What To Do When Your Business Has No Money

You need money to operate your business. But you've heard you can't just use your personal money to pay your business expenses if you have an LLC... so what do you do if your business just doesn't have quite enough?

In this episode, we talk about why you can't just pay your business expenses with your personal money and what you can do to give your business a cash injection when you need it.

Key Takeaways

• Mixing your personal money and your business money is called "co-mingling funds" - don't do it.
• If you don't treat your business money and your personal money as separate, a court can take down the liability protection of your LLC - the whole reason you have an LLC in the first place
• If your business needs a cash injection, you can provide it from your personal money via a capital contribution or a loan

Resources Mentioned

• Watch the free masterclass
• Follow Amy on Instagram @artfulcontracts

Next Steps

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Episode Transcript

Money. We need it, right? Our business has to have money in order to operate. But what happens if you don't have any? I know that sounds a little dramatic, but it will make more sense once we get into it.

Hey, I'm Amy Nessheim, licensed attorney for online business owners and founder of my own business, Artful Contracts. You're listening to Legal Made Easy, the show that makes the legal aspects of online business easy to understand and implement so you can grow your business with confidence knowing you've got it all covered. Let's dive in.

I have said this before, and I will say it again a hundred million times until I'm blue in the face. If you have an LLC or any type of business entity, a corporation, nonprofit, a PLLC, you have to have separate personal and business bank accounts. You have to keep all of your money for your personal life and all of your money for your business separate. But how do you do that?

If you start your LLC right at the beginning of your business and you don't have any clients yet, there's no money coming in, but you have startup costs, right? You have to pay for your website, you have to pay for your domain, you have all those million software fees that we pay as online business owners to maintain our operations every single month. Client relationship management software, I could go on and on. There are costs to doing business. Yes, you can do it lean, you can do it lean and mean and spend very little at the beginning, but it's probably not gonna be zero.

So especially if you started your LLC wanting to do it right from day one, you don't have any money coming in yet. How do you do that whole not paying for things with your personal money thing? How do you do that? You're gonna have business expenses, so how do you pay for them if you can't use your personal money? That's what this episode is all about.

First, I want to back up a little bit and talk about why it is that you have to have separate accounts. The whole reason for creating that LLC is to create a legal wall in between you and your business, in between your personal assets and the risks of doing business. In the eyes of the law, you are creating a separate legal person.

Your business, your LLC, is a separate legal person from you. That means that you own things separately. You can enter contracts as your business, you can't, your business can own things, your business can have debt, and all of that is just under the business and it has nothing to do with you personally. But if your business is a separate person from you, that means it has to have separate accounts too. And it's one of the first things that the court looks at if you get sued and the court is trying to decide if your business is responsible or if you are responsible personally, which a plaintiff is going to want, someone who sues you is gonna want that because it opens up a whole new pool of assets for them to go after, like your savings accounts and your car and your house. If that happens, the first thing the court's gonna look at is how are you treating your money? Are you mixing up your money and your business's money? Are you treating them as the same, or are you respecting your business as a separate legal person?

If you are sharing money with your business, if you're using your personal credit card for business expenses, if you're using your business card to pay for your DoorDash, this is called co-mingling funds. And the court is going to be able to pierce the corporate veil. And that just means they're going to get rid of that legal wall in between you and your business and decide that your house, your savings, your car, all of it's up for grabs. So this stuff is super important. If you're forming an LLC, you're probably doing it for liability protection. If you want to maintain your liability protection, you have to keep your business money and your personal money separate. That's the bottom line. That's all there is to it.

But every time I talk about this, someone asks this question What about startup costs? I'm doing the right thing. I'm creating my LLC on day one. And you know, if you're listening to this, you probably want to do the right thing too. That's the kind of people that I attract. You want to do it right. But if you're forming your LLC on day one, it means you don't have any money in your business yet.

You don't have any income coming in, but there's gonna be costs. There's gonna be ongoing costs, there's gonna be startup costs. So how do you pay for it if you're not allowed to use your personal money? And we're not just talking about the beginning here, because honestly, sometimes there are slow periods in business, sometimes things don't pick up as quickly as you want them to. And maybe you put a bunch, you opened up a business credit card, you put a bunch of expenses on it, hoping that by the end of that, by the end of that billing cycle, you would have the money to pay it off. And you get there and you can't quite cut it with your business money. And so you think, oh, I'll just hook my personal debit card up to my business credit card and pay it off just this once. No, don't do that.

Or it might be that you have a big investment that you want to make in your business. You know that a funnel is really going to skyrocket your business and you want an expert to build it for you. That can cost 20, 30 grand. Maybe you don't have the cash in your business to do it, but you have some savings you want to put toward it. How do you do? How do you put money into your business without breaking down that legal wall, without commingling funds and getting a court to think that you're treating your business and your personal money as the same thing? How do you do it?

When I say that your business money has to be separate from your personal money, that doesn't mean that you can never invest in your business. It doesn't mean that you can never take your own money and put it into your business. It just means that you have to be intentional about it and track it and create a paper trail for it.

There are basically two ways to do this. The first one is called a capital contribution, and the other way is with a regular old loan. Capital contributions are probably the most common and the way that you would want to do it, so let's talk about that first.

When you're starting your LLC, when you are first doing that initial paperwork, or you know, within the first little bit of doing it, you can fund your business with an initial capital contribution that basically is a purchase of your ownership interest in your business. It's a transaction. You give the business money and the business gives you ownership interest, which is like stock or shares in the business.

