Small Business Saturday – What Small Business Owners Should Know about Business Credit

For a small business to grow, it is often necessary to borrow money. In fact, the Small Business Administration reports that the inability to obtain funding is one of the main obstacles that prevents small businesses from expanding their operations. To increase your business’s chances of obtaining much-needed funding, it is important to understand and establish business credit.

What is Business Credit?

Most people know that each individual has a personal credit score that helps lenders decide how likely a person is to repay a loan. Lenders use that score to determine whether to provide a person with financing—auto loans, home mortgages, or lines of credit—as well as the terms for such financing. However, many small business owners do not know that their businesses can establish a separate credit score—and that there are benefits to doing so.

What Are the Benefits?

According to the Small Business Administration, nearly half of small businesses use personal credit cards for business expenses. However, separating your personal credit from your business can protect your personal credit score in the event your business encounters difficulties in repaying a loan. Likewise, if your personal credit score is low, building a good business credit history for your company can be beneficial, opening up more opportunities for financing, as well as for obtaining better interest rates and repayment terms.

How Can It Be Established?

For businesses like sole proprietorships, which are not legally separate from their owners, it is more difficult to establish a separation between business and personal credit. However, it is not impossible to build separate business credit. The following steps can help your business build a separate credit score:

  • Obtain an employer identification number (EIN) from the Internal Revenue Service. Some business forms, like sole proprietorships and single-member LLCs, are seldom required to get an EIN for tax purposes, but must obtain one for building separate business credit. Multi-member limited liability companies (LLCs), partnerships, and corporations, on the other hand, are already required to obtain an EIN by the IRS. This number acts like a business’s Social Security number and is used by business credit bureaus to identify your business and track its credit history.
  • Open a business checking account to pay for the business’s expenses and employees’ wages. This is required for businesses that are legally separate from their owners, such as LLCs or corporations, but can also be helpful for sole proprietorships in building business credit.
  • Obtain a business credit card using your business’s EIN. It is likely you will also have to provide your personal Social Security number, but the EIN will enable business credit bureaus to track prompt payments to establish a business credit score that is separate from your personal credit score.
  • Establish accounts with companies who will sell products to your small business on credit. Make sure that you consistently pay the bills on time. Ask them to report your business’s prompt payments to business credit bureaus and to provide positive credit references.
  • Contact business credit bureaus to register your small business. The credit bureaus can then open a business credit file for your company.
  • If you are currently operating a sole proprietorship, consider forming an LLC or corporation, which are legal entities that are separate from their owners. This will enable you to establish a clear delineation between your personal and business credit.

We Can Help

It is generally advisable to separate your business and personal affairs. As business law attorneys, we can help you structure your business in a way that optimizes your opportunities to build excellent business credit, separate from your personal credit, as well as guide you in the many aspects of your business planning. Call us at (228) 460-5243 or email us at to find our how your business planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website ( without seeking legal or professional advice.

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Small Business Saturday – Can Your Small Business Write Off Bad Debts

Despite your best efforts to work only with customers or clients you believe will pay for the goods or services your business provides and to diligently collect delinquent amounts owed, you will almost inevitably have to deal with bad debts on occasion. In some circumstances, the IRS allows you to take a bad debt deduction.

What Is Considered a Business Bad Debt?

According to the IRS, a business bad debt is considered a loss incurred from the worthlessness of a debt that was created or acquired in a trade or business or was “closely related” to your trade or business when it became partly or completely worthless. If your primary motive for incurring the debt was related to the business, the IRS will consider the debt to be closely related to the business.

The IRS provides the following examples of bad business debts: (1) loans to clients, suppliers, distributors, and employees, (2) credit sales to customers, or (3) business loan guarantees. For small businesses, the most common bad debt arises from credit sales to customers.

If the circumstances indicate that your business has no reasonable expectation that the debt will be repaid, it will be considered worthless. Depending upon the relevant facts, this could be on the date the debt is due or even prior to that date.

You must be able to demonstrate that you have made a reasonable effort to collect what is owed to your business prior to being eligible for the deduction. What is considered “reasonable” will vary depending upon the type of business in which you are engaged. It is unnecessary to sue the customer if you can show that a judgment would be uncollectible. For example, if the customer has filed for bankruptcy, this is sufficient to demonstrate that your debt is uncollectible and therefore worthless (assuming it is an unsecured debt).

