4 times a week.
That is a horrible way to pay yourself no matter how you look at it, but not uncommon.
Why?
Because, just like anything else, there is a right way and a wrong way to get money out of the business to take care of personal expenses.
And just to be clear, when I say “pay yourself” I’m using that to describe the act of taking money out of your business to use for personal purposes.
The Problem With Taking Money From A Business
The money that comes into a business is meant to be used strictly for business purposes.
That means it can only be used for paying for:
- supplies
- business rent
- running payroll
- marketing costs
- your business website & all its related costs
- and anything directly related to the operation of the business.
That money is not to be used to pay for your:
- mortgage payment
- grocery delivery services
- utility bills
- car insurance premiums
- anything for your kids
- personal vacations
- or anything else that has nothing to do with the business.
If you work from home, you can take a reasonable portion of certain household expenses such as phone, power, cable television & internet, or auto-related outlays.
Sometimes, however, it is necessary to take money out of the business in order to cover some personal expenses…
The Wrong Way To Pay Yourself
Lots of people who own small businesses don’t know how to properly handle the task of taking money out of the business.
Unfortunately, many also don’t feel like they need to work with a tax accountant because they can “Google what they need to know”.
They simply make payments for their personal expenses out of the business bank account or use the business credit card for those personal expenses.
Some even head over to the ATM machine and take cash out of the business for no other reason than to have some pocket cash.
None of those methods are even close to proper.
Another thing I’ve been hearing as of late is incorrect advice for sole proprietors and single-member limited liability company (SMLLC) members, or the partnership partners to sign up with a payroll service and take a salary.
While in theory that’s a sensible option and helps to alleviate the headaches of paying self-employment tax each quarter, it’s not permitted.
A sole proprietor can have employees but they cannot be employees.
If anyone recommends that you pay yourself by putting yourself on salary as either a partner (of a traditional partnership without S Corporation status) or a sole proprietor you should ignore them and seek advice elsewhere!
The Correct Way(s) To Pay Yourself
Let’s face it, starting a business wasn’t done just to put in work and get no reward.
You want to get paid for your time and effort.
If you need to access money for personal reasons, there are three acceptable methods for doing so:
- Putting yourself on salary and taking payroll checks (if an S-Corp)
- Writing a check to yourself in the form of a distribution (again, if an S-Corp)
- Schedule regular draws (if you’re a sole prop or Single-Member LLC) instead of random withdrawals
You should always create some sort of separation between business and personal expenses, and taking either of these steps does so without drawing any unnecessary attention to the transactions.
Setting yourself up with regular payments, even if they aren’t actual “salary” checks helps not only keep the business looking legit, but it also helps people budget better because it simulates a regular salary like before they took on the entrepreneurial venture.
It also creates a paper trail, which keeps you in a good position if/when it comes to…
Getting In Trouble By Not Paying Yourself Properly
So what’s the worst thing that can happen if you don’t keep your business and personal money and expenses separate?
If you continue to treat your business as your personal piggy bank?
Bottom line is that if you are ever looked at for any reason by the IRS, a whole lot actually.
The first that that would happen is that you would have to undergo an audit, during which the burden would lie on your shoulders to prove that the expenses in question are valid business expenses.
It is your responsibility to show proof in the form of receipts or invoices that can support your claims.
If you cannot, then the fun really begins.
If you happen to be a C-Corporation, then the tax return would be recalculated with all of the expenses added back.
What makes this particularly troublesome is that C-Corps can be taxed at higher rates than individuals.
Not only that but you will be assessed interest and penalties on the unpaid portion of the newly calculated tax liability.
If the business is a partnership or an S-Corporation, the expenses will still be added back to the tax return, but it gets a little dicier from there.
Since those business formats flow through to the personal income tax return, you not only have to have your individual return recalculated but the additional income may in fact cause you to be phased out from deductions and/or credits that were originally claimed.
Let’s also keep in mind that if you have a state income tax, your state return will be affected too.
From there, your new income tax liability will be computed and you will again be charged penalties and interest on the unpaid portion of this new figure.
Additionally, you will now be on the IRS’s radar and the chance for future reviews and audits will increase.
On top of that, if you needed to raid the business accounts to support your personal lifestyle, then you will be in even greater trouble once the interest and penalties start piling on.
“How Much Should I Pay Myself?”
