Do you dream of just chucking the corporate rat race and becoming your own boss?
Many workers have chosen that option after joining the ranks of the millions who have lost their jobs in the recession.
While there’s a certain amount of freedom at being your own boss, there’s also the realization that you now wear two hats — employer and employee.
That means you must be extra vigilant about how you manage your finances because your personal money and business money are closely intertwined.
“When you’re starting your own business, they are almost one and the same,” said Ken Sibley, certified public accountant and founder of Sibley &Co., a Dallas accounting and business consulting firm.
More and more people are dealing with this situation. An average 8.6 percent of unemployed workers started their own business in 2009, up from an average 5.1 percent in 2008, according to Challenger, Gray &Christmas Inc., a global outplacement consulting firm.
Those working for themselves must divvy up their money very carefully.
“You should know without hesitation what the minimum amount of money you need every month to maintain your life and your business,” said Denise Kiernan, co-author with her husband of “The Money Book for Freelancers, Part-Timers, and the Self-Employed.”
Livney, 21, started Livney + Partners, an interactive advertising firm in Fort Worth, Texas,, when he was still in high school. He’ll graduate in May with a degree in entrepreneurial management and marketing from Texas Christian University.
“One of the biggest things is going to be determining how you can bootstrap and live off of your current savings and how much debt you’re willing to take on,” said Livney, who started out with no debt. “Most businesses are not cash-flow-positive in the first few months.”
When he started out, Livney didn’t eat out as often or go to the movies as often. He’s also kept his business and personal expenses separate.
Not commingling those two is important, said Jim Smith, certified public accountant and managing partner at Smith, Jackson, Boyer &Bovard PLLC in Dallas.
“We recommend to people that if they want to start their own freelance business, that they consider getting a separate checking account and a separate credit card account,” he said.
If business and personal expenses are too closely intertwined, it can be difficult for a business owner to justify business expenses claimed on an income tax return “because things are so closely mixed up,” Smith said.
That’s especially true for claiming a deduction for a home office, which the Internal Revenue Service examines closely.
It must be an office solely dedicated to your business. Don’t have toys lying all around and don’t use it as a spare playroom for your children.
You have to worry about making estimated tax payments, which is how the self-employed pay tax on income that is not subject to withholding from a paycheck.
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