Your Small Business: Not a Piggy Bank

Are you confused about how you can spend your company’s money? Small business owners make many mistakes about when it’s legal to dip into the company till for spending money.

Smart practice: Don’t help yourself to extra pay from your business. If your enterprise is incorporated or is a limited liability company, the extra money you take for personal expenses is taxable income. Oh yeah, I know many owners grab cash out of the register or the petty cash drawer as they dash out the door for lunch with friends. If you’re engaging in a legitimate business lunch, and you return the restaurant and parking receipts along with change, you shouldn't have a legal problem although a record of expense reports would be better for accepted accounting practices. Unfortunately, what frequently happens is CEO pilfering of cash with no record of expenses.

A friend, whose parents owned my favorite bakery as a child, tells how his mother would take money out of the register, leaving a note in its place, whenever she needed cash to shop for various family items. I’ve known many business owners who do this habitually. With a sole proprietorship that is not incorporated, since all business income is taxed as personal income, as long as you keep accurate records this spending habit is more sloppy than illegal. With a corporation, your actions may be illegal.

You can structure your corporate perqs to cover various business requirements. Just as you design programs for your corporation or LLC to pay for health insurance, a company car, business travel, etc., you can also establish policies that the company provides lunch, supplies you with printer ink and paper so you can work at home, pays for your cell phone, and various other expenses that contribute to your performance for your enterprise. Write up the policy to apply only to CEOs or senior executives if you don’t want to include all employees. It’s your company; design the policy to fit your needs.

In addition, when you start your business or confront a slowdown, you may prefer to pay yourself a very low salary so you can build up company resources. Decide how realistic this decision is. You could realize you are not able to meet your personal expenses with the pay that you feel the company should provide under the circumstances. An alternative: Loan yourself money from the business.

Companies can make personal loans to employees at will. And you can make the loan on a monthly basis for an extended period of time. You’ll show the loan on your corporate books, you’ll be able to meet your personal expenses, and you’ll achieve your business goals. It is essential for you to write up a simple loan agreement between yourself and your business. Be clear on the loan terms. For example, “Acme Corp will loan Joanie Smith $1,000.00 per month for the next twelve (12) months. The funds will be repaid on a schedule to be determined by the lender and borrower. No interest will be charged on the loaned funds.” 

When your business is able to increase your salary, you can pay the funds back to the company or do some specific work that is used as barter to pay the debt. Or your company may choose to write off the debt. You will want to discuss the best way to handle this with your CPA, whose expertise includes other small businesses similar to yours.

As the owner of a company, you have much legal latitude to provide assistance to yourself without driving up your personal income. Realize that by keeping your personal income low you will limit some personal financial flexibility. One example will be real estate.

When I worked in mortgage banking, a wealthy high profile psychologist called me about buying an office building. It seemed like an easy transaction until I discovered he wanted to make this purchase as an individual rather than through his company. However, for the previous three years, his personal income had been less than $15,000. His company owned everything. While he had excellent credit scores, his personal income – substantiated by his tax returns – would not support a mortgage. I never understood why he did not want his corporation to make the purchase. The building sold while he was feeling upset about the consequences of reducing his personal income to limit his personal income taxes.

Think through your future plans before you limit your income and establish executive perqs. Whatever decisions you make, check with your CPA or a corporate attorney, who specializes in small businesses. Be certain your actions are legal and will serve both your short and long term needs.