Putting Personal Money Into a Business in 7 Steps

Putting personal money into a business can help you overcome startup funding needs, but can also create unnecessary risk if done incorrectly. You need to make sure you properly account for the money on your business books so you accurately track the amount your business either owes you or how much ownership you have.

The seven steps to putting personal money into a business are:

1. Make Sure You Have Separate Bank Accounts

One of the most important things to do as a small business owner is to separate business and personal accounts. Having a legal entity for your business, like a limited liability company (LLC), protects you from liability and the decisions you make in your business. Combining your personal and business financials can take that protection away and cost you dearly later.

If you don’t currently have a separate business checking account, then you should open one right away. The best free business checking accounts allow you to make payments, deposit checks, and schedule transfers on your phone. Novo does that and more, allowing you to also send digital invoices and connect to your Stripe account. You can open an online account in just a few minutes with no minimum deposit required.

Visit Novo

2. Fund Your Business Bank Account

In order to have a transaction to record, there needs to be money flowing from your personal account to the business’ account. Make sure you fund the full amount the business needs (or that you want to invest) so that you don’t have to go through the accounting process multiple times unnecessarily.

Having a separate business bank account makes it really easy to track your personal money. For example, you’ll have two transactions: a withdrawal from your personal account and a deposit for the same amount in your business account. This makes it easier to properly record the transactions on your books.

3. Record Your Money as Either a Loan or Equity

When you’re putting your own money into your business, you’ll either book it as equity or a loan. Most business owners book this transaction as a contribution (meaning equity in the business), so this is the process we’ll cover in this article. That means the business doesn’t owe you anything. Instead, you’re making an investment in the future success of the business in return for equity in the business.

How you record the transaction will determine the accounting process and how you receive money back from the business later. It’s important that you take the necessary steps to properly record every transaction between the business and your personal accounts so that you keep the legal protections discussed in the first step.

4. Debit the Cash Account

The first accounting step (and the fourth step overall) is to create a journal entry that properly debits the amount of money you placed into your business checking account. This process starts by debiting cash to show an increase in your current asset account.

If you are putting $10,000 in cash into your business from your personal assets, you’ll first need to debit cash (we’ll show the credit entry in the next step):

5. Credit the Capital Account

The next step is to credit your capital account. While the name of this account will vary based upon the specific entity type, it reflects the owner’s equity in the business. You’ll offset the debit entry you made to cash in step four with a credit entry to the owner’s equity account. These entries are exactly opposite because they’re designed to keep your balance sheet in balance.

The full journal entry you would need to make for a $10,000 cash injection is:

6. Reconcile the Amount of the Deposit to Your Cash Balance

Step three will likely be done for you if you have the right accounting software, but you should double-check to make sure that it is done correctly. You need to make sure the amount of your deposit was added to the previous cash balance in your books. The new balance will be reflected in the cash line of your balance sheet. You’ll see your cash account on the balance sheet in the “assets” section.

7. Reconcile the Amount of the Deposit to Your Previous Owner’s Equity Balance

This step involves adding your deposited amount to your previous capital account balance or common stock balance. This is another step that should be done for you if you have decent accounting software. Again, check to make sure it shows up on your balance sheet properly at the bottom of the equity section, after you’ve made your initial journal entries in steps four and five.

This is the step you’re likely most interested in as the person putting money into the business if you’re also interested in taking it out at some point in the future. You’ll need to either add the new balance to owner’s equity or stockholders equity on your balance sheet, depending on how the business is structured.

The new capital you invested in the business will appear under:

• Owner’s equity: When new capital is added to the business, if your company does not issue shares in exchange for that equity, you can add the new balance to owner’s equity.
• Stockholders equity: If your company issues shares in exchange for the equity, which is typically more common if there are multiple people contributing, you’ll need to record the transaction under stockholders equity.

There should be a total balance that shows up on the balance sheet, but your accounting software should provide more details. These details should include a breakdown of equity by the owner and appear in your financial reporting.

Things to Consider When Putting Personal Money Into a Business

Putting personal money into a business isn’t difficult, but if you’re not experienced with the process, it’s fairly easy to make a mistake that could cost you. You need to make sure you take the advice of experts into account before moving any money so that you don’t end up hurting your financials or your taxes later.

