We’re halfway through the first month of the new year, but do you know your numbers? How did your business do last year? I know, most creators don’t want to be bothered with the numbers side of business (except when the dough has been rolling in – Congrats!!). Unfortunately, this part of business cannot be ignored because you want to know what comes in and goes out of your business as well. That’s good business sense and this post is a basic breakdown of the most important accounting items to check off to avoid problems later.
Whether you’re starting or already have a business, these insights will help you put all your ducks in a row and take care of your business accounting. Then, you can fully dive into the creative side of your business! I gathered this information from a newsletter I subscribe too and thought it might be useful to you.
Setting up your business properly
1. Choose a structure and get your business license
Depending on the type of business you’re in, your choices are: Sole Proprietor, LLC or S-Corp.
As a Sole Proprietor you are everything to and in your business. It’s the easiest and most affordable way to get started, but one big disadvantage is that you will be personally liable for any debts.
An LLC or Limited Liability Corporation may be a better choice, as you’ll have personal liability protection under this structure. A business name and more paperwork is required. You can use online resources or a service provider like a CPA or lawyer to set up. This costs for this option are higher.
Another option is the structure of an S-corporation to get some of the benefits of larger corporations. Your business is a eparate entity and taxpayer but comes with favorable tax rates and additional legal protection. This form will cost a lot more to get started, but if you want the coverage of a corporation it will be your best option. Set up requires professional help from a CPA or attorney.
2. Split your finances
No matter which structure, it is best to split your personal and business finances and consistently track your expenses. It’s so tempting to use business income for personal expenditures and vice versa, but this can quickly cause a big mess. Especially when your receipts are not marked immediately as a business expense. The IRS will want to know the details, so being on top of your expense tracking will make tax time stress-free. See more expense tracking details here.
That brings us to getting a separate bank account for your business. Stress will not exist (or will be less) because now you will only have business expenses coming out of one account. This will simplify your life and that of your accountant if you use one, and is a requirement when your business is set up as an LLC or S-Corp.
3. Bookkeeping helps with your financial picture
Bookkeeping is important for tracking your income and expenses; it’ll give you a good picture of your financial status. Are you making or losing money? Do your own bookkeeping if you have time and love working with numbers. Otherwise hire a bookkeeper to do this for you, and hire an accountant for the taxes. Find out what their fees are to help you make a decision. Another option is to go online. There are a lot of tools available but my favorite for bookkeeping is FreshBooks, so check them out. (Disclaimer: If you use my link, I may earn a commission without any extra costs to you, should you decide to buy)
Save time with FreshBooks, the #1 cloud accounting specialist for small business owners.
4. The difference between Employees & Contractors
If business is booming, you probably need help and want to hire employees or contractors. Do you understand the difference between the two? Employees are on payroll and work either in your office or according to your instructions and processes, using your equipment. Here’s where an accountant comes in handy because he/she can help with payroll withholding and taxes. A contractor works independently on your project (you can’t tell a contractor how/when to do the job) and is responsible for their own tools and taxes. At the end of the year, you will provide a 1099 tax form to any contractor who provided services of $600 and more.
5. Pay your taxes
Paying taxes depend on the type of business you have. Sales tax, for when you’re selling products in a shop or online, should be collected from the customer and paid to the IRS each month. Payroll tax is withheld from your employee’s paycheck and paid to the government on a monthly or quarterly basis. Check with your tax specialist.
6. Insurance for your business
Insurance, the other least favorite topic for almost anyone I know… Do you need it? This also depends on the type of business you have and the country you live in. Some forms of insurance are general, others are professional liability insurance, property insurance, worker’s compensation, etc. Here’s an article about the types of small business insurance you may need. Discuss with your account or an insurance agent to get customized information for your own business needs. You never know when you’ll need it.
Get piece of mind
The last two items on the list above put the most fear in me. We all need to pay our taxes, and in the U.S. insurance is not optional, whether it’s for driving a car or running a business. All I know is that we need to take care of our taxes and insurance. Combined with the fact that there are constant changes in the law we can’t keep up with, my husband (also a business owner) and I have always used an accountant (CPA) to do our taxes. Our accountant also helped to set up our businesses to cover all our bases. Call it peace of mind…
It doesn’t mean you can’t apply for your own license or do your own taxes, especially if you are super detail oriented. Just consider where you save the most, time or money. Sometimes it’s both…
Good accounting, less worry
When you take care or these pesky details, you will have one less thing to worry about when tax time rolls around. Or when you need to get a loan and are asked for financial details of your business. What’s more important, is knowing how your business is doing because it will help you grow your business by cutting costs, or looking for other opportunities to grow your business.
I hope this post helped you understand why business accounting plays a significant role for your business. Have other tips or experiences with accounting to share? Post in the comments below.
Would you like to read more about this topic, visit the “A Better Lemon Stand website” to educate yourself.
Good luck and keep on growing your business!