No matter how excited you are about your business model or concept, starting a new company takes time. You may spend months or more than a year developing your business plan, finding investors and eventually creating your formal business entity.
There are no hard-and-fast rules about what order you take those steps in, but there are considerations that can influence the best time to make certain moves. Creating a business entity and opening a business bank account should often occur early in the process.
Many people put off doing these things until they are well into the process of building the business. The problem with this approach is that it may leave the entrepreneur involved at risk of losing their personal assets.
You take a risk by using your own bank account or credit cards
Whether you need to purchase a prototype for investment pitches or want to obtain a patent, using your own money for business purposes will put your assets at risk. One of the biggest benefits of creating a formal business entity is the separation between you and the company. If the company fails, goes into debt or faces a lawsuit, only business assets are usually vulnerable to claims and judgments.
However, if you have commingled your personal assets with business assets, possibly by using your personal bank account or credit cards for business purchases, creditors may have an easier time going after your personal assets if the business doesn’t have enough to repay them.
Understanding the risks involved in starting a new business can help you protect yourself from mistakes that could affect you financially.