What is Business Entity Assumption?

You may have heard this term before, but are not quite sure what it means.

Since we have put the education of our clients at top priority here at Prestige Auditors, let’s explain in a couple of words what business entity assumption means.

Let’s say that you are a business owner, and you own a clothing store, or another type of business. Naturally, businesses are prone to quite a large number of risks, such as debt, lawsuits, legal issues, etc. We certainly hope that none of these issues hit your business, but nevertheless, they are a possibility.

You obviously do not want these issues to affect your personal life and more importantly, your personal assets. And this is where business entity assumption comes in.

Basically, a business entity assumption is a principle which requires that the bookkeeping for a business is completely separate from that of the owner, or owners. This can be applied to any type of business, even if from a legal standpoint, the business and the owner are the same.

Whatever income you generate with your business must be recorded as what your business has earned, and the same goes for any business-related expenses. What you spend in your personal life should in no way be connected to your business.

Having these two separated can dramatically affect your life in a positive way, because it’ll be easier for you to assess your personal life expenses separately from that of your business. The end goal of every business is to generate income (revenue generation, as pros like to call it), and that might not be the same end goal in your personal life. Let’s say you own a dry-cleaning establishment. It wouldn’t make sense for you to purchase a giant industrial dry cleaner as part of your personal assets, would it? You could, but what would be the point? And it wouldn’t make sense for you to utilize your business revenue for a trip to Hawaii. The bookkeeping would be a nightmare! Plus, doing this would be counterproductive to revenue generation.

And let’s say something goes wrong in your business, and there are lawsuits involved. If you are not separated from your business via business entity assumption, the lawyers and complainants will visit your doorstep and basically have the authority to pull from your personal assets. A lot of people have lost their homes over this issue.

Basically, business entity assumption is there not just as a safety net, but also as a way of better evaluating your business in terms of how profitable it has been or not been, how it’s taxes are managed, and other similar aspects.

Now that you know what business entity assumption is, it’s time for you to start your journey with business entity formation, which we at Prestige Auditors are completely ready to help you with! Let’s set up a strong, safe business together and catapult you toward success! That’s not all. We can also help you out with other things! Let’s imagine you are a seller operating outside of Texas and want to do a Texas business entity search. We will help you get this done in no time!