We all know running a successful business requires more than just expertise in your field. It demands smart financial management. I’ve helped countless business owners navigate complex business decisions over the years. Here are six mistakes I see a lot in my tax firm.
1. Choosing the Wrong Business Structure
The structure of your business is a critical decision that impacts everything from taxes to liability protection. While LLCs are popular, they’re not always the best choice. Each entity type (Sole Proprietorship, LLC, Partnership, C Corporation, and S Corporation) serves different needs and comes with unique tax implications.
2. Mixing Business and Personal Funds
It’s tempting to treat business funds as personal money, especially when you’re bootstrapping. However, commingling funds can lead to serious legal and tax complications. Even if you personally funded your business’s launch, maintaining separate business accounts is crucial. This separation protects your liability shield and makes tax time significantly easier. And using business funds for personal expenses can even risk your LLC’s liability protection by “piercing the corporate veil.”
3. Taking Out Too Much Money
Distribution decisions aren’t just about having available cash—they’re about understanding your basis in the business. Your basis represents your investment plus profits minus previous distributions. Before taking distributions, calculate your basis and consult with a tax professional to avoid surprising tax bills.
4. Taking Out Too Little Money
Surprisingly, being too conservative with distributions can also cause problems. You’ll owe taxes on business profits whether you take distributions or not.
5. Blindly Following Generic Advice
The tax code is complex by design, and what works for one business might not work for another. I often see business owners make major purchases based on general advice without understanding the specific rules that apply to their situation. For instance, while you might hear about “writing off” a vehicle purchase, the actual deduction depends on factors like business use percentage, vehicle weight, and your entity type.
6. Waiting Until Tax Season to Plan
By April, it’s too late. Most deductions, elections, and entity changes must be done during the year.
Protect your business and optimize your tax position when you book a consultation today at: yapfinancial.com