As a single member LLC, as the only owner of your business, it's going to be 100% ownership interest in your business. But that doesn't really matter. You have you are purchasing the ownership interest that you receive. If you have a partner, it might be, you know, 50% interest. You each have you each give the same amount of money to the business and you each get the same amount of ownership interest back. Or you can, if you have a partner, contribute different amounts of money and you get ownership interests that match.

So let's say you give $400 to your business and your partner gives $600, you get 40% interest, and your partner gets 60% interest. But for most of you, I think we're gonna, we're mostly single member LLCs in my audience. So that's what I'm gonna talk about. When you're starting your business, when you're creating your operating agreement for your LLC, there's a page at the back. If you use my templates, it's an exhibit at the end of the operating agreement that lists your initial capital contribution and your ownership interest. That initial capital contribution can be whatever amount you want.

So I say capital contribution, all I mean is the dollar amount, the money that you are putting into your business. It's just the official term for it. So that initial capital contribution can be whatever amount you want. When I started my business, I paid $20 into my business because that's what I had, and I took back 100% ownership interest in my business. It's been a it worked out great for me. But you might want to put in $1,000 or $10,000 or whatever amount you think your business is going to need to get off the ground to start with. That's how much you put in as your initial capital contribution, and you take back 100% ownership interest.

These should be recorded in your bookkeeping software or in a spreadsheet or ledger somewhere and in your LLC binder, your binder of documents that relate to, or you know, Google folder of documents that relate to your LLC formation and operation as a capital contribution and recorded in your bookkeeping software as owner's equity. All the money you put in goes towards owner's equity on your balance sheet. You can also do this at any time. You can make capital contributions at any time. It doesn't have to be just at the beginning of your business.

And again, you just add it onto your owner's equity. And you can think of it in the same way that you think of your equity in your house. If you buy a house, you have equity in it, and that equity relates to the value, the money that you put into it to buy it, and also the appreciated value over time. With your business, your equity is the money that you put into it and your profits and losses over time. So if you want to upgrade your kitchen in your house and you spend $20,000 operating your kitchen, the value of your equity in your house is probably going to increase and it won't necessarily match the amount of money that you put into that renovation. It's going to match the amount of value that the renovation gives to your house.

It's very similar with your business. You put money into your business and your equity increases in the amount that that contribution increased your profitability. So your equity has to do with the amount of money you put in and your profits, or it can decrease if you have losses. And all of that is shown on your balance sheet. The important thing when you make capital contributions is that you record them.

What you want to avoid is just paying an expense from your personal account as it comes up. You want to be intentional about this. So if you know you have a bunch of expenses coming up that you just don't have the revenue for in your business, then you can make a decision. Okay, I have about this amount of expenses coming up, and I want to make sure I'm set for the next 90 days. So I'm going to put a big chunk into my business to account for that and help me push my growth for the next 90 days.

There is no particular mechanism that you have to use. You can do this as simply as writing a check to your business or doing a bank transfer from your personal account to your business account. What matters is that you're not just paying expenses directly and that you're recording that transfer as a capital contribution in your bookkeeping software and it shows in your owner's equity account.

You also don't want to do it too frequently for a couple reasons. Number one, you're not profitable if you're just putting money into your business all the time. And if you're not profitable for too many years in a row, the IRS can classify your business as a hobby. So you can't do this forever. And number two, the point of your business is to be profitable for you. So you want to be careful about this because sometimes just having the pressure of bills coming up makes you get creative with how you make your money and can actually help you be profitable if you put that pressure on yourself. But that's more of my philosophy than anything else.

So, moral of the story to give your business a capital contribution, choose an amount, be intentional about it, transfer it to your business account from your personal account, don't just pay the expense directly. And then record it in your bookkeeping as an owner's capital contribution and make sure it shows up on the balance sheet as increasing your equity in the business.

Now the other way that you can add money to your business is with a loan. Loans are much more structured than capital contributions usually. They have a specific amount, they have interest, and they have payment schedules. And you should do this with you should actually have a promissory note. So it's just like if you went out and got a personal loan from a bank or if you're, you know, buying something and getting a loan. You are the lender in this case, you're operating as the bank for your business, and your business has an obligation to pay you back. With capital contributions, you'll probably make the money back over time in profit distributions, but there isn't that same structured repayment schedule and interest schedule that goes along with a capital contribution like there is with a loan.

So if you have a specific amount and a schedule that you want that money back by and you want to make sure that you're getting a return on your investment, then a loan might be the way to go. It's also helpful if you don't want to mess with your if you have partners and you don't want to change your ownership interest or change the dynamics of how much equity each partner has in the business, then a loan might be a good way to go. You just have to make it super formal.

You write a promissory note, you have the business sign the promissory note to you, and a promissory note is just the contract for a loan. And then the business makes the payments on the schedule that are set out in the promissory note, and eventually you'll have that money back with interest and you're good to go. All right, I think that covers it.

Moral of the story to sum up real quick: if you don't have money in your business, you can give your business money. You just have to do it in a way that is structured and intentional and tracked and written down, and there's a paper trail for it. Because if you don't, if you just pay your expenses out of your personal account or vice versa, and you're all willy-nilly about it, then you risk losing that liability protection, which is the whole reason you have an LLC in the first place.

Thank you so much for listening to this episode. If you're enjoying it, if you're enjoying the podcast so far, we're still brand new. I would so appreciate if you would head on over to the Apple Podcast app and leave us a review.

We've gotten some amazing feedback on the podcast so far, but it really helps us out as a new podcast, and we're just getting started to have some of that great feedback. So I would appreciate that so much. I'll see you next week.