The four things you should consider before putting personal money into a business are:

1. Evaluate the Risks of Using Personal Assets

Howard Rosen, an experienced CPA and President of business consulting firm Conner Ash P.C., says the first thing he asks clients who are planning to fund their businesses with personal money is: Can you afford to lose it?

Although most people go into business thinking for certain that they will succeed, about half of new businesses fail in their first five years. Rosen cautions borrowers to be realistic about their chances for business success given the industry that they’re in and existing competition. If the business folds, the owner could lose their life savings, retirement funds, or other personal assets that they’ve put into the business.

Rosen also advises business owners to think carefully about how much money they will need to get off the ground successfully, and for working capital going forward. You want to ensure that you put enough money into your business but also hold onto enough personal assets in case something goes wrong.

2. Consider Which Legal Business Structure Is Right

A business can be organized as one of multiple business structures, such as a corporation, LLC, partnership, or sole proprietorship. Most businesses start out as a sole proprietorship or partnership and later re-organize as an LLC or a corporation as they grow. The advantage of LLCs and corporations is that they protect the business owner from personal liability for the debts and obligations of the business.

It’s more difficult to put personal money into a corporation because of the formalities that need to be followed. For example, if you invest money into a corporation, you must issue shares and record the transaction in corporate ledgers. In addition, taking personal investments out of a C corporation (C-corp) is treated as a taxable dividend.

Personal money is a lot easier to move in and out of a sole proprietorship, LLC, or partnership. In particular, LLCs offer almost as much legal protection as a corporation, but it’s a lot easier to transfer money in and out of an LLC. You can visit Rocket Lawyer if you need help transitioning your business to an LLC.

3. Determine Whether to Record the Money as Equity or a Loan

Personal money going into a business can be treated as equity (i.e., an investment) or as a loan that must be paid back by the business. In general, if you are organized as an LLC, sole proprietorship, or partnership, it’s best to invest personal money and increase your equity in the business. This is because equity makes for a stronger balance sheet than a loan. Banks and vendors prefer to work with businesses that have more equity than loans.

Banks, in particular, want to make sure they get paid first in the event of a default. If you record it as a loan, the bank will typically require you to subordinate the loan to them. This means the bank must be repaid before your loan is repaid. Depending on the agreement, you may not even be able to receive interest payments until the bank is repaid. Your business should accrue the interest it owes you for payment at a later date.

Equity investments in a business are not taxable unless there are very specific taxable events, like a sale of the business. If you put your personal savings into your business, for example, the business won’t treat the investment as income. That is simply an owner investing in the company, and the taxes owed by the business won’t be changed by your investment. In return, you increase your owner’s equity.

If you put personal money into a corporation, you may want to consider treating it as a loan to your S corporation (S-corp) instead of as equity. If you invest money into a C-corp as equity, it’s impossible to get it back without taxation because taking the investment out of the corporation is treated as a taxable dividend.

4. Separate Funds & Keep a Paper Trail

After you’ve decided whether to treat personal funds as equity or as a loan, you then need to transfer the funds to your business checking account. The transaction should then be documented in your business’ accounting records, which will vary depending on your business structure. If you later take funds out to give yourself a salary or for other personal uses, then that will need to be fully documented as well so that your balance sheet is accurate.

The procedures for documenting putting personal money into a business are:

• Equity investment documentation: If you’re putting an equity investment in a corporation, ensure that you follow all corporate formalities in terms of issuing shares and recording the transaction in the corporate ledgers.
• Loan documentation: If you’re lending money to your own business, document the loan in a promissory note. A promissory note is a legal document that promises payment from one party to another for a specific amount.

Novo makes it easy to get your paper trail started off on the right foot. Their online business checking account is a great option for small business owners who want to avoid fees and be able to manage their account from their phones. There is no restriction on the number of transactions you get; setting one up is free and only takes a few minutes online.

How Putting Personal Money Into a Business Impacts Your Taxes

When you put your personal money into a business, it is recorded as either an equity contribution or a loan. Neither method allows you to take your investment as a deduction on your personal taxes immediately, so there should be little impact come tax season.