This is something I get asked regularly:
Hey Eric, I’m newly self-employed, can you tell me or help me to figure out how much I should pay myself?
Dozens of entrepreneurs
It’s not a bad question.
In fact, it’s a sign that they are thinking about things in the right way.
The answer, however, is difficult to come by.
It’s like most things in life, the answer is: it depends.
Everyone has a different circumstance and family situation to consider when coming up with a figure to pay yourself.
Another thing that factors into the equation is whether the business is profitable or not.
Obviously, if your business is losing money, you can’t pay yourself.
The best way I have found to answer the question of “how much should I pay myself” is to do this:
- Make a budget for your personal needs
- Figure out how much in total you will need to pay yourself in order to meet the budget
- Divide that number in half
- Pay yourself one half on the 15th of the month
- Pay yourself the 2nd half on the last day of the month
This essentially acts like a regular paycheck which makes it easier to maintain a budget.
If, however, you can’t pay yourself that amount in full, then simply pay what you can.
The point of this exercise is to make it so that you aren’t constantly dipping into your business money to pay for your personal expenses.
So now you know the answer to the question “How much should I pay myself?” should you be wondering?
Wrapping Up
Well, that’s the basics on how to pay yourself as a self-employed “boss”.
Granted, no one article can ever address everyone but this should help the majority of you.
Keep in mind 2 things:
- Nothing is written in stone–you can schedule it however and use any dollar figure you wish.
- These aren’t “rules” or “laws” just guides to help keep you out of potential trouble and make it easier to manage your business plus your money.
I urge you to adjust these guides to suit your own individual situation.
And one last thing:
A BUSINESS IS NOT YOUR PERSONAL PIGGY BANK!
Your Turn
How do you pay yourself as a self-employed person? Do you just take money out of the business account whenever you feel like it? Do you have a schedule? Do you leave the money in the business account and simply pay yourself whenever you want to bring that balance down?
my employer literally hand writes COMPANY checks to pay mortgages, car payments (4 vehicles) home taxes, personal credit card, vacations, home repairs… etc. and also collects a weekly paycheck as well
I’ve seen that in the past Dean, so it’s not anything new that they are doing nor is it illegal.
That being said…it doesn’t make it right.
Hi Eric,
I read the article about the business account not being a personal piggy bank. So does that mean a partner of an LLC SHOULDNT use the business credit card to pay for dinner out with his wife on Valentine’s Day and other special days, pay for hotel stays while on vacation, (but also worked during the week), car insurance when the company doesnt own the car, pay for a personal credit card, and pay for the kids cell phones? All of these charges go against his capital account. Is that right?
That’s correct–NOBODY should be paying for personal expenses directly from a business account of any kind.
The business credit card is used for the individual to be able to pay for business expenses without having to carry around business checks, or to pay for them personally then get reimbursed by the business itself.
All personal transactions (or those whose primary and majority purpose is personal) need to be paid out of personal funds. If the partner needs money, they would take it in the form of payroll or distributions depending on the type of business structure and tax treatment.
The bottom line is that in the case of undeniably personal expenses like V-day dinner, kids’ phones, family vacations, etc there is no reason for those to be paid by the business on behalf of the partner.
And it doesn’t matter what type of business you have set up correct LLC versus C Corp. versus S Corp. it doesn’t matter right? What about a partners capital account? Can’t they put The charges in their capital account?
No, it shouldn’t matter. BUT, there is a difference between “it shouldn’t be done” and “it’s illegal to do”.
Some accountants will allow themselves to be bullied into doing what the client says because they’re afraid to lose the money. I tell people outright that if they don’t change their ways I refuse to do business with them because I personally view it as unacceptable and unethical.
The capital accounts can be used, but then the line is being blurred between business and personal use. The proper way is to move the money from the business to the personal account and then do what you would like to do with it. That way there are clear distinctions and it doesn’t look like anyone is trying to play games.
Just ask yourself if you think Tim Cook or Bill Gates or Jeff Bezos pay for their personal expenses through their businesses.
the capital account belong to the company, they are not to be used as a piggy bank either. The capital accounts represent your interest or capital in the company, but you have to follow the Operating Agreement or By-Law on whether loans to members or shareholders can be made.
Thank you very much for your replies that eases my mind tremendously! I’m glad there’s articles like this to help those that do not have a CPA or other finance degree and are just trying to handle the books for their employer the right way.
