Putting personal money into a business

If you’re moving forward with a business plan, you may be considering your personal funds as a potential source of financing. While the ease of access to your personal funds can make this a tempting way to invest in your fledgling business, there are pros and cons to doing so.

In all cases, it’s best to start off by setting up a business bank account for your new enterprise.

Can you fund an LLC with personal money?

Yes, you can! In fact, many businesses do.

A limited liability company (LLC) is a type of business structure that means that your personal property and assets are protected but makes a distinction between an often smaller business and a corporation. It’s a common structure for small businesses.

While it can be great to have additional funding for receiving your LLC, many pay for the LLC filing upfront. For most states, this fee can cost between $50 and $500 with an annual filing fee of under $150. Be aware that it can be higher for some states, such as California, Massachusetts and Maryland. Third-party sites will charge an additional fee for this filing, so it’s best to go straight to the state government website and file directly with them.

Overall, funding an LLC with personal money can be a necessary step to get your business off the ground and in a better position to get additional funding in the future.

Open a bank account for your business

By setting up a business bank account, you’ll be able to keep your personal funds separate from money that you use in the business. This is true even if you plan to put personal money into your business account when you’re starting out. A separate business account will still help you better track your business spending and expenses.

Looking ahead, maintaining separate accounts for your business also helps when it comes time to file the inevitable tax returns. Further, in the case of any business debts or losses, keeping your business and personal funds separate may help minimize your personal liability for financial fallouts. Here’s what you need to do to open a business account:

• Identify your needs and compare different accounts. You need to anticipate how money for the business will be received and what type of account will keep your business best organized financially. This can include a checking, savings and a merchant savings account. The best business accounts have low fees and a good amount of benefits.
• Choose a bank. Not all banks are created equal and some may be more accessible to your business needs than others, so make sure to research and find the best bank for your business.
• Have proper documentation. Opening a business bank account is quite different from opening a personal account. Some of the documentation you may need to provide are your identification, a tax ID number (TIN), your business’ formation documents, and a business license.
• Complete your application. Once you have all you need, visit the bank either online or in-person to open your account. Approval can vary depending on what is needed, but it shouldn’t take more than 28 days. If you’re worried about how long the approval process is taking, don’t hesitate to contact the bank for assistance.

Different types of personal funds to put into a business account

Once your business bank account is open, consider which sources of personal funding you’ll tap into for your business enterprise, if any. One may be your personal savings, which is often the easiest to access. You may also be able to turn to your personal credit card for a cash advance if you have the credit available, though this is ill-advised as the fees and interest rates on cash advances are sky-high.

Other potential sources of funding include tapping into your retirement savings or even your home equity, if these sources are available to you. Be cautious about dipping into these funding sources, however, since doing so could jeopardize your retirement or your home if a business loss occurs.

Finally, you could consider taking out a personal loan or asking friends and family to act as investors in your new business. Just remember to clearly establish terms for paying back funds or taking ownership stakes in your company, so you can guard against relationships souring over disagreements later on.

Structure your personal contributions as a business loan

By setting up your business as an LLC or other business entity, you can choose to loan your business money from your personal funds. Begin by drawing up paperwork that specifies the terms of the loan, such as how frequently it will be repaid and how much interest the business will pay.

Be aware, however, that while your business can deduct interest payments on the loan as a business expense, you will need to pay taxes on a personal tax return for any interest payments you receive on that loan from your business. A qualified tax planner or CPA can help ensure you structure the loan in a way that benefits both you and your business.

Consider a secured business credit card

If you currently have a poor or fair credit rating, it may be a good idea to build up your creditworthiness before starting your business. This way, you’ll be able to earn more favorable terms on any business debt you eventually need to take on.

You can request your credit reports weekly from U.S. credit reporting agencies Equifax, Experian and TransUnion through the free site AnnualCreditReport.com, and major credit card issuers like American Express and Capital One allow cardholders to see their credit score online or through an app. (You can get access to your FICO score from myfico.com for a fee). Both resources can help you understand where you currently stand financially and how much you’ll need to do to repair your credit.

Another option for new businesses is a secured business credit card. A secured credit card requires you to put down a deposit that serves as security for your card’s line of credit. You can then build up your credit and graduate to a stronger unsecured card as your business and credit scores grow.

