Entrepreneurs, Keep Your Books Clean!

The article title’s admonition is not simply a warning to avoid actively engaging in illegal or unethical transactions (obviously, a lawyer is going to tell you not to break the law!), but also a caution to always ensure that your business’s finances are well-maintained, and more importantly kept separate from those of the owners. Failure to “keep the books clean” can have a number of dire consequences for startup ventures:

– It could potentially lead to an IRS audit of you and/or your business, or if you were to get audited for an unrelated reason, sloppy financial activity or poor financial records can make the process more difficult.
– If your business is a limited liability entity, co-mingling of business and personal funds, or at least the inability to distinguish between business and personal transactions, can lead an opposing party in litigation to successfully petition the court to “pierce the corporate veil” (and its LLC/LLP equivalent) and reach the assets of the business owners to satisfy a judgment.
– Perhaps most importantly, poor financial records (or worse, co-mingling of business and personal finances) can make it difficult, if not impossible, to raise capital for the business through bank loans, angel investors, or venture capital financing — not only do messy record books make it difficult for banks or investors to properly analyze the business, but it also serves as a red flag that the owners themselves are not to be trusted with an investment (it is cliché, but true, that angels and VCs not only invest in the business, but also in the founders)

In addition to the obvious step of diligent bookkeeping, there are a few other steps entrepreneurs can take to ensure that they keep their finances in order. The first is obtaining a Tax Identification Number (TIN), also known as an Employer Identification Number (EIN), the business equivalent of a Social Security Number. Although TINs aren’t required for some types of business organizations (sole proprietorships in particular), having a TIN can help entrepreneurs avoid having to give out their own personal Social Security Numbers for business purposes, such as opening business bank accounts or obtaining business credit cards — this leads to the second step entrepreneurs can take to keep their books clean, keeping separate banking accounts in the name of the business. Although it is possible to keep diligent accounting records showing each personal and each business transaction from a personal account, having both personal and business funds in a single account greatly raises the possibility of errors, and in many cases is impermissible. Having accounts in the name of the business makes keeping financial transactions separate easier on business owners, and makes doing business significantly easier on third parties the venture transacts with. A separate business account can be obtained even by sole proprietorships by providing a DBA (Doing Business As) certificate — obtained in most jurisdictions from the local town/city or county clerk — to the bank.