It’s not uncommon for business owners to put personal money into a business for startup costs and recurring expenses. If you’re considering doing the same with your company, we’ve outlined the four steps you’ll need to take to properly account for the transfer of funds, while avoiding any tax penalties and other associated risks.
To help you track this transfer of funds, we recommend using financial management software such as Wave Financial. It offers a number of tools for small businesses, including accounting, invoicing, payroll, payment processing, and receipt scanning. Free options are available depending on your needs, and you can read our review of Wave Financial to learn more.
Step 1: Open a Business Bank Account
If you’re considering using your own money to start a business, the first step will be to open a business bank account to be able to separate your personal funds from your business funds. Doing so will make it easier for you to track business expenses, write-offs, and income for tax reporting purposes. It can also limit your personal liability for business debts.
You can follow our steps on how to separate business and personal finances, as well as learn more about when you should consider doing this and its importance.
For a business bank account, we recommend considering Bluevine. It made our list of the best small business checking accounts as it’s largely fee-free and allows you to earn 2.0% interest on balances up to $250,000.
Types of Business Bank Accounts
You’ll have two main options: a business checking account and a business savings account. You can choose to open one or both business bank account types. Each has its own set of pros and cons with regard to interest rates, ease of access to funds, minimum balance requirements, and more.
Most business owners open a business checking account first as it offers more flexibility in terms of accessing funds, but a savings account can also be useful depending on your business needs. Below is a quick comparison of a typical business checking account versus a business savings account.
Business Checking | Business Savings | |
|---|---|---|
Best For | Daily expenses, regular withdrawals | Long-term savings |
Annual Percentage Yield (APY) | 0% to 1% | 4% to 5% |
Transaction/Withdrawal Limits | Unlimited | 6 per month |
Minimum Balance Required | None | None |
Federal Deposit Insurance Corp. (FDIC) Coverage | Yes | Yes |
Debit Card Provided | Yes | No |
How To Choose a Bank & Other Considerations
For an in-depth look into how to choose a bank, documentation requirements, and the specific steps needed to open a business bank account, you can check out our guide on how to open a business bank account. It also contains tips on how to determine whether a bank is the right fit for you. Some considerations can include things like the fee structure, number of physical locations, mobile app or online access, and customer reviews.
Step 2: Determine the Source of Personal Funds
Once you’ve selected a business bank account, you’ll need to figure out where you’ll be transferring funds from. This can be as simple as taking funds from a personal bank account, or something more complicated if it’s from a personal loan for business purposes.
Here are some common sources of funding for a business bank account, along with a comparison table highlighting typical features and requirements.
Funding Source | Interest Rate | Funding Speed | Loan Amount | Credit Score | Time in Business | Loan Term |
|---|---|---|---|---|---|---|
Rollovers for Business Financing (ROBS) | N/A | 2 to 3 weeks | N/A | None | None | N/A |
Credit Card | 20% to 30% | 7 to 10 days | $5,000 to $75,000 | 700 | None | Revolving |
Home Equity Loan (HEL) | 7% to 9% | 30 to 45 days | $25,000 to $500,000 | 680 | 2 years | 30 years |
Personal Loan | 5% to 9% | 24 hours | $100,000 | 660 | None | 7 years |
Friends & Family Loan | Varies | Varies | Varies | None | Varies | Varies |
Personal Savings | N/A | N/A | N/A | N/A | N/A | N/A |
If you choose to fund your business with a loan, we recommend reading the tips in our article on how to get a small business loan to improve your approval odds for the best rates available.
A ROBSis a way for you to access your retirement accounts without having to pay the usual taxes or penalties associated with an early withdrawal. It is not a loan, so you won’t pay interest charges or be required to make monthly payments. You will, however, need to be structured as a C corporation (C-corp). Most ROBS providers also require that you have a balance of at least $50,000 in your retirement accounts.
