If you owe back taxes but you’re getting ready to launch a new business, you might be unsure how to proceed – or if it’s even possible. Does your personal tax situation influence your ability to open a business? The short answer is: it depends. While your individual tax debt may not preclude you from opening a business, it can still negatively impact your ability to get approved for business loans. With that said, there are many variables involved that affect your business finances besides your taxes. Keep reading for a full explanation or navigate directly to the section that answers your question.
- Is it Possible to Incorporate Your Business?
- Financing Your Business (While You Owe Back Taxes)
- Resolving Your Unpaid Taxes
- Other Tax Considerations
Is it Possible to Incorporate Your Business?Even if you owe taxes, you can still incorporate your business. Both corporations and LLC business structures allow business owners to separate and protect their personal assets. If you’re a business owner or if you’re about to become one, it’s important to have a clear distinction between you as an individual and the business. Incorporating or forming an LLC means that you can run your business without the threat of your personal assets being taken away to satisfy a business debt. From a tax standpoint, it’s much easier to do your taxes if your expenses for your business are separated from your personal expenses. Business structures such as corporations and LLCs can deduct certain eligible expenses such as salaries and supplies. But when your expenses for your personal life and business are mixed, it can be a much more complicated tax process. In order to make sure your business structure makes sense given the size and services of your business, it’s crucial to work with a financial advisor or tax professional to help you properly set up your company.
Financing Your Business (While You Owe Back Taxes)It’s important to note that when you apply for financing for your business, your personal credit can affect your business loan application. Most lenders evaluate your personal credit and financial history when they’re deciding whether or not to grant a business loan. In fact, your credit score is likely one of the highest weighted factors when it comes to your business loan application. If you have a high amount of tax debt or you haven’t paid your taxes, it can result in a fairly steep decrease in your credit score. Specifically, if a tax lien is reported on your credit report, it stands out as a serious blemish and will remain on your credit report for up to 10 years. Even when you pay your tax lien, the record of it will remain for seven years from the filing date. So, when a lender is determining your risk as a borrower, lenders who weigh credit scores heavily in their evaluation process could decide that your lower credit score makes you a riskier borrower. This is especially true if you are a new business owner and don’t have any business credit. Luckily, not all lenders weigh your personal credit score as heavily as other factors. The weight of your credit score varies lender to lender, which is why it’s essential to shop around. Here are a few of the financing options you can explore to raise capital for your business if you’re worried about your tax debt getting in the way:
- Accounts Receivable Financing: This type of loan is great for business owners who are waiting on unpaid invoices to pay business expenses. The invoices are used as collateral, so the rest of your business finances aren’t typically heavily investigated.
- Short-term Loans: If you don’t have great credit but your business has a sustainable cash flow, you might be able to qualify for a shorter-term loan. These kinds of loans place a greater emphasis on your company’s revenue rather than your credit score. Unfortunately, while they may be easier to qualify for, you’ll usually pay higher interest rates and face a shorter repayment period.
- Term loans: Term loans give you a lump sum of money you repay with a fixed interest rate. They require good personal credit to qualify for.
- SBA Loans: SBA loans are highly sought after because of their low interest rates coupled with longer repayment terms. With that said, they are more difficult to receive approval for because they typically only choose business owners with good personal credit.