Basic Financial Management and Your Business Structure

When you start a business, you have several different structures to choose from. For the purposes of this article, I am going to focus on the two most common small business structures, the Sole Proprietor and the Limited Liability Company.

The Basics: How These Structures are Different

For many people who are just starting out or are self-employed, they choose to remain a sole proprietor and keep the revenue and earnings in their own name and under a social security number or a “personal” Employer Identification Number (EIN) assigned by the IRS.

A sole proprietor is personally responsible and liable for everything related to their business activities and can be sued personally for disputes. A sole proprietor may have employees, but it does not have partners.  A sole proprietor can open bank accounts and file taxes using their own social security number, particularly if they do not have employees.

Another structure available, and one that has become more popular over the recent years, is the Limited Liability Company (LLC). The LLC is a completely separate entity from the individual business owner and must be formed correctly with the Secretary of State (or the office governing corporations) according to that state's regulations. 

The LLC has at least one “member” but can have more than one. These members have ownership percentage, but stock is not issued, and a board of directors is not appointed. The LLC will have its own EIN assigned by the IRS which will be used to open bank accounts and file taxes, even if the LLC doesn't have any employees outside the members.

Financial Management as a Sole Proprietor

Firstly, this is not tax advice. I'm not an accountant.  This is plain vanilla business advice based on years of experience and knowledge in this area.  I'm going to give you some tips on managing your finances that will help you avoid future issues if you operate as a sole proprietor.

  1. Separate Your Finances.

The first thing I run into when advising a sole proprietor is the attitude that, “it's so much work to separate my finances, and it's all my money anyway.” I get it.  If you are a sole proprietor the argument can be made that yes, it's all yours. 

But you are earning it in your business and keeping business and personal finances separate is important. Now, I know some business owners that still use their personal accounts for business transactions. They accept credit card payments to their personal accounts. That creates kind of a mess for business expenses. There are fees for accepting cards, and these are co-mingled with personal money. And oftentimes, business expenses are missed when they are mixed in with the personal.

Separating your finances is one of the easiest things you can do that protects the integrity of your business record keeping. All of your payments earned in your business go into the business account.

  1. Create a payday schedule. And write yourself a check or transfer on specific days

Taking the extra step to pay yourself protects your business and personal cashflow. Here's what I often see happen. The electric bill is due, and “just this once” you are going to use the business debit for your personal expense.  Or you just write a business check to the orthodontist because it is just “easier” than taking a check and depositing it in your personal account.  In both of these very common occurrences you are potentially messing with your cash flow.

If you dip into your account throughout the month for personal expenses, you are increasing the chance for a cash flow issue.  There are always things that can happen to your income. You can have a chargeback. Or you can have a client pay late. Or you can have a down sales month.

Many times, unexpected challenges affect our business financially for a time.  If you set two days a month that you would take time to write that paycheck (for what you really need to support your personal expenses) you allow the cash in your business to build up throughout the month. For example, instead of eight draws on your cash for personal bills, you would have two.

  1. Set aside your taxes when you pay yourself

I know, I know, it doesn't really feel like you are taking a lot out. However, the tax liabilities on small business owners can be huge where the taxes aren't withheld when money is taken from the accounts.

More than once when the books are actually reviewed did the entrepreneur have to do a double-take to see what was actually taken. Owner's draws, those little withdrawals from the account for personal use, add up and they are taxable as self-employment income.  

In the U.S. you have to pay Social Security and Medicare taxes on your personal income. It is very easy to take a little bit each week, and not pay taxes on it. Because it doesn't feel like very much. But do yourself a favor. Set up the online portal for electronic federal tax payments and make a deposit in there whenever you take a paycheck. Or at least quarterly as required. Get an accountant to help you plan your deposit amounts.

Financial Management as an LLC

The first thing here is that ALL revenues earned in the business belong to the LLC. You do not have to separate the finances, because, well, you should NEVER have income personally. Full stop.

  1. ALL revenue sources point to the LLC bank account, expenses from the LLC account

Make sure the moment you set up your business bank account under the LLC (the bank will want your formation documents and EIN) you immediate point all sources of revenue such as Stripe, PayPal, checks, cash, and anything else to that business account. Remember, you created a separate entity, and all business transactions should be through this account.

This includes paying your business expenses from this account.  This can get a little dicey in the beginning if you are still supporting a new business with money earned outside the business.  For example, you new company doesn't yet generate enough revenue to cover the monthly business expenses.  Your best bet is to write a check or make a transfer to the LLC account and note it personally that it was a capital contribution.

