THERE’S an old saying that may be wiser today than ever: “East is east, and west is west; and never the twain shall meet.” This holds true in the case of the 5th Gokongwei Commandment: Personal assets should be kept separate from company assets.
Lance Gokongwei, president of JG Summit Group, said that personal expenses incurred by family members employed in the firm should be paid from their own pocket – including personal travels via the family-controlled Cebu Pacific and personal hotel stay at the family-owned RLC hotels, and even shopping at the Robinsons retail stores. In short, run the family business like a business.
Blurry line between business and personal matters
Small family businesses often are unsophisticated in legal and business matters and don’t always respect the formalities of running an enterprise. A family business often will not have formal meetings of the board of directors or shareholders. Decisions made by the family business owner become confused with decisions the board of directors should make. Many times the owners and the board of directors are one and the same. Minute books are not kept up-to-date, and the business operations often become intermingled with the individual’s.
One of the biggest problems small family-run operations have is failing to make a clear delineation between business and personal assets. Business owners sometimes pay personal expenses out of the company checkbook. Cars and other personal-use assets may be found on the business balance sheet. Straightening out the mess caused by intermingling assets can be difficult. Despite warnings from bankers to stop, and from accountants that the Bureau of Internal Revenue (BIR) will not look favorably on this practice, many family business owners either do not understand or do not wish to understand. But it is important to keep the business separate from personal assets for many reasons.
Confusion can hurt you
It is fairly common to find the balance sheet of a family business clouded with personal assets, loans to individuals and other entities, and other messy items. A third party who makes an offer to buy the business will look at this balance sheet. When a business owner has been lax in keeping the business assets separate from individual assets, it may scare off the buyer. Even when it does not scare off the buyer, it makes it harder for the buyer to assess the value of the business. It takes a great deal of effort for the buyer and the seller to clean up past transgressions.
Getting a loan from a bank is another common situation where a messy balance sheet can hurt you. If a messy balance sheet and income statement are sent to the banker for review, the assets and liabilities of the company may raise questions. Bankers are not interested in doing business with companies that do not conduct themselves in a professional manner. You may still get a loan, but not without a tremendous number of restrictions and covenants placed on it by the bank to protect itself from what it perceives as potential abuses. Many family businesses can save themselves this grief if they keep their balance sheets clean from the beginning.
Good business practice
Finally, good financial reporting and a professional attitude toward business management help the business poise itself for growth, provide it with adequate controls to prevent fraud and abuse, instill professionalism in successor generations and help position the business for the future.
Take a good look at your balance sheet. Be sure the business is run like a business and personal assets are kept separate. Listen to professional advisors and meet with them regularly. Be sure to observe the legal formalities of your form of business. Everyone will benefit from it.
Avoid mixing business and personal assets
As a business owner of any kind, you must avoid mixing or co-mingling business and personal assets. Co-mingling or juggling is done by either depositing business funds into your personal bank account, or the reverse. Doing either is a serious matter, and will get you into lots of legal trouble. Any funds that are to be used for business should only be withdrawn from the business. Likewise, any personal business should be conducted through personal bank accounts. Open a separate business checking account. Obtain business credit cards to free up some corporate money. Keep track of all business transactions such as expenditures, deposits, and investments. If the business fails, your home or other property could be at risk. Consider a worst-case scenario where your business is bankrupt and your home is lost before putting your home up as collateral.
Maintain a paper trail showing where funds were transferred from your personal accounts to your business accounts. In a nutshell, maintain all business and personal assets separately.
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Prof. Soriano is the chairperson of the Marketing Cluster of the Ateneo Graduate School of Business. He is also a Senior Consultant of Wong+Bernstein Business Advisory Group. For comments, send email at [email protected]
