Business is going well, and you have some substantial cash in your bank account. How do you keep it safe? In this article, we discuss some practical steps business owners can take to keep their money protected.
Open a savings account
This first step seems almost too simple, but it is important. You may be surprised how many business owners do not have a savings account set up for their business. Maybe they haven’t gotten around to it. They could also prefer the simplicity of managing only one bank account.
As your business grows, your checking account will grow too. When that happens, setting aside a portion of your cash in reserve can keep it protected. For one, any cash not in the checking account is less likely to be spent. Additionally, having a portion in savings gives you a reserve to pull from for emergencies or to save for taxes.
Consider a high-yield savings account
Having money set aside in a savings account is a great start to building cash reserves. What if you aren’t planning to use those funds for a while? Then consider opening a higher-yield (or high-interest) savings account to park your cash until you really need it. True to their name, these accounts usually yield higher-than-average interest rates.
Keep in mind that although these types of accounts do pay greater interest, they do come with restrictions. For example, withdrawals from most high-yield savings accounts are limited. They usually require minimum deposits or balances. And bank fees associated with these accounts may be higher than traditional bank accounts.
Change banks
Most of us have heard of the FDIC when it comes to banking. The Federal Deposit Insurance Corporation (FDIC) is an independent agency created to maintain stability and confidence in the banking system. One of the primary ways it does this is by providing deposit insurance to bank customers. Your banking funds are protected in the event a financial institution fails.
What many do not know is that the FDIC insures up to $250,000 per depositor, per ownership category. What does that mean? If you conduct all your financial business with a single bank, only $250,000 of your business funds will be insured. Any excess funds could be lost.
If you regularly have bank balances exceeding $250,000 each month, our recommendation is to open an additional account with another financial institution. Opening an account elsewhere increases your insurance coverage with the FDIC. Different banks also offer better incentives to business customers. For instance, some smaller banks can offer competitive loan rates or higher lines of credit. They may also offer higher-yield bank account options.
Change your entity type
In some cases, changing the entity type of your business can provide extra financial protection. If your business is a sole proprietorship, it’s common for expenses and income to be combined between personal and business accounts. From a tax standpoint, the business is treated as an extension of your personal taxes.
For other business types, such as S-Corps for C-Corps, the “corporate veil” comes into play. The corporate veil is a legal concept that separates the actions of a business from the actions of the officers or shareholders. The corporate veil can provide some protection to business owners in the sense that they can be shielded from some negative impact should the business fall on hard times.
If you are considering a change in the structure of your business, do some diligent research. You should also have a detailed discussion with your tax professional and lawyer. They can discuss the potential benefits and risks associated with changing the entity type of your business.
By making a few practical adjustments, you can keep your money protected and hopefully sustain your business for many years to come. Are you interested in working with an accounting partner that proactively looks for ways to protect your business? Set up a complimentary consultation with us to get started!