The reason you’ll need to make sure it’s properly booked is because of the tax advantages you may receive when the business pays you interest on the loan or you sell your ownership interest in the business.

David Mitroff, Ph.D., founder of Piedmont Avenue Consulting, Inc., shared some advice on how to handle the tax implications of putting personal money into a business:

“Though it can be tough, the best way to do this is to set aside a specific amount of money and keep a note of all of it for tax purposes. Find an accountant who specializes in small business so you can learn the best way to make your business investment sustainable.”

The impact on your taxes if you record your contribution to the business as a loan are:

Structuring Your Investment as a Loan

If you’re lending your business the money, then you’ll need to make sure you have the proper paperwork drafted to acknowledge what the business owes you and how they’ll repay the loan. The business will need to make regular payments, and you’ll have to charge at least a nominal amount of interest in order to make the transaction legal and to fill out your personal taxes correctly. Any interest payments will show up on your personal taxes as income.

Loans have a tax benefit for the business that a contribution doesn’t provide. Interest on a loan is considered a business expense, which reduces the business’ taxable income. However, if you lend money to your business from your own savings, the interest that’s deducted on your business return or Schedule C (for sole proprietors) must be reported as income on your personal tax return, so there’s no personal tax benefit.

The impact on your taxes of recording your investment as equity in the business is:

Making a Contribution

If you’re making a contribution to your business as an investment, then you just need to make sure the business properly accounts for your money in this way. This is to ensure that you’re properly compensated if the business sells, you cash out your ownership, or the business pays dividends to its owners. Any money you receive due to your ownership will be reported on your personal tax return as income.

6 Ways to Invest Personal Money into a Business

Personal money represents the funds you have, receive, or borrow as an individual rather than under your business’ name. The best funding options include ways to leverage your existing assets like retirement accounts, home equity, and personal savings. You can also borrow funds with personal credit cards, personal loans, or loans from friends and family.

According to the Fall 2018 Bank of America Small Business Owner Report, 51% of small business owners stated they intended on using the following sources to finance their business in the year ahead:

To help you decide which business funding option is best, it helps to make a quick list of your assets, liabilities, income, likely investors, and current credit score. Use our Assets and Liabilities Worksheet to properly inventory your assets, liabilities, and income. Once you’ve completed the list, evaluate it to determine which option is best for putting personal money into your business.

Putting Personal Money Into a Business Options at a Glance

The six ways you can use personal funds to invest in your business are:

1. Using a Retirement Account to Fund Your Business (ROBS)

Some entrepreneurs choose to fund a startup with 401(k) savings, IRA money, or other retirement accounts. A rollover for business startups (ROBS) allows you to do so without the penalties and taxes that accompany an early withdrawal. It’s a good way you can use your own money to start a business, buy an existing business, or recapitalize a business.

One thing people love about using ROBS for new businesses is that you don’t start your business off in the hole. A ROBS is not a loan, which means there is no big monthly payment that needs to be made immediately. It’s a good way to get funding into your business without burdening it with debt.

If you’re considering using your own money to start a business, a ROBS gives you the opportunity to draw on your retirement savings without having to meet minimum qualifications or paying the penalties typically associated with those withdrawals. However, you will typically need at least $50,000 saved up to make it worthwhile, and you need to remember that your retirement funds are at risk.

Note: There are multiple tax and legal issues associated with a ROBS, so we encourage you to use a specialized ROBS adviser, like Guidant, which will help you set up this type of funding.

Some risks and benefits to consider before using a ROBS to fund your business are:

Pros of Using a ROBS to Fund Your Business

The benefits of using a ROBS to fund your business are:

• No minimum qualifications: A ROBS isn’t a loan, so there are no minimum qualifications that need to be met to get the funds.
• No interest payments: You are not borrowing the funds, so there are no monthly payments. This gives your business additional cash flow to invest in operations or expansion, rather than paying down interest on a loan.
• No penalties or taxes: If you didn’t use a ROBS to access your retirement savings, you would usually need to pay fees and taxes. However, with a ROBS, there are no penalties or taxes for early withdrawal.
• Allows you to pay yourself: With a ROBS, you can pay yourself a salary. However, this salary needs to be considered reasonable in order to avoid any scrutiny.
• Provides tax-advantaged earnings: If the business succeeds, profits can grow in a tax-advantaged retirement account. Your retirement plan owns shares in your company; as the value of that company increases, so does the size of your retirement savings.