Tips for using your personal money in your business account

Investing in yourself not only speaks to your confidence in your business, but it can be an easy way to get started. Still, it can be a tricky transition from strictly personal purchases to business investments. When using personal money, make sure to keep a few things in mind:

• Keep track of your spending. Its never a good idea to make purchases for your business without tracking them. This can lead to racking up more debt than your business can handle. Most businesses start at a deficiency, so do what you can to avoid adding to it
• Lower your startup costs. When you’re first starting out, it’s best to think strictly about only your business’ necessities. Don’t buy more than what you need. For example, if you need supplied for an office, get the amount you need for the next few months use rather than assuming your needs for the next few years. This can apply to both quality and quantity. If you need a laptop, perhaps a refurbished one in good condition will be better for your business than a top-of-the-line new model.
• Keep outside income flowing in. “Don’t quit your day job” can feel discouraging, but its actually solid advice. Your original source of income can be a safety net while work out the kinks of your new endeavor without extra stress. If you can balance both, give yourself time to get your footing under you as a businessowner.
• Be patient. Businesses are very rarely quick successes–and that’s okay! New businesses take time to figure out, and it is crucial to give yourself time to grow. So, don’t feel like you have to succeed overnight.

Risks of using your personal funds

When starting up your business, understand the risks of investing your personal funds in your new company.

You may lose your personal funds

Businesses can be structured in various ways with the intent of separating your personal liability from your business liability. When you set up your business as an LLC your debtors can’t turn to your personal assets to satisfy your business obligations. However, when you put your personal money into your LLC, you lose that protection.

Not only that, but keep in mind that business startups have a high rate of failure. Data from the Bureau of Labor Statistics reports that only one-third of businesses created in March 2013 were still operating a decade later in March 2023.

Your personal resources may be limited

Unless you have especially deep pockets, there’s a good chance you won’t have access to enough money to fully fund your new operation. New entrepreneurs are often caught off guard with the number of unexpected expenses involved in running a business, and it may take some time before you’re profitable enough to take income from the business to recoup your personal funds.

As a result, you may find yourself in the position of having exhausted your personal funds, but still needing to seek additional financing sources to keep your business running.

You may lose out on business-specific credit card rewards

A tremendous advantage of using small business credit cards is that they come with rewards programs designed specifically for the needs of small business owners, as well as help with building up your business credit.

One such perk is a 0 percent introductory period. If you were to get a credit card that comes with 0 percent APR for 12 months, you’d have a year to use the card issuer’s money to buy materials, packaging items and shipping supplies without any financing fees added to your debt — that is, as long as you can make your payments on time and pay off your balance before the promotional rate ends.

A small business credit card could also help you earn rewards such as cash back, points or miles with every purchase, not to mention earn you a large welcome bonus when you open the card and spend a minimum amount in the first few months. Many small business cards come with excellent accounting features, too, which can help you track your costs and more easily prepare your taxes.

Alternatives to putting your personal money into your LLC

If you’re not comfortable putting your own money down or the price is too far out of reach, there are other ways of funding your LLC, such as:

• Angel investors: Angel investors are usually private investors with a high net-worth that provide funding to small businesses, often trading money for partial ownership of the company. This will often be in smaller amounts than venture capitalists. This can be a high-risk, high-reward type of funding.
• 0 percent intro APR business cards: Cards with introductory zero-interest periods give you a set amount of time to pay of your business purchases without applying interest. This can be a good open for both establishing your business credit and giving yourself time to pay off your LLC without having to worry about the initial filing fee. However, if you don’t pay off the card before the introductory offer ends, the ongoing interest will be applied to the remaining balance, and it’s likely the offer will not apply to the annual renewal fee.
• A small business loan: This is a loan dedicated specifically for small businesses and their needs. These loans will often be lower than $50,000 and can be used for any business needs, including an LLC. Loan terms can vary by the amount you need and the bank you choose, but they’ll often have lower interest than personal loans. However, it can take years to pay them off.
• Grants: Grants provide funding without a loan or giving up partial ownership. This type of funding is often provided by organizations geared to help small businesses thrive. You usually have to apply and either explain your business plan or write an essay about your business. The downside is that the amounts can be pretty small and supply can be very limited.

The bottom line

There’s something to be said about investing your own hard-earned money into your business, but the last thing you want is to lose money that you’ve worked hard to earn and made sacrifices to save. Taking time to understand the challenges and risks that could come from investing your personal money in your business will help guide you toward the best choices for your ambitions, budget and financial goals.

Understand the steps you can take to limit your personal liability against business losses, including business accounts and business credit cards.