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Avoid This Common Mistake When Funding Your Business

Funding your business

Before we go further, I want to take a detour and talk about a mistake often made by sole owners of businesses. The mistake can have serious consequences but is easy to avoid. You just have to do a few things early and make a habit of it for the future.

Looking at Where We are on the Startup Timeline

By this time, if you’re following the step-by-step guide of this blog, you’ll have decided on your business format, found a great name for your new business, and probably bought the domain name using personal funds.

Hopefully, you’ve filed the paperwork to form your business, and you’re just waiting for the government agency to approve the documents.

Once the paperwork comes down, you’ll be able to open a business bank account, deposit your startup funds, and maybe get a business credit card. Then, you’ll be able to run the business under the business’s name.

Let’s talk about the startup funds you’ll be depositing into that new business account.

The Danger of Just Moving Your Savings Money to the Business’s Bank Account

For most small businesses, the initial startup fund is going to be your own money. Often, you move a certain amount from your personal bank account to your new business account. Because this is your own business, you don’t think much of it and don’t document it (other than having the record of the money transfer from your bank).

And this lack of documentation is the common mistake sole owners often make.

Why You Should Formally Document the Transfer

What you’ve technically done is to loan money from you, personally, to your business. You need to formally document this. If you don’t, depending on your business format, it might erase the liability limitation you’ve just spent money setting up.

Fortunately, documenting the loan is not too hard or too time consuming. Read this article to find out how. I’ve even provided a sample promissory note for you.

This mistake is less likely when there are multiple owners to the business. When there are other owners/investors involved, most people instinctively want at least something written to document the loan. If this is you, you might still find things in the linked article useful, especially the example promissory note. I encourage you to take a look even though you’re not the sole owner of your business.

Questions? Comments?