So I’m being told from my employer that using the business credit card and coding the charge to his capital account is the same as taking a distribution. So it’s ok to use the card this way. This is an LLC filing as a C-Corp.
Like I said earlier, it’s not *illegal* to do it this way but it *shouldn’t* be done.
The partners are free to do as they wish, as they are the only ones will have to answer to the IRS should an audit or any kind of examination be done. Never mind the legal issues that may arise from commingling money when it comes to the legal protections afforded by the LLC structure that are lost when it is deemed that there is no longer a distinction between business and personal funds.
But that is all moot:
You as the employee raised the issue and were told to do the way they want…that was all you could do and just have to follow their instructions. I wouldn’t make any more of it because people can be pretty petty when you try to tall them that they are wrong.
“…d coding the charge to his capital account is the same as taking a distribution. So it’s ok to use the card this way. This is an LLC filing as a C-Corp.”
Then there’s another issue…
How is the accountant or whoever do does the C-Corp’s returns handle the ‘distributions’, IF it’s handled at all? (Is it a dividend? Compensation?)
The accountant should know that on a C-Corp anything other than salary or official loans are dividends and a form 1099-DIV needs to be issued to the receiver.
I’d recommend you schedule some time to dive deeper into this situation as this is getting more into consulting and less into “generalities”. https://clarity.fm/eric-nisall
I have work for a company that is going to use the business line of credit $700,000.00 for a down payment on a house. Is that ok?
It depends.
Technically, nothing should be paid directly from a business account for anyone’s personal expenses.
If, however the business is a sole-proprietorship then there is no legal distinction between the business and the owner so the money can be mixed, although it is better to keep it separated.
If the business is buying a house in its own name and not in the name of individuals, and the business will be collecting rent or charging fringe benefits on the W-2s of the people who use it, then that could also be a valid purchase.
It is a father son business. If they you the line of credit to help purchase the house and act as if it a business expense isn’t that wrong? And wouldn’t they need to show that as personal income.
Just being a father/son business doesn’t signify anything Mary. The business structure is what is important, as well as how this transaction is structured.
Without knowing every single detail of the way the business is set up, and how this transaction is going to be executed, as well as the intended use of the property, there is nothing I can add to what I previously stated.
I’m not in the business of taking half of the available info and giving severely faulty “advice” just to seem like an expert as so many others like to do. If you are concerned I would bring up the issue with the owners or their accountant/attorney if you are so inclined because they will have all of the necessary knowledge. I, however, am in no place to make any judgments based on what little I know if this situation.
Hi Eric. I have a complicated question.
My friend and I started a business over a year ago under an LLC that I am not attached to. When we opened the business account though, I was given 90% ownership of the account and titled “president”. Well, we’ve since had a falling out. Over a year later the business is still operating and I am still attached to the business account.
Legally speaking, Do I myself have any jurisdiction to the money? If I chose to close the account out as 90% owner, what legal trouble am I looking at?
I’m not even going to touch that Stephen, because it’s a legal matter and I’m not a lawyer.
Not to sound harsh, but you need to be speaking to a qualified attorney, not looking on blogs or doing searches for the answers to that situation. When you’re in that kind of position, you don’t want to rely on anything except for someone who is qualified in contract/business law who will have access to ALL of the information involved and knows what you may be leaving out or forgetting in relaying the info!
What is considered a distribution? Is it a bonus? Can I write a check to us for the same amount every month in addition to the monthly salary?
Hello Stacey!
A distribution is actually a “Distribution of Profits” and it’s available to S-Corporation shareholders. It’s not a bonus, but rather a way to take out the profits of the business that were taxed to the shareholders. Since the shareholders already paid taxes on these profits, the money is taken out tax-free as a straight check or funds transfer.
You can set up the payment of distributions in any way you wish: monthly, quarterly, lump-sum. It doesn’t really matter how you do it, but yes, it is most definitely in addition to any salary payments.
can the owner of an LLC write a check to his wife from his business to be deposited into her personal account to cover the cost of their monthly mortgage? Then code is on the books as a building expense? Also change the name on the check in the register to read the name of the bank instead of her to make it look like a company expense. And she never claims it as income. is this even legal?
Hello Kelly, thanks for reading!
