YOU'RE IN BUSINESS, NOW WHAT? 3 THINGS THAT WILL SET YOU UP FOR SUCCESS.
If you’re like most people the first few months of being in business is a whirlwind of excitement, on the job learning, and dare we say...overwhelm.
Managing the financial side of things can be especially daunting.
If your jaw tightens at the thought of keeping your business records straight, you are not the only one. You’d rather spend time on the parts of your business you love and need right away like marketing your brand and bringing in new customers.
You may be saying to yourself, who really has time to track and analyze their numbers?
If you’re feeling out of control figuring out how to manage your business finances, we’re here to help! We’ve worked with many entrepreneurs in your position and promise to make things smooth and fun while we’re at it.
We also know how savvy you are, so if you’ve got your DIY hat on and are ready to figure things out (with a little help from your Swell friends) we’re here for you too.
We’ve put together this list of tips to help new business owners or anyone interested in legitimizing their business set things up.
1. Protect your personal assets by registering your business as a separate entity.
If you’re an army of one, running a small business, it’s easy to get caught up in the 1000’s of demands on your time. Whether you have big aspirations for growth or are aiming for a lifestyle business that will allow you to do what you love and support yourself, it’s important to pause from the daily grind and remember that your business should serve you regardless of its size.
A big component of making sure your business serves you is ensuring that you’re personally protected should something unexpected happen in your business. When starting out, no one thinks, one day my business could get sued. And not to scare you, but the reality is this happens. You want to be sure that if a disgruntled customer or vendor goes after your business they cannot touch you personally.
There are a number of different business structures (we’ll do a deep dive into each in another post), but for now, it’s most important that you know you want to create a separate entity for your business so you have these protections.
Here is a brief explanation of the common business structures:
Sole Proprietorship
You’re automatically considered a sole proprietor if you do business, but do not register as another type of business entity. Sole proprietors aren’t required to file specific paperwork, but there is no separation between personal and business assets and liabilities. We do not recommend going this route unless you have a very low-risk business or are just testing an idea before setting up something more formal.
LLC
This is the most common structure for small businesses. An LLC can be owned by a single person or multiple partners and protects its owners from personal liability (like your car, house, and life savings) if your business faces bankruptcy or lawsuits. Members of an LLC are considered self-employed and must pay self-employment tax. This is our recommendation for most small business owners because it’s the simplest/most cost effective option with strong personal protection.
C Corporation
A C Corp is a legal entity that is completely separate from its owners. Corporations offer the strongest protection for their owners, but the cost to form them and stay up to date with specific record-keeping & reporting is higher than other entity options. C Corporations are best for medium to large businesses that need to raise money and plan to go public or be sold.
S Corporation
An S Corp is a special type of corporation. They have the protections of a C Corp, but are designed to avoid double taxation. It’s worth noting that an LLC can file to be taxed as an S Corp to get tax benefits. Speak to your accountant about this option if you anticipate your net income will be over 60K annually.
Most small businesses we work with set themselves up as an LLC or S Corp and rest easy knowing they have ample personal protection. If you’re unsure what’s best for you consult a lawyer or accountant.
2. You need a separate checking and savings account for your business.
Mixing business and personal expenses will complicate your life in many ways. If you’ve been running your business out of your personal checking account, you can attest to how difficult it is to tell what is what without going line by line through transactions. We want to avoid this at all cost.
Make it easy to run your numbers.
Without separate accounts, you will not have a clear picture of how your business is doing because you’ve been personally dipping into the business piggy bank. Your goal is to make it easy to run your numbers and figure out how profitable your business truly is. Step one to do this is to avoid commingling personal & business expenses.
Make it easy to file taxes.
By keeping your business transactions in a separate checking account you will also make it much easier for yourself at tax time. You will be able to simply pull info from your separate business account to figure out business tax deductions and income. We promise you’ll be happy you have this in place come tax season.
Hit home the personal & business separation.
By keeping your business and personal finances separate, you further ensure that your personal assets are out of reach if business challenges arise.
3. Sign up for accounting software.
When you’re just starting out, it may seem like a good idea to track your business in spreadsheets. You have a sheet for income and one for expenses and it’s all pretty straightforward. That is, until you’re a couple of months in and recognize you have a lot more activity in your business than expected and you have no controls in place to ensure you captured it all on the books. It’s time to graduate to a bookkeeping & accounting software.
We recommend accounting software for all of our clients and promise you’ll save time and money if you go this route. Our favorite software is Quickbooks Online because it’s cloud-based, scalable, and user-friendly.
How you’ll save time.
We’re firm believers in automating as many systems in our business as possible. Quickbooks provides a lot of opportunities to automate processes you will need to do each month, like invoicing, bank reconciliations, and pulling all your numbers together in a variety of useful reports. You can read more about financial reports in this post.
How you’ll save money.
If you use Quickbooks or another accounting software, you’ll be able to easily pull reports to understand how your business is tracking. Knowing your numbers is the basis for good decision making and using accounting software you’ll find your numbers are much clearer.
You’ll also notice that come tax time it’s super simple to determine what expenses can be written off, thus decreasing the taxes you owe.