Most new business people start their venture by creating a business that is an extension of themselves.
Not only is the enterprise a manifestation of the entrepreneur’s vision, but it is also, a physical expression of their financial life because they oftentimes use their own assets and credit to get the business up and running. If the business is not started as a corporation (and most are not), then the business’ assets and liabilities become even more inextricably linked with that of the owner.
There are many things that can go wrong with this type of financial blend:
First, a new business is a risk. By having your personal credit tied in with the business, you risk personal financial ruin if something we
re to go wrong. By the same token, if you get sued personally, your business would be an asset that your creditors can go after.
Second, you limit the growth potential of the business. Lenders and investors want to see that the business is a separate entity, separate and apart from the entrepreneur.
The smart move therefore is to separate your business and personal credit as soon as possible after starting the enterprise. The problem is that most people, while knowing how to create and improve their own personal credit, have little understanding as to how to do this for a business.
1. Incorporate: As indicated above, for a variety of reasons, it is beneficial for your business to be a separate legal entity, and this can only be done by incorporating. Corporations are stand-alone entities, legally. A partnership is not a corporation and a sole proprietorship is not a corporation. Only S corps, C corps, and Limited Liability Companies (LLCs) are corporations.By incorporating, you begin to separate your personal credit from that of the business.
2. Get Employer Identification number: If it is true that your personal credit is tied to your social security number, then it should follow that you need a different sort of number for your business. That number is obtained from the IRS and is called an “Employer Identification number” or EIN.
You can apply for one here.
3. Open a bank account in the name of the business. Once you have a corporation with it’s own EIN, then the next step is to go to a bank and open a checking and savings account in the name of the business using the business’ tax ID number. (It is critical that you do not use your own social security number here as that would once again tie your personal credit to that of the business, and that is precisely what we are trying to avoid.)
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4. Register your business with a business credit bureau: The main company that tracks business credit is Dun & Bradstreet and you will want to establish a credit reporting relationship with them by getting what is known as a DUNS number.
5. Establish commercial credit: Next, put your business credit accounts in the name of the business, using your EIN and DUNS number – telephone and internet, shipping, bottled water, whatever. Additionally, see if any of your vendors will extend you business credit.
6. Get a loan: You may want to take out a small loan in the name of the business, simply for the purpose of establishing a good repayment history.
7. Pay on time: As we all know, paying in full and on time is how you reinforce a positive credit profile.
The good news is that before long, you will have two separate credit profiles, one for your business and one personally, and that is as it should be.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.
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