If the owner was coding the check to his Draw account, then it would be perfectly legit. Since he is entitled to take money out of the business, this is the best way to approach it, although, I would still say that a better way would be to write HIMSELF the check and then pay the mortgage.
BUT, because he wants to write of the personal mortgage as a business expense–that’s against the rules. I wouldn’t go as far to say that it’s illegal, but it’s closer to fraud than not.
It’s one thing to properly take money out of a business for personal expenses. It’s a completely other issue entirely to claim personal living expenses as business deductions. Under audit or even the general examination, that would get questioned, and the deduction would get thrown out, leading to the original tax being owed plus interest and penalties. Plus, people caught doing this are also subject to closer watch, and a higher chance of future examinations or audits!
Hello Kelly, thanks for reading!
If the owner was coding the check to his Draw account, then it would be perfectly legit. Since he is entitled to take money out of the business, this is the best way to approach it, although, I would still say that a better way would be to write HIMSELF the check and then pay the mortgage.
BUT, because he wants to write of the personal mortgage as a business expense–that’s against the rules. I wouldn’t go as far to say that it’s illegal, but it’s closer to fraud than not. Regardless of how the payment is structured, personal mortgages simply cannot be treated as business expenses.
It’s one thing to properly take money out of a business for personal expenses. It’s a completely other issue entirely to claim personal living expenses as business deductions. Under audit or even the general examination, that would get questioned, and the deduction would get thrown out, leading to the original tax being owed plus interest and penalties. Plus, people caught doing this are also subject to closer watch, and a higher chance of future examinations or audits!
Hello Eric, just curious I have a C Corp if write myself a check from the business to help off set the cost of health insurance, and not use the cost as a business expense and pay any taxes owed . Is this ok, will there be any personal liability on my part for the distribution? Thanks
Hey Lester, thanks for reading!
For general issues, when dealing with a C-Corp the rule is dividends not distributions. And since dividends are taxable to the individual receiving them, it may not make sense to take them unless you know you’ll be falling into the 0% long-term capital gain and qualified dividend tax brackets. But if you want to pay the taxes on them, that’s fine! Because the dividend comes from profits & retained earnings, it’s never going to be a deduction anyway.
If you don’t have enough profits/retained earnings to issue a dividend, then you can consider taking a distribution against your basis in the company. Again, that is going to only affect your equity, and won’t be a deduction reducing net income. The same goes if you had a legal loan to the business. Either of those will also allow you to do what you are thinking of in general terms.
It gets even trickier if you’re talking about health insurance, because:
1. The policy needs to be structured in a specific way, and
2. It should be done via the W-2 assuming you’re an employee/shareholder and not just an investor/shareholder
This is something you really should be speaking to your own accountant or payroll/insurance person about because of the rules that are different based on the number of employees, the types of policies you have and your position in the company. There are just too many variables to make a blanket statement beyond the ways of taking money out of the business I outlined.
Even if you don’t want to use it as a deduction, you still need to follow certain rules when it comes to things like health insurance for employees/ownership. And, like many things regarding accounting & taxes, you and/or your accountant may be willing to push the boundaries where someone else might not be as aggressive and stick to the letter of the law.
Good luck!
As the famous adage goes that we must keep our personal and professional lives separated, the similar rule also applies to our finances too. The 5 reasons you have given are pretty strong and are sufficient to convince the entrepreneurs to follow it. Thanks for this post!
I have a small bookkeeping practice and I’m struggling with one of my clients. They run their entire lives through their business and while my “job” is to record the transactions as they are given to me, I am struggling and think I need to drop them. I even made their tax prep CPA aware of several situations that are incorrect and he made no adjustments before filing their business tax return. Do I have an liability if/when they get audited?
Hey Lisa!
To be honest, I’m not an attorney so speaking to your culpability in the legal sense isn’t my thing, and I would suggest you checking with someone qualified.
However, if you are keeping records and documenting your communication with both the client and their CPA, I would tend to think that you would be in the clear. Looking at it logically (which is obviously not always how the law works unfortunately) you are raising the concern with the client, and then telling the CPA that what they are receiving isn’t 100% accurate for accounting/tax purposes. If the CPA then proceeds with the knowledge of specific areas which should be adjusted, and they sign off on the return, then I’d like to think you are absolved of any liability.
