I recently made the switch to being self-employed and it’s been great. But now my partner and I are expecting our first child and honestly, I’m a little scared. I want to make sure I’m doing what’s right by my family to keep us safe in case something happens in my little solo operation. I’m a sole proprietor so the last thing I want is to be at risk of losing our house or all of our savings if something goes wrong. Any tips for navigating a new baby and a new business?
Signed, Expecting Entrepreneur
Wow! First of all, congratulations! It sounds like you have two big changes to contend with (and celebrate). Might we recommend a deep, cleansing breath? Thanks for phoning in!
Kidding, of course. Some might argue that we’re not equipped to dole out advice on becoming a new parent, but the truth is when you run your own business, the personal is very much entwined with your work. So while we can’t recommend the best car seat, we do have some tips for the business side of things.
Let’s start with the basics: do you have a separate business bank account? A lot of entrepreneurs think they’re not at that stage yet, but it’s one of the first things you should do. There’s a couple of reasons a separate account is a good idea:
Simplifying: As a new business owner, you’re going to have to file taxes at some point. And that’s going to be a whole lot easier when you’re not sifting through a year’s worth of personal and business expenses on your credit card statement. Less time on admin=more time with baby.
Liability: If you formed an LLC or corporation for your business, then you’re actually required to keep your business and personal finances separate (more on LLCs later). But equally as important, it offers you and your family protection. Should someone go after your business, they won’t be able to pursue your personal assets.
You might also want to set up a rainy day fund, specifically a business savings account. Treat it as your buffer in case your cash flow slows down and you still need to stay on top of credit card or loan payments.
But if you really want to create a separation between your business and your family, consider incorporating. Let us be very clear when we say incorporation isn’t for everyone. One benefit for incorporating as a business owner is that your business becomes a separate entity which gives you some liability protection. So if the business is at risk of defaulting on a loan, the financial institution comes after the business’s assets as collateral first.
You might also want to consider changing your business structure to a Limited Liability Company (LLC). This is a popular option for either solo entrepreneurs or individuals starting a business as a group. There’s a lot of pros and cons to every business structure, but here are the spark notes:
LLCs are separate business entities, similar to corporations. This means the business and business owner are separated. Every revenue, expense, asset, and liability belongs to the business, not the business owners. Because they are separate entities, if your business defaults on a debt or is facing legal issues, it will be the business’s assets used as collateral first, not yours.
However, corporations and LLCs aren’t for everyone. It can be a big administrative hassle to get incorporated and there are much stricter reporting requirements. For example, since you’re a sole proprietor, you’re probably enjoying the fact that you only have to file one tax return at year-end, but if you incorporate, you’ve got another tax return you have to worry about. You’d also have to tighten up how you take money from the business since that money isn’t your money anymore, but the business’s. Simply put, these business types might be more of a headache and costly than the worries you’re currently facing.
One last piece of advice: try and enjoy the ride. It may seem scary and stressful, but it can also be wonderful and exciting. And if your worries are getting the best of you, reach out for support! Whether that’s financial support from a trusted advisor or CPA, or joining a new parent or entrepreneur group—you’re not alone.
And hey, next tax season you’ll have a new dependent to add to your return!
Your business best,