Your Accounting Method Matters

If your small business uses the cash method of accounting, which is often preferred because it is less complicated than the accrual method, you report income during the year it is actually received. Because you have not reported amounts you merely expect to receive, but only those you have actually received, you cannot receive a tax deduction based on a bad business debt. Only businesses that use the accrual method of accounting—which reports income in the year earned despite not having been received—have the right to claim a deduction based upon a bad debt. This is because under the accrual method, a business never actually received the income reported to the IRS as a result of the customer’s failure to pay for the goods or services provided by the business. This does not provide an unfair advantage to businesses using the accrual method. Rather, it simply ensures that those businesses are not paying taxes on income reported but never actually received.

Note: The deduction is available only in the year the debt becomes worthless.

Contact Us Today

If your small business has suffered losses because of bad debts, and you are wondering if you may be entitled to write them off, we can help you navigate the applicable tax rules to minimize your tax liability, as well as provide guidance about steps you can take to avoid losses from bad debts. Please give us a call to set up a meeting.

Call us (228) 460-5243 or email us at to find our how your estate planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website ( without seeking legal or professional advice.

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Small Business Saturday – What You Need to Know About Non-Compete Agreements for Your Employees

A small business that has invested substantial resources in developing a product or a customer base could be devastated if its employees then go to work for a competitor down the street or set up their own competing business. A noncompetition agreement is an important tool that could protect your business from former employees who could otherwise reveal or use your sensitive information, trade secrets, strategies, or customer information for the benefit of a competitor. These agreements are not favored by the courts, however, because they place a restriction on workers’ ability to freely earn a living (and a few states refuse to enforce them at all). If you choose to require a non-compete agreement for employees, it is important to keep the following factors in mind.

1) Your business must have a legitimate, good faith reason for the non-compete agreement. As mentioned above, if your business has trade secrets or other information that is a valuable asset needing protection, a non-compete agreement is more likely to be enforced by a court. On the contrary, if an employee does not have access to valuable or sensitive information, a non-compete agreement is likely to be seen as merely punishment for leaving your business. In those circumstances, it is unlikely to be enforceable. Be careful about which employees you ask to sign non-compete agreements. A receptionist at the front desk is less likely to have confidential business information than a key manager, so a non-compete agreement precluding the receptionist from working for a competitor probably would not be considered a justifiable restriction.

2) The non-compete agreement must be reasonable. Different states have varying standards about what restrictions will be considered “reasonable.” What is seen as reasonable will also vary based on the type of job the employee held, as well as the type of business. You should err on the side of the minimum duration needed to protect your business. A lifetime restriction is almost never enforceable, but a one-year restriction may be deemed reasonable, for example, for an employee who has had access to your customer information. The non-compete agreement also should only cover the geographic region in which your business operates. A restriction covering the entire state will be considered unreasonable if your business only provides services or goods in one county. In addition, the non-compete agreement must not restrict an employee from performing a completely different job for a competitor. If your salesperson takes a job as an interior designer for a competitor, he or she is less likely to use “insider” information gained while employed by your company against you in the new position because the duties performed will be quite different.

3) Provide a benefit to the employee to compensate for the restriction. If you require a new employee to sign a non-compete agreement as a condition for hiring that employee, the employee is receiving the benefit of a job with your business. However, if you require someone who is already employed by your company to sign a non-compete agreement, it is important to provide an additional benefit, such as a raise, to increase the likelihood that the agreement will be enforceable.

4) Weigh the pros and cons. Although non-compete agreements do protect your business’s trade secrets, sensitive information, customers and more from being disclosed to a competing business, they may also discourage some potential employees from accepting a job with you or prompt existing employees to leave rather than sign the agreement. Along with the concerns about their enforceability, this is another reason to impose only the minimum restrictions needed to protect your business.

Give Us a Call
A non-competition agreement should be customized and carefully drafted to meet the needs of your particular business. We can help you determine which restrictions are legitimate and reasonable to decrease its vulnerability to a legal challenge. Give us a call at (228) 202-2490 to set up a meeting to discuss this and any other employment-related concerns.

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Business Owners Need Estate Plan and a Succession Plan

Business owners get so caught up in working in their business, that they don’t take the time to consider their future—and that of the business—when sometime in the future they’ll want to retire. Many business owners insist they’ll never retire, but that time does eventually come. The question The Gardner News article asks of business owners is this: “Do you have a business succession strategy?”

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Announcing a New Blog Feature: Small Business Saturday

We are proud to announce a new weekly blog post dedicated to small business owners. These posts will address issues such as hiring employees, business succession, the relationship between estate planning and business planning, protecting your personal assets from business creditors….and much more!

Stay tuned for this new series starting this Saturday, July 13.

Let us know what you would like us to blog about in the comments.

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