All that being said, I would strongly suggest you move forward on dropping them considering the fact that they are doing things incorrectly, but more importantly causing you more trouble than they are worth (I’m assuming).
If I have an LLC and I have my wife as a partner, can I take money out to pay a personal expense by having my wife write me a check from this account? Is this legal as long as I don’t claim it as a business expense?
If you are both partners and both signers on the account then you can always just write the check yourself Dennis, there isn’t anything wrong with that.
As far as it being to pay for a personal expense, as long as you have basis (either from capital or profits) then you can take a distribution for it. However, the point of the business bank account/credit card is for business transactions and you should be trying to schedule out your distributions in regular increments to cover your personal needs rather than dipping in whenever the need arises (just making a blanket statement here, not accusing you).
Not booking the withdrawal as an expense is the correct way to classify it as you state as well.
Hey Eric, so basically I bought a handgun with a c Corp card and it costs 500 dollars. Do you think I will be penalized with interest? If so how much would it be?
If it was a legit expense ie: to protect your business then it’s fine.
If not, and the business gets audited or examined in any way and the agent asks about it then you certainly will have that expense disallowed with interest and penalties added on top of the tax.
The amount of the extra charges is hard to calculate without knowing dates and rates and all of the variables, but your real worry is something else. If you are found to be misappropriating business funds in any way, you will be look at even harder and more often going forward.
The company that I work for is owned by a husband and wife team that take a salary AND run their personal (gas, groceries, VERY expensive vacations) expenses through the company. I happen to know that they are struggling with cash for the business and are making budget cuts and planning to make even bigger cuts claiming the need is that sales have been low. Even though sales have been low, and cuts may be necessary, they have not changed their personal spending habits at all. In fact, they are planning an expensive ski vacation for their family in midst of these cut backs that are…yep…being funded by the company credit cards.
I know the easiest thing would be just to find another job. But it makes me so mad that they would dare talk about cutting back on people, and not their own shopping habits.
I’m a partner in an LLC, I have 25%, spouse has 25%, friend has 35% and the 4th has 15%. I operate the business on a daily basis. The 3 others are silent partners. Am I supposed to notify them if I write a distribution check to myself in addition to my automatic monthly distribution? What if I then wrote a personal check to cover that additional check?
Hey Casey, thanks for reading!
Honestly, I would check with your accountant/attorney. In an arrangement like the one you lay out, there are probably specific ways of paying out distributions in the operating records. For example, capital contributed doesn’t always correlate to distribution percentage. It’s all spelled out in the operating agreement.
Sorry to be non-committal on an answer, but there just isn’t enough info to come up with one.
I’m pulling 80k from my LLC as a down payment for my home where my new business head quarters will be located. Can that be written off?
No Carlos, you cannot expense any part of your personal residence purchase.
What you can do is take the home office deduction if you qualify going forward, and depreciate an external unit (ie: shed used as an office or specially-built detached unit) but that is the extent of it.
The $80,000 needs to be classified as a draw (or distribution if you are taxed as an S-Corp and have the basis to take it).
I have a relative whose asked me to look at his books for him. He does not manage his business money well at all. Its an S Corp HVAC repair company which he does not pay himself taxable paychecks but rather continuous dividend distributions. He once had employees in previous years in which he did pay himself and payroll taxes (50% payroll and 50% dividends in a year) but is now on his own. On top of this, many personal expenses are on his business bank statements such as personal vehicle expenses, vacation expenses, many fast food transactions and so many other transactions that are not business related. The scary part is we’re just completing the 2017 year and he litetally paid himself NO true payroll checks with any payroll taxes paid, just weekly dividends in addition to the countless personal expenses.
If by some miracle he were to have a religious experience and realize the wrongs hes done, what are his best amd worst case scenarios?
Hey there Anon, thanks for reading!
Unfortunately, the circumstances can be pretty bad if no action is taken this year. As an S-Corp, the IRS is going to look at the Ordinary Business Income on the tax return (1120-S). If it’s positive, the next place that will be inspected is the line for Compensation of Officers. If there isn’t anything on that line, and there are distributions, the return has a good chance of being called for inspection. The IRS can take a few years to even take any action including asking to inspect a return, so that means the possibility of years of compounding interest and penalties depending on how long it takes and if it even happens at all.