Then proceed to pay the business bills from the LLC account.

  1. Make yourself a W-2 employee as soon as possible.

This means, hire yourself through the business, at a reasonable salary, and get regular paydays with taxes withheld.  As a sole proprietor the self-employment taxes fall totally and completely on the business owner.  As an employee of the LLC, your paycheck taxes are split. You pay the employee portion of the payroll and other taxes and the LLC (the separate entity employing you) pays the employer portion.

There are great online payroll services available that will do the calculations, make the direct deposits, and even file the employer payroll tax returns and deposit the employer payroll deposits with the local, state, and federal governments when they are due.

This reduces your paperwork load and the potential to miss important deadlines, and it ensures all taxes are withheld so you don't end up with really messy surprises. Yes, you can set up payroll services for one employee, and yes, these services can be very affordable.

  1. Do not comingle your money if you want that LLC structure to protect you.

One of the primary reasons people form an LLC is to limit their “personal liability” for a lawsuit if something goes wrong. Knock wood it won't, but this is a main reason people open their businesses under this structure.

However, if you comingle your money, meaning you mix the LLC business money and your personal money, you may lose that protection.  Please don't use the LLC debit card for your vet bills. Or pay business expenses from your personal checking account. If you do, the courts can conclude that you didn't actually treat the LLC as a separate person and that you are really the “same person” as the business, so they can go after your personal assets.

The legal action is a bit complex, but it is called, “piercing the corporate veil” and varies again from state to state how that can be done.  The technicalities are a bit beyond the scope of this post, but I cannot stress enough how strictly you must keep the finances clean with an LLC.

A very important facet of business ownership is financial management. It is also an often-overlooked facet, in that people are just busy managing their businesses and may not be aware or understand the potential pitfalls if they don't manage the money correctly.  The basics are to keep it separate, pay yourself on a schedule, and get an accountant to advise you on the taxes.   Happy entrepreneuring.

Divorce Basics

While Divorce is never contemplated at the time of your marriage, understanding the process is essential to protecting your financial security after dissolution.  The divorce process can become nuanced depending on numerous factors such as the length of the marriage, business ownership, and custody issues to name a few.  The following contains some of the basic information you would need to better understand the process from a high-level perspective. 

Grounds for Divorce

California is a no-fault divorce state which means that neither party must prove any specific reason for the divorce.  This means even where one spouse does not want the divorce, it will not prevent the other spouse from seeking the divorce.  

You can file for divorce or for legal separation in California based on either of the following grounds (reasons):

  1. Irreconcilable differences, which have caused the permanent breakdown of the marriage; or
  2. Permanent legal incapacity to make decisions. For this ground, there needs to be proof (competent medical or psychiatric testimony) that the spouse was at the time the petition was filed, and still is, lacking the legal capacity to make decisions.

Initiating a Divorce

To initiate a divorce in California, at least one party must be a resident of California for at least six months, and a resident of the county in which the petition is filed for at least three months.  However, when filing a petition for separation, only one party must reside in California.  There is no requirement for how long the party has lived within the state. 

Once the Residency requirements are met, the person seeking the divorce (“Petitioner”) would need to complete two forms:

This form asks for basic information about your marriage and the type of orders you want the court to be able to make about things like spousal support and property. 

The Summons tells your spouse that you've started a court case and that they have 30 days to respond.

 Child Custody

Child custody refers to the responsibilities of the parents taking care of minor children.  Legal custody refers to who may make important decisions for the child(ren) and physical custody refers to who the child(ren) live with most of the time. 

For legal custody, parents may have joint legal custody in which both parents share in the responsibilities for making important decisions about the child(ren).  Sole legal custody means that only one parent has this responsibility. 

Under California law, it is the policy of the State to ensure minor children have frequent and continuing contact with both parents, except when that contact would not be in the child's best interest. In making this determination, a court will consider the child's health, safety, and general welfare. 

Spousal Support

Spousal support, known in some states as alimony or spousal maintenance, is a court order in which one party provides financial support to the other for some amount of time after divorce. It attempts to lessen the financial disparity between spouses often encountered with divorce. This includes cases where one ex-spouse is unable to be financially self-sufficient. 

Courts base this decision on several factors (14 to be exact) and is intended to be a temporary equitable distribution of the family income, considering the parties' individual incomes and expenses.  Some of the factors a court will consider are the age, earning capacity, needs, and health of each party.

Everyone knows how difficult the divorce process can be for all parties involved, including the couple, the children, and even their extended families. We deal with family issues daily and have the knowledge, skills, and resources to help you transition through the entire divorce process as comfortably.

