Starting your own business can be one of the most rewarding professional moves you can make. If you prefer being your own boss and making your own rules, running your own company may be the right for you.
If you haven’t done so yet, you’ll want to consider what form your business will take. The way that you form your business will affect everything, from how you pay your taxes, how much personal liability (and stake) you have in the company, the types of regulations you will be governed by and how you handle your bookkeeping.
Most small businesses opt to create what is called a Limited Liability Corporation, or LLC. This type of business formation allows the business owner to run the business as an extension of themselves, while still allowing certain liability protections from debts and court judgments. It also keeps business dealings with creditors separate from your personal affairs. If that's the route you choose, there are some things you should know.
Register your LLC
First, you’ll need to register your business name with your state. Look online for information about what department you will need to register with. Next, you will need to prepare an LLC operating agreement – a document that is essentially a road map of how your business will operate, who has a stake in operating the business and how things will be ended should you go out of business.
Lastly, you’ll file organizational paperwork with your state, and receive a certificate of operation that will include an identification number for tax purposes. This information will be helpful for things like setting up bank accounts and any other matters that require proof that your business exists.
You’ll also have to learn how to keep your LLC ledger as a business owner. If you don’t have any experience, there is a lot to learn, but the good news is that it’s surprisingly easy to get started. A first step, if you decide not to hire your own accountant, and you don’t have partners in your business venture, for you as a small business owner to file as a Single Member LLC. This is the same as filing as a sole , which is the same as sole proprietorship.
As a result of filing as a Single Member LLC, any profits or losses from your business will be taxed through your personal federal tax return. As such, LLC bookkeeping records that are separate from your personal income taxes are essential..
Open a Business Checking Account
One of the first things you’ll hear as a new business owner is that it’s very important to make sure you keep your business finances completely separate from those of your own personal life. One reason is that it keeps things much simpler when it comes time to do your taxes. Another is that you won’t have to go sifting through your checkbook register and receipts to try to remember which expenses were for business purposes.
You'll also able to better tell with a glance at your LLC bookkeeping software whether or not your business made a profit or sustained a loss. Many banks offer business checking accounts that are free to open, with only a minimum balance required to avoid fees.
You will, however, need your LLC paperwork available to provide your business tax identification information to the bank. It’s a good idea to maintain good relationships with local bankers in your area, as they can not only help you identify good deals on sources of credit such as business loans, but will also know and do business with lots of other business owners in your area. Their contacts could turn into your future customers if you know how to network well.
Purchase Accounting Software
If your LLC bookkeeping is straightforward and basic, there is very little reason to hire an accountant, even if you have scant experience with financial matters. Much of the bookkeeping software on the market today – such as QuickBooks, FreshBooks and GoDaddy Bookkeeping – are quite easy to use. They require the user only to enter day-to-day entries for expenses and deposits.
These bookkeeping programs, which usually come with online support services, will keep track of your invoices, tax information and everything that you will need to give your accountant at tax time. In many cases, you will be able to download the information directly into tax preparation software such as TurboTax or grant permission for your accountant to view your information online.
You may want to consider hiring an accountant if your business finances are complicated or if you maintain a formal business entity, such as a corporation. In this case, you may be held accountable by business partners or investors, which makes it extremely important to maintain impeccable records.
The Small Business Administration estimates that there are 30 million small businesses in the United States, and unless you are an accountant yourself, you may want to consider a professional who specializes in your industry.
Record All Transactions as They Occur
Unless you have a photographic memory, you may find that it’s extremely difficult to keep track of every single sale and expense for your business. Receipts get lost, memories fail and it’s extremely easy to get so busy that you forget to sit down at the end of the day to update your books. Some financial experts recommend that you record any purchases as close as possible to the transaction time as possible. This can be done easily by keeping a pocket notebook in which you jot such expenses, or using a notetaking app such as Evernote on your smartphone.
You may also consider an online bookkeeping software application that keeps your data in the cloud and gives you the capability to record transactions in real time on your phone.