What will likely happen next is the entire return will be examined, and the deductions for the personal expenses will be thrown out, thereby increasing profits (unless the personal stuff was just booked as distributions which doesn’t impact profits). Then the distributions will be reclassified based on the incomes and your relative’s position/duties.
All of the payroll tax returns will be created and interest/penalties will be added to the regular taxes due. On top of that, state unemployment taxes will be due as well including any interest/penalties due there (it doesn’t matter if your relative is in a no-tax state, all states have unemployment tax responsibility based on wages paid).
Once all of the adjustments are made, the new info will be passed through to the 1040 (since an S-Corp doesn’t pay its own taxes and simply passes through to the individual to pay). Any additional income taxes that this creates will also be assessed penalties/interest as well.
What CAN be done, however, is to make a large paycheck before the end of the year, filing all of the correct payroll tax returns, and paying all of the liabilities timely. That and going back and filing all of the late zero-dollar payroll tax returns (because even if no payroll was done, the returns are still required to be filed).
Honestly, even the old 50/50 ratio was too low. A ratio of AT LEAST 60/40 salary/distribution is recommended by most accountants to be in the safe zone. That way, if ever asked about, the answer is “I’m clearly taking a majority of my income as salary and paying the FICA taxes”. It’s important because distributions are only taxed on the federal level and trying to only take income in that method is considered to be tax fraud by trying to evade paying the FICA taxes.
I would seriously consider having them hire a local CPA who will know how to handle a person in that position. Good luck and I hope they see the light sooner than later!
Thanks for your quick response. I truly appreciate it.
Im in a similar sitiation. Owner uses bank card for a lot of personal eats, trips, vacations, home repairs, eat outs, knowing she cant make payroll the following week. She seems to not care anymore….im on the checking and don’t want to be….dont want to ne held liable. In my mind, she gas quit caring and so have i. I want out…..will i be implicated since i was paying the bills…..withwhat ever money i had a available and she wasnt spending?
Hello Mary.
I’m not an attorney so I cannot speak to your liability as a signer on the account. You would have to present this to lawyer to have a definite answer.
Sorry 🙁
Hi Anon,
I am getting my ducks in a row to open an online fabric store. I am getting my garage in order to store the inventory and shipping table and supplies. I plan on applying for a small business loan to purchase my inventory. As luck would have it, my garage ceiling (Sheetrock) collapsed. I received a quote to repair it ($2800). Can this unexpected expense be paid for using my business loan since this is the business space?
Hello Julie.
While you plan on using the space for your business, it is still part of your home. That means you will have to go through your insurance or out of your own pocket to pay for the repairs.
If this was a separate unit, like a shed, that was built specifically to serve as business space, then you would be able to use the business loan to pay for it–assuming you are getting a loan that has no constraints meaning it can be used for anything not just inventory.
But, the garage is first and foremost a part of the house and not business property.
I’m a sole proprietor, no employees, licensed contractor that works freelance with no guaranteed income, my DBA is my name, my state contractors license is my name, and I have a business savings account and a personal checking account, no business credit card or checking account. I deposit checks made to the business (my name plus Electric) into the business savings account and then move the money as I need to my personal checking to pay for everything for business and personal. I don’t see any other way of doing things
Hey there Kenneth, thanks for commenting!
My question to you is: why would you have a business savings account and not a checking?You had the right idea by having a separate account where all of the money from the business would go.
So here is how the other way to do things would go:
Instead of the business savings, you have a business checking. You continue your current practice of using that account to collect all customer payments. BUT instead of moving everything to your personal account, you simply move over enough to cover your personal expenses. Then you keep the rest in the business account and pay the business liabilities from there.
Why?
For starters it indicates a clear distinction between personal and business transactions should you get audited or examined by the IRS. Second, should you need a loan you will be able to show the lender separate statements and not one big mess of commingled money. Lastly, you will know that everything running through the business account is only business so it makes your bookkeeping easier and less time consuming plus it ensures that you don’t miss any deductible transactions.
There you go–another way of doing things without very much effort or cost but one which will simplify things for you tremendously.
Hope this helps!
My husband owns a company with a partner who manages it with a salary. The partner recently hired his wife to manage the financials from their home without consulting my husband. She isn’t a professional and we are upset and would like to know what you think. We do have access to the business checking account but she will be checking receipts to see if charges are legit. What do we need to do to make sure all is well.
