I didn't realize taking spending money out of the company would cause tax issues

Every month I took $2000 out of my business for my own expenses. This was in addition to my salary. I used credit cards and cash and thought this was my company so it was my money.

When we filed our tax returns we did not declare this as income for me. There were only five of us, so no one was really looking. We paid taxes on all the income we declared. Over the next three years the business grew and I started taking $3000 per month. No one said anything.

One day we got a notice that there would be a sales tax audit by the local government officials. I didn’t see any problems with this as we paid all the tax that was due. We passed the audit but I began to think what would happened if they audit our federal returns? I had taken more than $100K over the years. Even if I wanted to declare it, I could not afford to pay the tax and penalties. I was stuck

We needed to get a bridge loan from the bank to finance a new machine in the factory. When they examined our accounts they immediately said there was something wrong. The financial accounts and the bank statements did not balance. I told them I would look into it but knew the difference was the money I had used for my expenses

How did I get into this mess? How do I get out of it?

I thought managing my own accounts was good enough until the investors looked at my books

I own my business and did most the accounting myself using Quickbooks. I’ve never had a proper audit but I file and pay my taxes on time. I keep most of my receipts but sometimes when I was paid in cash, I just put the money in my pocket. I wasn’t taking a big salary from the business, so I thought this would be okay.

As sales increased, I needed more money to grow. I went to the bank and they went through my accounts and tax filings. They said that I was not making enough for them to give me a $100k line of credit. I told them about taking money out of the business, but I still had to agree to put my house up for collateral to get the line of credit.

Then my product featured in a national paper and later in a nationwide TV program. Sales immediately increased and three investors approached me. They all wanted to do due diligence. I thought I knew what due diligence meant, but I was shocked by how much information and detail they wanted.

They went through three years of accounts and had five pages of questions; I couldn’t answer most of them. They tried to reconcile our bank statements, accounts, and tax filings and couldn’t do it. They each concluded that we were overstating our margins and profits. I then explained how much cash I was taking out of the business.

Two investors dropped out because it was taking so much time. The remaining one had their own auditors rework the accounts. They offered to make an investment at incredibly unfavorable terms payable in tranches over two years. I had choice but to accept their offer. I wish I had good accounting in place from the start.