Cons of Using a ROBS to Fund Your Business

Some disadvantages to consider when using a ROBS to fund your business are:

• Typically requires at least $50,000: You need to have at least $50,000 available in your retirement account. This is to ensure that the upfront fee and ongoing maintenance cost of a ROBS make the transaction worth completing from a cost consideration.
• Puts retirement funds at risk: You are using your retirement savings to fund a ROBS, and if your business is unsuccessful, you could lose those funds.
• Requires active ownership: To qualify for a ROBS, you must be a full-time employee of your business. This means you can’t use a ROBS to fund any business that provides passive income, like a rental property.
• Increases the audit potential: Due to its complexity and compliance requirements, a ROBS may increase your chances of an audit from the IRS or Department of Labor (but a provider like Guidant will help you if it happens).

2. Using Consumer Credit Cards to Fund Your Business

Consumer credit cards can actually be relatively inexpensive, fast ways to get funding. As a bonus, you may benefit from a promotional APR or from rewards programs. You can often borrow as either an individual or a business, but with a newer business, you will likely have to personally guarantee the debt.

Consumer credit cards have relatively low-interest rates, allow you to build your credit, and often even offer rewards for spending the money you were going to spend anyway. However, in order to qualify for larger limits, you will need to have a good personal credit score, and although personal credit cards are versatile, they can’t be used for all expenses.

Some risks and benefits you should consider before using consumer credit cards to fund your business are:

Pros of Using Consumer Credit Cards to Fund Your Business

The benefits of using consumer credit cards to fund your business are:

• Provides a relatively inexpensive source of funding: The rates on business credit cards are relatively low, ranging from 8% to 24%, compared to online business loans, which typically have APRs ranging from 30% to 50%.
• Doesn’t charge any interest on unused funds: Since it’s a line of credit, you only pay interest on revolving balances.
• Provides rewards for purchases: Many cards let you earn rewards, such as points or cash back on purchases.
• Helps build credit: Using a consumer credit card can help build your business and personal credit score as you borrow and repay funds and establish a credit history.

Cons of Using Consumer Credit Cards to Fund Your Business

Some of the disadvantages of using consumer credit cards to fund your business are:

• Requires good minimum credit: To qualify for larger limits and cards with outstanding rewards and protection, you’ll need to have a personal credit score of at least 640 (check your score for free).
• Not suitable for all expenses: Some merchants may not accept credit cards, and you can’t use your credit card to pay for some working capital expenses (e.g., payroll).

However, if you’re looking for a business credit card that offers you a high degree of flexibility plus great rates and rewards, we recommend checking out our small business credit card marketplace. There you can filter cards by interest rates, fees, rewards, and providers to find the best credit card for your business.

Visit Business Credit Card Marketplace

3. Using Personal Loans to Fund Your Business

Many traditional lenders will not give new businesses loans, at least not without a substantial amount of collateral. This leads to many newer businesses relying on personal loans instead. Personal loans can be obtained from your local bank or from an online lender.

Mathew Ross shares why he considered using personal loans to fund his business:

“If you’re just starting a company, personal loans might be your best bet since your options are quite limited. I looked into a few different personal loan options before finding an investor who loaned the business money. I primarily looked at loans from my bank and local credit unions, but I also briefly looked at getting a loan from online lenders like LendingClub and Upstart.

– Mathew Ross, co-owner and COO of The Slumber Yard

When you’re considering using a personal loan to fund your business, it’s important to remember that you will need to have good personal credit to qualify and that loan limits tend to be relatively low. However, you won’t need to meet any business requirement or pledge collateral, and you’ll be able to get access to funding quickly.