Contact us today to help you fully understand the requirements and to make sure your personal and financial interests are protected. 

Story time.

I once worked with a client who was accused by another company of not having email security because the company was “phished” and sent a wire transfer to what appeared to be a legitimate payment link but ended up being fraudulent. It was no little money transfer either. The wire was more than $50k… ouch.

My client ended up being fine, but I wanted to point out some “red flags” to protect you and your business from this type of fraud.  These “red flags” were ignored by the company, which is why the fraud was successful.

  1. Check the URL carefully for EVERYTHING.

Sadly, in this day and age, it is way too easy for fraudsters to purchase a web domain that is spelled “almost” exactly like any other company. They can purchase the company name with a “.net” or “.co” or any other number of extensions that are close, but not exactly, the web domain of the company you are legitimately doing business with.  Switching a few letters around in the name or using .net could go undetected if you aren't careful.

Once this “dupe” company domain is purchased, email addresses of company officers, purchasing agents, and other personnel can easily be created. Spend 15 minutes on LinkedIn and a fraudster can create an excellent looking email address, with logo and signature. This can easily be faked. Particularly with smaller businesses.

  1. Do you have previous business dealings? Changes in processes should be suspect.

Let's say you've transacted business with the legitimate company previously.  They sent an invoice, and you paid it online with a specific link. Or you sent them a check. Or you've always had “Net 30” terms.

But suddenly you get a request for a wire transfer. To a different business address? Time to ask some questions.

Pick up the phone. Start a new email to the address you have on file for the department you typically work with. 

And don't ask by replying to the email!  If you typically work with jon.doe@example.com email Jon directly.  If you aren't careful you would reply to jon.doe@exampel.com and they would confirm the directions to send a wire. Notice the spelling in the email that sent you the request versus the one you actually send communications to normally?

  1. Have strong financial controls in place.

Please answer the following questions about your company's financial controls in place for remitting payments.

  1. What are your internal processes for paying invoices?
  2. How do you confirm invoices are ready to be paid and all deliverables have been received?
  3. What level of authorization and payment approval is required based on the invoice total?
  4. What is the maximum amount someone can remit with only one signature?

If you cannot answer these questions, please, please look at your internal financial controls. And there's one more. Who sends the authorized transfer or signs the checks? Is it your admin? Your CFO? Who is authorized to send money from your company and has signature authority on your accounts?

As part of the matter, one unfortunate outcome was that the CFO of the other company was let go.  Because we asked these questions.  Whether or not my client's email was hacked, or the company's email was “phished,” the answers to these questions revealed that there were at least four different places in the typical corporate payment process where the fraud would have and could have been detected. And ultimately no reasonable company with these controls would have wired the money.

Which is part of the reason my client was fine. Without getting too legalese here, the other company had a bit of a challenge proving that if my client was indeed hacked (turns out they weren't) that the hack was the actual and proximate cause of the wire transfer to the fraudulent address. And yeah, we could definitely show some liability on their part, in at least four places.

Evaluate Your Business

If you don't have strong processes and controls in place in your business for every financial transaction, you could become the victim of this type of fraud. Unfortunately, it is way too easy these days to dupe company emails, websites, and other marketing assets.  I'm sure you've heard of the PayPal scam or some other scam where people click legitimate looking links and change passwords or give banking access.

This fraud was slightly more elaborate because companies typically have strong controls in place to evaluate invoices and remit payments to vendors and suppliers.  Take a moment and review the questions above and take the time to make the necessary changes in your processes to protect your business.

Finally, if something like this has ever happened to you, understand that it is becoming more and more common. This blog has some startling statistics Must-know phishing statistics - updated for 2023 | Egress and it's a multimillion dollar problem. Unsurprisingly, Facebook was the most duped company.  Awareness and following strong processes will be your company's best defense.

Dawn K Kennedy is a business lawyer and entrepreneur. She is a partner in Bowen & Kennedy P.C. and serves clients across California and in the federal courts.

Running a business without written agreements puts you and your clients at risk for misunderstandings. It puts you at risk of not getting paid. And further puts you at risk for chargebacks, where the client goes directly to the credit card company and claims fraud after receiving products and services. Without a written agreement, you will likely have to refund any money you've received, even if your policy is “no refunds.”

Agreements need to be clearly written, including all terms, and signed. 

The truth is that contracts, or as I call them business agreements, do not have to be complicated, written in legalese, or 20 pages long to be enforceable. What they need to be is yours, not someone else's copy/paste.

