We have had the privilege of helping many new businesses get off the ground. It is an exciting time for a new business owner, but can also be very stressful since there are many things to think about. Unfortunately, keeping accounting/bookkeeping often takes a back seat to the other items. We often get clients coming to us after they have been in business for months, only to find out they haven’t been maintaining adequate accounting records. We get it, it is not a fun thing to deal with and it’s much easier to focus on the other items you are more comfortable with. But putting accounting on the back burner will come back to haunt you. Below are some of the more common mistakes we have seen.
No accounting system
Maintaining an accounting system is more than just tracking money in and money out in a spreadsheet. It should also be used for tracking other information such as fixed assets and related depreciation, keeping track of which customers owe you money and how what are your liabilities are in respect to your various vendors and lenders. Depending on the circumstances your business may be required to include a balance sheet as part of a business tax return. That is usually overwhelming for the non-accountant. Fear not there are several online accounting packages that you can get started for minimal cost. Be sure to have a qualified accountant assist you with the selection and set up to make sure you get started on the right foot.
Not establishing a separate bank account and credit card for the business
So you’ve decided to start your business, and you need to buy a few things. You write a check from your personal bank account. You take a client out for lunch and use your personal credit card. You shove the receipts in your wallet. When the statement comes, you’ll separate out the business from the personal, right? This may work for a few months but six months down the line, your bank or credit card statement will be ten pages long and you won’t remember which transactions are personal and which transactions are related to the business. You’ll be tearing your hair out (or your accountant will be).
Knowing when to have a payroll
If your business is a Corporation (including an “S” Corporation, or an LLC taxed as a corporation), you will need to setup a payroll in order to receive compensation. A payroll entails withholding taxes, filing quarterly payroll tax returns, and giving yourself a W-2 at the end of the year. Don’t start just taking money out and say to yourself “I’ll figure it all out later”. Also avoid the temptation to “pay” yourself as a contractor and just give yourself a 1099 at the end of the year. Determine if your situation requires a payroll to be used for owner compensation. If it does, then have one setup before you start taking money out of the company. Payroll for a small company isn’t as daunting as it sounds – we provide a service to our clients that starts as low as $50 a month and you can pay the taxes and file the returns electronically as well as generate your year-end W-2s. If you are operating as a sole proprietor, partnership or LLC (single member or partnership), you should not be on a payroll. Under those circumstances you will use draws and/or guaranteed payments to take money out of the business.
Selling product before you understand sales tax rules
Simply put, sales tax can be a nightmare. Right now there are nearly 10,000 sales tax jurisdictions in the United States. Different counties and cities charge different amounts. There are many factors that determine if you are supposed to collect and remit sales tax, and those factors differ from state to state. Before you start expanding your operations into other jurisdictions you should determine if you are required to register the business in those jurisdictions.
Not filing your income tax returns
There is a difference between not paying taxes and not fling a tax return. The IRS imposes penalties for both so it is important to be aware of the due dates for your business and personal tax returns. In the event that you are not going to be able to file on timely basis, you may still be able to avoid/minimize failure to file penalties by filing an extension to file. Also be aware that if your business operates as a Partnership, LLC, or S Corporation, you will likely need to have the business returns prepared in advance of the deadline for filing personal returns. If other partners, members or shareholders are involved, their personal tax returns are also dependent on having K1 data. Needless to say it is important to have your income tax returns ready to file on a timely basis and the best way to facilitate that is by keeping your books and records up to date.
There are so many things to think about when starting a business, inevitably something is going to fall through the cracks. Engaging a CPA sooner rather than later will almost always end up saving you time and money right from the start