Some risks and potential benefits of using personal loans to fund your business are:

Pros of Using Personal Loans to Fund Your Business

The benefits of using personal loans to fund your business are:

• Qualifying can be based on your current income: When you’re taking out a personal loan, most lenders will rely on your personal tax returns to qualify you, making this a great option for moonlighting a startup while working.
• Funding time is quick: A personal loan application is faster and requires less paperwork than getting a business loan.
• No collateral required: Most personal loans won’t require collateral due to the smaller loan amount.

Cons of Using Personal Loans to Fund Your Business

Some cons to using personal loans to fund your business are:

• Requires good personal credit: Due to the lack of collateral, lenders require you to have a credit score of at least 650 to qualify (check your score for free).
• Typically provides smaller loan limits: Personal loans tend to be up to $40,000, which can be sufficient for a startup, but not enough for larger businesses.

4. Using Equity in Your Property to Fund Your Business

Home equity loans (HEL) or home equity lines of credit (HELOC) are options that work well for those business owners who are short on cash but have lots of equity in their personal real estate. They typically offer some of the lowest rates of any financing option, and you could get funded within a few weeks.

Ray Zinn shared his experience with using home equity to fund his business:

“I mortgaged my home and took out a line of credit with a bank to fund my company. I ran Micrel for 37 years before it was sold, and only one of those years was not profitable. I believe putting my own money on the line and taking out a line of credit from the bank with its strict profitability rules contributed to the company’s longevity and success. It also helped instill a culture that focused on frugality and mindful spending.”

– Ray Zinn, former CEO of Micrel Semiconductor, and author of Tough Things First

Using the equity in your home to fund your business can be risky because if your business doesn’t succeed, your home may be on the line. Although rates are typically lower than other forms of financing for home equity loans, a home equity line of credit may have a variable rate, which can leave you with payments you did not expect.

The risks and benefits of using the equity in your property to fund your business are:

Pros of Using Equity in Your Property to Fund Your Business

The benefits of using the equity in your property to fund your business are:

• Allows you to access your largest asset: Home equity loans are a popular way to fund startups and existing businesses because for many entrepreneurs, their home is their biggest asset and is most accessible for funding.
• Charges low interest rates: The average home equity loan rate is 8%, which is less expensive than most other financing options.

Cons of Using Equity in Your Property to Fund Your Business

Some of the risks to consider when using the equity in your property for business funding are:

• May charge variable rates: Home equity lines of credit tend to have variable rates that will change with the market, leaving you potentially paying more interest than you expected.
• Puts your personal home at risk: By borrowing against your home equity, you are putting your home at risk in the event of default. It’s important to have a contingency plan if your business doesn’t do well.

For those considering using their property’s equity to fund a startup, take a look at LendingTree. Their online marketplace has numerous lenders allowing you to compare rates, offers, and find a good fit. Seeing your options takes just a few minutes.

5. Using Loans From Family & Friends to Fund Your Business

Family and friends can be a great resource for small business owners trying to borrow money. They can invest in the business in exchange for an ownership share (equity), or they can lend money to the business like any other lender. You’ll need access to high net worth individuals who really believe in your business plan.

Although raising money from friends and family can be a tempting option, especially if you are a startup, it’s important to consider that you may receive unsolicited advice or damage relationships if you are unable to repay. However, there are no minimum requirements and you may be able to get the money fairly quickly.

Some benefits and risks of using loans from family and friends to fund your business are:

Pros of Using Loans From Family & Friends to Fund Your Business

The benefits of getting a loan from family and friends to fund your business are:

• Has no minimum requirements: Your friends and family may ask you for some favors in return, but typically they won’t check your credit score before lending to you.
• Allows for quick funding: Without an application or a lengthy transfer, you may be able to get funding for your business after just a phone call, compared to waiting up to a month for a bank to approve you.

Cons of Using Loans From Family & Friends to Fund Your Business

Some of the disadvantages of using loans from family and friends as business funding are:

• Potentially puts relationships at risk: Sometimes things don’t go as planned in business, and although you won’t lose your personal assets in the process, you can potentially damage some relationships.
• May come with unsolicited advice: Unsolicited business advice from “investors,” even if you don’t give up equity, can be unwelcome and distracting. Ensure that your friends and family understand what their role in the business will be given their investment.
• Can lead to the loss of some control: Those investors with equity are legally entitled to some control over the business, which can impact your ability to make decisions independently.

