When entrepreneurs begin the process of turning a business idea into a reality, many of them run into the unfamiliar world of business accounting for the first time. While consulting with specialists like CPAs and tax attorneys is often a good idea, there are a number of basics that every small business owner ought to know.
Separating Accounts
One of the most important steps to take when starting your own small business is to keep your personal expenses and income separate from your business ones. An essential step toward this is opening a business checking account from which you can pay your team, as well as business expenses such as your monthly business credit card statement.
To open a business bank account, most banks will require you to show (i) your filed Articles of Incorporation (if you own a corporation) or Articles of Organization (if you own an LLC), (ii) your federal Employer Identification Number (often referred to as your business’s EIN), and (iii) operating documents, such as your bylaws or operating agreement.
A separate account is crucial to protect against the claim that the owner failed to take the business seriously and is instead operating as themselves personally, and therefore, should not be granted personal liability protection. One of the key factors a court will look at when deciding if the personal and business affairs were kept separate is the strict use of a separate business bank account.
Create Regular Profit and Loss Statements
A profit and loss statement (P&L) is a financial statement that summarizes revenues, costs, and expenses incurred during a specific period of time. A P&L will look at the total revenue you’ve generated in your business and itemize expenses into costs of goods sold and operating expenses. You obtain your business profit by subtracting your total expenses, including taxes and interest, from your total revenue.
A P&L is a helpful tool to allow the business owner to understand if they are operating at a profit or a loss, and if done consistently, you can compare this to other time periods. Comparing allows you to understand if business strategies and tactics are taking hold, and give you a better insight into profits and growth.
Track Business Expenses
It’s important to get a receipt for any expenses incurred on behalf of your company. Not only does this practice help you prepare monthly, quarterly and annual P&Ls, but is necessary when it comes time to report your taxes. In order to claim both partially or fully deductible business expenses you need the receipt for proper verification and tracking.
Some examples of business expenses that can be deducted, include, but are not limited to: staff salaries and benefits, software and subscription services, business meals, education, insurance, marketing, professional fees, supplies, interest, and travel expenses.
Keep it clean, keep it relevant, keep it actionable
Your books are going to become one of the primary sources of data for tracking and reporting your business’s performance. Your P&L mentioned above is a big part of that data. As such, you want to make sure that not only are books accurate for tax purposes, but they’re also relevant and actionable for your own decision making.
Clean books – in addition to just staying up to date on entering your expenses, make sure they expenses are added with the right date, vendor, and category (to help with deductions). Your P&L will offer few insights (and be a headache for your tax preparer) if the months don’t reflect when expenses were incurred or the categories are inconsistent from month to month. A couple of important tips:
Avoid categorizing expenses as “miscellaneous”
Make sure invoices and payments are paired to avoid double-counting expenses
When writing checks put the invoice number(s) on the check and indicate what it is for on the memo line
Relevant data – besides being accurate, expenses should be in appropriate categories and months to give a clear picture of the business’s performance. Books that are not accurate from a tax perspective may not be giving you a clear picture or be easy to understand. A couple tips:
Familiarize yourself with accrual and cash basis accounting (it’s simpler than it sounds) and track expenses in the month they were incurred to avoid months with big jumps in expenses due to timing of payments
Organize your expense categories to group similar expenses so you can track patterns in spending and draw insights
Take action –
Setting your records up early with a plan will save a lot of time and effort down the road as you expand your business reporting to gain deeper insights into the business.
Stay on Top of Tax Deadlines
Almost all small businesses are required to file estimated quarterly tax payments. Quarterly taxes are due April 15, June 15, September 15, and January 15. Set reminders for at least a month before to make sure you don’t miss these deadlines.
The quarterly tax payments are made up of two types of taxes: income tax on your company’s profits and self-employment taxes. For a business operating in California, this includes California Franchise Taxes, federal taxes, and, for pass through entities such as a standard LLC or an entity taxed as an S-Corp, personal quarterly tax payments based on estimated earnings.
This blog was co-authored by Alex King of Archetype Legal, and Chase Spenst of Ground Control.
Disclaimer: This post discusses general legal and tax issues and developments, is intended to serve as informational only, and may not reflect the most current law or tax regulations in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel or tax professional in the relevant jurisdiction. Archetype Legal PC and Ground Control expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this blog post.