Honestly, I would be at bit concerned any time a major decision such as that is made unilaterally.
That being said, since you have complete access to the accounts, I wouldn’t be so worried as you will be able to see all of the activity online and be able to check that nothing funky is going on.
If I was your husband, I would sit the partner down and discuss this like adults (as opposed to storming in and screaming from the jump). I’d mention that I didn’t particularly are for the fact that made these decisions without consulting him first since it affects the company as a whole. And it’s a little odd that the financials are being kept at their home rather than in the office and it’s more appropriate for that to be location of all business documents.
The important thing is to keep thing neutral and not make it seem like the partner or his wife is being “attacked”. Rather it needs to approached as a simple discussion the same way any other business decision would be.
Good luck, and hopefully it works out for everyone!
Thank you so much for your response and we completely agree.
We could use some advice on another issue… We bought in to the company 2 1/2 years ago when the company wasn’t doing well. Partner and wife then decided to go to two conventions both in exotic places. We know they didn’t do this before we bought in and want to know if we can make them pay us back for financing 1/2 of it. They did ask us to go and we politely declined mainly because the company was just getting back on its feet and we felt it irresponsible. OK I will be honest here, when I heard they were going a second time I completely lost it. Our company is doing better but not good enough for trips like that so if you could please let us know how to handle this we would appreciate it. They are not going on a third trip but partner said we couldn’t afford it, duh!!!
Honestly, that’s not something I can/should be advising on.
If the trip has legitimate business purposes, then it could be viewed as a needed expense to try to build relationships, learn new things, get valuable industry insight, etc. I’ve seen plenty of real conventions held in resort towns or tropical locales simply to enhance the overall experience.
If you are having interpersonal issues with the other half of ownership, which includes ideological differences on how the business should be run, there really isn’t any way to sugarcoat it…you probably need to remove yourselves from the situation.
I would recommend you speak to an attorney about what your options are for dissolving the partnership and getting out.
Quick history…4 shareholders of a S Corp, 10%, 10%, 10%, 70%. One of the 10% bought the 70% through personal note from owner of 70%. Refinanced house for down payment. Now there is 10%, 10%, and 80%. All shareholders have always taken a reasonable salary and then distributions from the profits and payed for business notes out of personal $. New owner now is saying distributions will come out after mortgage used for down payment and personal business note is paid. Is that legal for a majority shareholder to do in an S Corp?
Hey Wyn!
I’m going to be honest, you need to speak to your attorney or whoever is responsible for drafting and/or maintaining operating agreements and corporate policies.
It doesn’t always matter what the ownership percentages for dictating policies. There are some businesses where there are partners simply for the sake of infusing capital where those shareholders have zero input. If other terms are agreed to and set forth in the corporate charter or some subsequent operating agreement.
It’s always best to go to the source–or at least someone who you can turn to who is knowledgeable and impartial on the matters. With that will come the need to give them access to all corporate info, and I simply do not have that. This is especially the case when there is a subsequent purchase agreement between two of the original shareholders which may lay out its own terms.
I hope this info points you in the right direction and wish you good luck with this!
What changes if this is a non-profit? (not 501-c3).
Hey there Curious!
There are not many operating differences between for-profit and non-profit businesses. The main difference is the intent–non-profits don’t operate for the intention to profit but rather to be a public-good business. Since you mention the 501(c)(3) designation let me state that that is simply a tax-exempt status with the IRS, and non-profits can still operate without that specific designation.
With that being said, the same basic rules apply to all businesses. Regardless of the intent, no one should be using the business to fund their personal life.
In my personal opinion, it’s even worse when the people who run businesses that are supposed to “give back” break this rule and use the business money for personal use. The biggest reason is that most people who donate or buy from these businesses do so on the sole basis of believing that the money is going to be used to help the community. So when someone takes advantage and misappropriates those types of funds, to me that is a special type of low.
I went in 1/3 with my nephew to open a business. Found out my nephew has been using the business account to pay things like his mortgage, loans and groceries. He hasn’t given me my share of profit in three years. What can I do about the embezzlement? The business and bank account are under his name only.
Sorry to hear that.
The sad truth is that your only recourse is probably to engage an attorney. Hopefully, you have everything documented showing your investment and the profit sharing agreement. Otherwise, you may have trouble getting what you feel you’re entitled to.