At what point in your business’s lifecycle are you? Are you at the point where reinvesting in your business (increasing employees, equipment, etc.) provides diminishing profit returns? If so, consider creating a financial fortress outside of your business so that you are NOT dependent on your business to supplement your lifestyle.
When you create a business, it’s your baby (I get it). It’s easy to get sucked into your business and reinvest 100% of every dollar you generate to grow your business. And if you’re creating a scalable product or service, maybe that’s the right decision (personal finance rules don’t apply to entrepreneurs). However, if you hit a wall (cannot scale further) or are at a point where you are paying yourself an amount that you’re happy with, consider fortifying your personal finances.
In this podcast episode, I discuss some of the pitfalls of becoming overly dependent on your primary business. Especially businesses where there may be little (or no) market value if you were to sell the business, why it’s important to fortify your personal finances sooner rather than later.
How susceptible is your business to changes in the health of the economy? What would happen if your business suddenly came to a halt? These will vary depending on your type of business but are important questions to ask yourself.
One of the first steps in creating a fortress around your business is creating a separate business entity that protects your personal assets from any potential financial and liability claims. The type of business entity you select (such as an LLC, S-Corp, or Partnership) will depend on the number of owners (and employees) you have, and how you want your business to be taxed (flow-through, dividend, etc.).
Once you’ve fully separated your personal assets from your business assets, you must pay yourself an appropriate amount from the business. You want to make sure that you’re keeping the cash flow of the business separate so that you can accurately keep track of tax liability and not compromise your liability benefits of having a separate entity.
As a business owner, you should be paying yourself for the risk you take on and the hard work you put in. Even if the business is self-sufficient, you should be reviewing the amount you are paid so that you can build financial independence outside of your business.
While it’s not uncommon for successful business owners to be dependent on their business to supplement their lifestyle, there may come a time when they’d rather not carry that burden. Depending on the revenues of your business and how transactional they are, you may or may not have as much equity in your business as you believe (if you were to sell). This is another reason why fortifying your personal finances sooner rather than later is a smart move.
Lastly, don’t forget to connect with me on Twitter!