A ROBS is a complex transaction that requires navigating through multiple tax regulations. If done incorrectly, it could result in hefty fines and penalties. For this reason, we recommend using the services of one of our top-recommended ROBS providers.
| PROS | CONS |
|---|---|
| Access your retirement funds tax-free and penalty-free | Risk of losing retirement funds if the business fails |
| No time in business requirement | Must be a C-corp to qualify |
| Allows for debt-free funding of business for higher monthly cash flows | Must maintain annual requirements to avoid taxes and penalties |
Even if you are a startup, you may qualify for a business credit card if you have good personal credit. If approved, you may have to agree to a personal guarantee. Also, make sure not to place personal expenses on the business credit card, as doing so can not only make it more difficult for business accounting purposes but can also open you up to being personally liable for business debts.
Since interest rates are often between 20% and 30%, credit cards are best used for smaller expenses that you can pay in full within one to three months. Since the best credit card will be different for each business, you can see our roundup of the best small business credit cards to find one suited for your needs.
| PROS | CONS |
|---|---|
| Can be a quick way to access funds for your business | Interest rates can be high after introductory rates expire |
| Good for new businesses that don’t have enough business credit yet | Your personal credit is on the line and can be damaged if payments are late |
| Ongoing rewards can help your business save money or earn bonuses | Credit limits are usually very low compared to loans and lines of credit |
If you have sufficient equity in your home, you may qualify for an HEL or HELOC. Qualification requirements will vary among lenders. Some will lend up to 100% of the home’s value, but most lenders will require you to have at least 10% to 20% equity in the home. And while some lenders may issue a HEL or HELOC on a vacation or investment property, many others will only lend on your primary residence.
An HEL and HELOC both borrow against the equity in your home, although there are some differences between the two:
HEL | HELOC |
|---|---|
Lump sum disbursem*nt | Borrow money only as you need it |
Fixed interest rate | Variable interest rate based on the prime rate |
Cannot borrow money as it is being repaid | As you pay back the money, it can be borrowed again, like a credit card |
Fully amortized repayment period of up to 30 years | Usually, a draw period of up to 10 years, followed by a renewal or repayment period |
Best for large and one-time expenses where a lump sum of money is needed upfront | Best for smaller, recurring expenses |
Although rates on a HEL or HELOC are generally below 10%, it does put your home at risk if your business fails. For this reason, borrowing against your home equity is not something to be taken lightly, and you should consider what your alternatives are in the event you do not get a sufficiently large enough return on investment from these funds.
| PROS | CONS |
|---|---|
| Less expensive than other financing options | Tied to homeownership |
| Available for startups | Your home is at risk if you default |
| No restrictions on how funds are used | Requires strong personal credit to qualify |
Once you’ve decided, our articles on how to use an HEL and how to use an HELOC can guide you through each process.
If your business credit or finances are unable to land you an approval for a business loan, a personal loan can be another option for funding your company. Personal loans place a larger emphasis on your personal credit rather than that of your business. As a result, this can make it easier to get.
With personal loans, you can get funding as fast as the same day. These loans come with varying rates, terms, and qualification requirements. Check out our buyer’s guide on the best personal loans for business funding to find a loan suited for your needs.
| PROS | CONS |
|---|---|
| Startups can get funding by using personal credit before business credit is established | Personal credit is at risk if the loan isn’t repaid |
| Funding can be received in the same day | Loan amounts can be small |
| Unsecured loans do not require collateral | Tax issues may arise |
Getting funding from family and friends has the advantage of being able to get around the usual eligibility criteria of a traditional bank loan. This can be helpful if you have bad credit, low revenue, or too little time in business. You may also be able to negotiate a more competitive interest rate.
To learn more about the steps involved in getting funding this way, see our instructional guide on how to ask friends and family to fund your business
| PROS | CONS |
|---|---|
| Can borrow money even with poor credit | Can get unwanted business advice from family or friends |
| Funding may be available quickly | Potentially unrealistic business valuations and return on investment |
| Flexible loan repayment can be set up | Selling business shares to family or friends may require them to be liable for future financing applications |
Using your own funds from a personal savings account and funding your business without any debt can help your business cash flow. As is the case with the other methods mentioned above, however, you should consider the possibility that you may not get the funds back should your business fail. As a result, you should ensure you maintain enough funds to cover any personal expenses that may come up unexpectedly.
| PROS | CONS |
|---|---|
| Should be able to access funds same-day | Putting personal savings at risk in your business |
| No obligation to pay back funds right away | Amount of funds available limited to what you have in savings |
| Flexible loan repayment if it is structured as a loan | Can cause tax issues depending on if it is a loan or an equity contribution |
Step 3: Transfer Personal Funds Into Your Business Bank Account
Once you put your personal money into your business, you can classify it as either equity or a loan. Most business owners will list this transaction as equity, meaning the funds are a contribution and that the business doesn’t owe you repayment. This transaction means that you’re investing in the business’s future success in return for an increased equity stake.