It’s also important to come up with a system to make sure that monthly or other regular expenses are paid on time. Your reputation for paying on time – or not so much – will be important to vendors who deliver supplies to you and to creditors who decide whether or not to extend you a line of credit. Therefore, it’s important to make sure that you schedule these expenses ahead of time.
Once again, consider using electronic bookkeeping software or an online calendar to keep track of your LLC bookkeeping. Make sure to sign up for electronic notifications on your phone or desktop from your bank to help keep track of due dates on credit cards and other bills.
Start Saving All of Your Receipts
There’s an old adage that says that if something wasn’t written down, it didn’t happen. The same goes for expenses that you can write off come tax time. You really don’t want to be sitting down to do your taxes and know in your heart that you took a business client out to an expensive dinner six months ago to lock down a business contract but have no record of that transaction.
That’s why it’s very important to save all receipts – even the small ones – that have anything to do with any business transaction, so that you can account for it later and maybe take advantage of tax incentives.
Some tax experts say that your chance of getting audited skyrockets if you start a business. Therefore it’s imperative that you save your receipts so you can defend yourself should that happen. This is also a reason you may want to consider hiring a professional accountant who is familiar with your business’s finances and industry.
If you are audited by the IRS, it helps to have someone who can help you along in the process.
You don’t want to be in a situation where you claim tax write-offs and credits only to have an IRS auditor knock at your door asking for proof. In some situations, such as taking a mileage write-off or writing off your home office as a credit, you obviously won’t be able to generate a receipt. In these cases, you’ll have to keep written estimates of how often you use your home office for business, or how many miles you drive in your vehicle to conduct business.
Structure Your Finances
If your business grows the way you hope it will, there’s a chance your LLC chart of accounts could get quite complicated, especially if you are handling many different accounts receivable, sources of income, or have stakeholders or investors that hold you accountable for your business success or failure.
At this point, you may want to consider changing the way you chart – or bring together - several key pieces of financial information about your business to make it neatly visible and accessible in one convenient place. Being able to quickly generate a business report from your LLC bookkeeping software is a convenient way of comparing your income to your expenses to quickly figure out whether you turned a profit or a loss and why.
Financial reports can quickly be created from your business ledgers – which should be easy if you are keeping good records in your electronic accounting software. The most common reports that small businesses need to create for their investors and creditors include LLC charts of accounts including a cash flow analysis, a profit and loss forecast and a balance sheet.
The LLC charts of accounts is crucial as it can help you determine things such as whether your credit customers are paying fast enough, or whether you are going to be able to pay your bills on time. These reports can help you make crucial business decisions to help determine how you will continue operating your business.
Create a Financial Routine
One of the biggest mistakes that rookie business owners make is that they don’t schedule enough time to tend to their finances. Like any routine – such as working out, studying or writing a book – it takes consistency to make sure that business finances are updated and reports studied to identify discrepancies, trends that can lead to loss (or profits) or mistakes that may have been overlooked.
Many financial experts suggest creating a systematic routine so you can sit down and spend time with your books – entering receipts into your accounting software, examining your LLC charts of accounts and reports, and making sure your financial situation is clean and clearly understandable. You should commit to a time slot every week (or daily, if you can find the time) during which you know you won’t be interrupted. Make it known that you are not to be interrupted. You can update your books during that time.
Then, once a month, set aside a time slot to reconcile your bank statements, review your monthly reports and LLC chart of accounts, and reconsider your business plans and goals. Don’t think you can find the time? Schedule it in your calendar ahead of time.
- Shopify: Basics of Small Business Accounting: 10 Steps to Get Your Company on Track
- Rocket Lawyer: Why Start An LLC?
- GoDaddy: 6 Tips for Small Business Expense Tracking
- Nolo: Bookkeeping and Accounting Basics
- Common Desk: How To Manage Your Company's Books
- LegalZoom: 5 Reasons You Need An Accountant If You're a Business Owner