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7 Accounting Tips for Beginning Businesses
written by Allan Branch on September 16th, 2008
We have the smartest and the most clever accountant in the world. So we asked him to write an article about starting a business and the accounting setup needed. Here's what he wrote, it's solid advice from an accountant that saves us tons of money.
1. KISS. Keep it simple starting out. The simplest form of entity for running your first business is called a sole proprietorship. This form of ownership requires NO special communication or filings to the Internal Revenue Service until you start paying employees.
2. As a sole proprietor you are the owner/entity which might require only to acquire an occupational license if your county or municipality mandates one. As the owner, you are also liable to remit all state or city tax collections on retail or wholesale sales your business collects. Service businesses and most cross state sales are exempt from state tax collections.
3. If you are concerned about personal liability as a sole proprietorship then do the cheapest and simplest thing which is to buy a personal liability umbrella policy. The best way to avoid liability is to learn your trade well and keep accurate records on LessAccounting .
4. Concentrate on building your business not communicating with the IRS. As a sole proprietor, the IRS will not even know you exsist until after you file your first personal income tax return. This return will include a Schedule C which communicates all of the sales and expenses you recorded in LessAccounting on your business. These sales and expenses do not have to be in a separate bank account as mandated by the LLC or Incorporation format. The sole proprietor losses offset your day job's income to provide a possible tax refund.
5. Over 90% of small businesses fail or change ownership within the first five years. Plan your business to thrive but if it fails under a sole proprietor you simply stop doing business. No communication or special forms with the IRS, no additional taxes to get your investment returned and no high accounting fees to close out your entity. Simply file a final Schedule C with your next personal return. KISS.
6. How do you get paid as a sole proprietorship? Simply take the money out as a draw. No payroll taxes or quarterly forms needed. Most startups lose money for the first several years, so keep your day job to pay your living expenses.
7. After you pass the five year hurdle, then you can talk with a CPA about another entity type that might save you taxes. Again a simple bookkeeping entry transfers all of the business assets from the sole proprietorship into the new entity without any tax penalties. Then quit your day job to celebrate your new livelyhood.
12 Responses to “7 Accounting Tips for Beginning Businesses”
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The only thing I would disagree with is that a separate bank account for business transactions is always a good idea, whether mandated by business form or not.
I wish I had read this three years ago. It’s good advice, and should be listened to. I made a lot of painful mistakes filing too many papers too early.
I agree with Yardboy. It makes money a lot easier to track if you open a separate bank account to manage the sole prop.
Also, do your best to stay away from creating debt. It’s so tempting to go out and buy new equipment on credit, but you really don’t need the added stress on your business. Save up and pay for everything with cash the Dave Ramsey way.
The advice is for people who really haven’t left their full time job. In theory if you’re doing side work and only making 5-10k in this venture how much tracking could there be? No much, the point is to keep everything very simple. We’ll get him to write about other levels of income next.
This is just what I needed to read right now. I’m most concerned about personal liability, so I was looking at going with an S corp or LLC. This gives me another option to consider.
Hey Eric, also personal liability insurance is very cheap for the tech industry. We have a several million dollar policy for a couple hundred bucks per year. Here’s where we got ours http://techinsurance.com/
Awesome, thanks for the extra info.
I was reading on the techinsurance.com site, and it sounds to me like a professional liability policy would be the first thing to get before a personal umbrella policy. I’m not certain I understand why you would want the personal umbrella policy first.
@Shaun,
I think the reason is because a sole proprietorship does not have the same personal protections that a corporation (or LLC, LLP) offer. So the person umbrella policy is meant to protect you in a similar fashion. But I am not a lawyer, and this is not legal advice, so please check with your attorney and accountant before making these decisions.
from our accountant
-The personal umbrella protects you from being financially drainned due to one of your family member’s mistake. Such as your child accidentally killing another child while both riding on a four wheeler or a boat you own.(not covered by auto insurance) This happens all the time in our neck of the woods :)
Makes sense. Thanks guys.
If you’re recommending buying a few hundred worth of insurance, why not spend the same few hundred on an LLC and do it right from the beginning?