How you record the transaction will determine the accounting process and how you receive money back from the business later. Ensure you keep fully documented proper records of this transaction, so your balance sheet and taxes are accurate.
Step 4: Record the Transaction in Your Accounting Software
Once the transfer of funds is complete, you’ll need to track it properly for accounting purposes. We recommend accounting software like Wave Accounting. It was selected for our list of the best small business accounting software as it is free for accounting and invoicing. Paid features include payroll, bookkeeping support, coaching, and mobile receipts. You can learn more about it through our review of Wave.
Using reliable accounting software consistently will help you when it comes time to file your business taxes, as you’ll be able to complete your taxes more quickly and more accurately.
What To Consider When Putting Personal Money Into Your Business
Putting funds into your business can carry tax and other financial implications for both your company and your personal assets. As a result, you should consult with a financial advisor to discuss your options for mitigating any potential risks.
Risk of Using Personal Assets
According to data from the Bureau of Labor Statistics (BLS), nearly half of businesses fail within five years. If this happens, the chances of recovering personal funds that were invested into the company are slim. Therefore, you should consider the possibility that you may not get your personal funds back if you transfer them to a business account.
Given the risk of losing your personal funds for good, you may want to also consult a financial advisor on how this may affect your other financial goals such as saving for the down payment on a home, your kid’s college tuition, your own retirement, or reserves to cover potential emergencies and unexpected personal expenses.
Timing of the Transfer & Tax Implications
Depending on the time of year and your business calendar year, you may be able to time the transfer of funds to maximize tax benefits. This typically comes into play if you decide to sell your ownership in the business, or if you funded the business with a personal loan and you receive interest payments from the company. In some cases, your payout could be affected in the event your business is sold or dividends are paid out to owners.
Business Legal Structure
Businesses can be structured in several different ways for tax and legal purposes. Some examples include corporations, limited liability companies (LLCs), sole proprietorships, and partnerships. The advantage of some of these business structures, such as LLCs and corporations, is the ability to protect business owners from being personally liable for the business debts.
With that being said, it’s important not to mix personal funds with business funds. Doing so could remove these protections and personally open you up to liability for your business debts. Intermingling funds is usually referred to as “piercing the corporate veil” and can result in personal assets being used to satisfy business obligations.
Structuring Your Investment as a Loan
If you’re lending your business the money, you’ll need to ensure you have the proper paperwork drafted to acknowledge what the business owes you and how the business repays the loan. The business will need to make regular payments, and you’ll have to charge at least a nominal amount of interest to make the transaction legal and to fill out your personal taxes correctly. Any interest payments will show up on your personal taxes as income.
Loans have a tax benefit for the business that a contribution doesn’t provide, as interest on a business loan is tax deductible. If you are a sole proprietor and lend money to your business from your savings, the interest deducted on your business return or Schedule C must be reported as income on your personal tax return. In this case, there’s no personal tax benefit.
Pros & Cons of Putting Personal Money Into a Business
| PROS | CONS |
|---|---|
| You can access money for your business quickly in most cases, except for ROBS. | Using personal funds for business puts your personal finances and credit at risk. |
| It can allow you to get funding before your business has credit or income to get business financing. | You may be limited by your personal credit and income, or the amount of retirement funds you have. |
| Adding your personal funds to your business makes you even more committed to the success of the business. | There can be tax implications when lending money or buying shares of your business. |
Bottom Line
Putting personal money into a business can be a good way to get your company up and running. You can use funds from your personal savings or retirement accounts or one of our recommendations for startup business loans. Regardless of the funding source you choose, be aware of the risks associated with using your own money to start a business.