6. Using Cash Savings to Fund Your Business

If you’ve set aside money in a savings account or investment portfolio, you have the option of financing your business without any debt. You could also choose to lend the business money yourself, but making an equity contribution in your own business is always the preferred method to maximize the value of your investment. Just because it’s your money being invested doesn’t mean that you shouldn’t expect a certain return on your investment from the company.

Paula Onysko, Money & Business Coach for Entrepreneurs, recommends:

“Have a plan and a timeline for creating a return on that invested money. Ideally, you want to invest in specific growth initiatives that are defined (e.g., a particular marketing campaign or piece of equipment) versus general business expenses that you can burn through very quickly.”

Digging into your personal savings for business funding is a great way to mitigate risk. You know exactly how much you have at stake, don’t owe anyone debt, and have complete control of how the money is spent. However, unexpected personal expenses may tighten the cash flow you have available, and you lose the opportunity to leverage your funds for a larger loan.

Some benefits and potential risks to consider before using cash savings to fund your business are:

Pros of Using Cash Savings to Fund Your Business

The benefits of using cash savings to fund your business are:

• It’s your own money, with no repayment required: Using your savings means you don’t have any monthly debt payments to cover, and you don’t have to pay yourself back on a set schedule.
• Allows you to retain complete control: When you provide the funds for your business from your personal savings, you retain complete control of how the funds will be used.

Cons of Using Cash Savings to Fund Your Business

Some of the risks to consider when using cash savings for business funding are:

• Potentially risks your liquidity: If your personal savings were also your rainy day fund, you may face liquidity issues in the event that you need to cover unexpected personal expenses.
• Doesn’t allow you to take advantage of leverage: By using your savings directly, rather than as collateral for a larger loan, you miss out on the chance to leverage your savings.

A Final Word of Caution When Using Personal Funds for Your Business

Many small business owners operate freely without caring about how their personal funds and business funds are mixed together. This is especially common during startup mode. This is a very big risk that could hurt your business in the future or could put your personal assets at an unintended risk.

Lee Reams, CEO of ClientWhys, says:

“Mixing business income and expenses with personal income and expenses can only lead to accounting confusion and mistakes, as well as create a lot of suspicions should your business be audited by the IRS or a state tax agency. Never pay personal expenses from the business account and always deposit business income in the business account, never in your personal account.

“If you incur expenses personally that are business expenses, detail them and reimburse yourself from the business checking account. If your business is operated as a corporation or partnership, be sure that the company’s reimbursement policy that entitles you to reimbursement for these expenses is included in the corporation’s board meeting minutes or the partnership agreement.”

These are great tips if you’re looking to put money into your business, or if you’re looking to take it out for any reason at all. If you mix personal and business assets, a court could “pierce the veil,” meaning that it can hold you personally liable for the business’ debts and legal obligations. You want to make sure your interests are protected and that your money is properly accounted for as equity you’ve established in your business.

Frequently Asked Questions (FAQs) About Putting Personal Money Into a Business

Can my LLC lend me money?

If your LLC is a pass-through entity, you don’t need to take a loan. Instead, simply withdraw the money. Whether you withdraw the money or not, you will need to pay income taxes on the funds and keep track of them on your books. If there are multiple LLC members, seek their approval first.

Can you use a business account for personal use?

Using a business checking account or company credit card for personal expenses is not recommended. Doing so puts your finances and your business at risk of audit by the IRS and penalties because you may lose the protection offered by the separate legal entity. Keep your business and personal records and transactions separate.

Can my LLC borrow money?

Unless the founding documents of the LLC indicate otherwise, your LLC has full rights to borrow money from individuals, traditional lenders, and online lenders. LLCs with multiple participants can sometimes restrict certain loans, like personal loans, when they are founded.

Bottom Line: Putting Personal Money Into a Business

Most entrepreneurs rely on personal funds to finance their businesses when they’re starting out. It’s important to weigh the risks of putting personal money into a business and to have a plan B in case things don’t work out. Learning how to invest in a business isn’t complicated, but you need to do it correctly, so consulting a legal or tax professional as needed is a good idea.