When I say do not “copy/paste” someone else's, I mean please do not copy/ paste. There are formats online you can follow, but don't include things you don't understand and just change terms just because they have it in theirs. I've reviewed many an agreement where people had conflicting terms because they chose the sexy Latin clause without understanding what it meant.

Here are the main things to include in your agreements.

Be Clear and Keep it Simple.

Nobody likes legalese. Nobody. Drop the “whereas” please. Just say it clearly and keep it simple. If the program lasts six months, it lasts 6 months. If there are 4 monthly payments, say that. People want to know what they are signing up for. It doesn't have to be fancy, lengthy, or in legalese to be enforceable. You can have a legally binding agreement written on a napkin in a bar (there's a law case on this!), not that I'm suggesting that approach.

Include QTIPS

The specific terms need to be spelled out. You can use QTIPS to remind you to include these things:

            Q: Quantity  (6 sessions, 2 bracelets, 5 massages, etc.)

            T: Time of Performance (15 days, 6 months, 1 hour)

            I: Identity of the Parties (You and the name of the client/ customer)

            P: Price (break out the price per item if needed, but the total price of the agreement is clear)

            S: Subject Matter (what are they specifically buying? Coffee? Coaching? Copywriting?)

When you include the above terms of your agreement, there isn't much room for misunderstanding. Just make sure you are specific. Don't say “fruit” if you mean “orange.” It can be a single sentence, “This agreement between Me and You is for Six 30-minute life coaching sessions over 6 weeks for $350.00.” All the terms are there. You know what you are giving, and they clearly know what they are getting.

Now, there are complex contract agreements, like a requirements contract, where you agree to provide or buy “all of your requirements” to or from a supplier.  But if you are that stage of business, you should consult an attorney. Really, you should.

Spell out the terms (versus your policies)

This is where people often leave out things that come back to bite them. And the place where there are serious risks for ambiguities.

First, “the terms.”  These are the actions that must happen under the agreement for it to be “perfectly performed.”  Some might call it the “fine print”, but these are the things that form part of the contract. These are the things everyone entering the agreement is legally required to do.

If you do not offer refunds as a term of the agreement, you must put it in writing, in the agreement and have it signed. If you offer refunds or replacements within 30 days, it must be in there as well. If you require a deposit, if you require pay in full before a VIP Day, if the customer pays shipping, you must let your clients and customers know this is what the legal thingies are BEFORE they complete the purchase.

If someone doesn't like your terms and chooses not to do business with you, trust me, it is far better to walk away without the agreement than to face the bitter dispute with the credit card company over the chargeback later.

Because these terms are what you or the other person would need to enforce if there was an issue in the performance of your clearly written, unambiguous, amazing agreement. A contract agreement is between the parties to that transaction, so the terms “govern” that particular agreement.

Policies are another matter.  Your policies are the actual guidelines within which you run your business. These apply broadly to everyone who does business with you. If people must call to reschedule within 48 hours, as a policy of your office, you enforce the policy to everyone, but maybe there's an exception available. Put your policies in writing, yes, but understand these aren't things that you or your clients are “legally required to perform” in the same sense as a contract term.

Get any changes in writing

If you make changes, and they do happen, just put them in writing and sign and date them. “You and I agree to change our agreement to include XYZ.  This change is effective immediately.”  Do not rely on the memory of what you said on the phone, and the out of context email isn't any better. Take a minute and “memorialize” the change.

Be prepared to enforce the agreement.

This is the part of business nobody really likes, but this is the reason you have written and signed agreements. You must be prepared to enforce them. This is business. Your livelihood depends on your customers and clients keeping their word, and your business growth and development relies on it too. It's uncomfortable at times, but we must choose to be stronger than the feelings. Nobody LIKES enforcing contracts, but hopefully, you would rarely need to take this step, and you would have a good enough relationship with the other party to negotiate how to complete the agreement.  You must view this from an objective place and understand that if your clients don't keep the agreements, your business could go under.

Finally, Having an attorney look over your agreements is a wise decision. I don't just say that because I am one. Attorneys went to school to spot gaps and look for language that is written in a way that can be interpreted differently than you think it means or is ambiguous.  If you are skipping the attorney for now, but you're still transacting business through email or handshakes and don't have written agreements, set aside time to get your written agreements together soon.

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Bowen & Kennedy, P.C. is committed to answering your questions about Family, Healthcare, Special Education, and Business law issues in California. We offer a Free Initial Consultation and we'll gladly discuss your case with you at your convenience. Contact us today to schedule an appointment.

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