You may never know what results come from your action, but if you do nothing, there will be no result. – Mohandas Kanamchand Ghandi
Welcome to Day 16 of the 20-Day Business Startup Challenge! Today we’re going to learn how to set up banking and an accounting process for your new business.
The time is approaching when the tax man will be looking for his share. If we don’t do it right, he may even show up at our door and insist on seeing our books. Audits are a scary proposition, especially for new entrepreneurs. But learning how to set up accounting for small business is not as scary as it sounds. You can start off right with three quick steps.
Before we begin, I need to make clear that I am not a CPA. The following is advice from my personal experience in building several businesses. It is always best to consult a CPA before starting a new business.
Learning how to setup accounting for a small business is not complicated. There are three main areas you need to take care of from day one. If you have these covered, the rest will fall into place and will grow with you as your business grows.
Step 1 – Open a business checking account
Opening a business checking account is the first step in setting up your accounting. Even as a sole proprietor, you will want to keep business expenses separate from personal expenses. The primary reason is to make sure it is evident you are running a business. If the IRS doesn’t think this is the case, you will have trouble claiming business write-offs.
To open an account, you will first need your Business License, DBA, and/or Entity paperwork. The bank will want to see these as proof of the business’ existence.
These will need to be the official copies from the various authorities. We started that process back on Day 6 if you need a refresher.
There are a few banks that offer free checking accounts for businesses. Each bank has different requirements, so you’ll want to find the one that works best for you.
Some things to consider when choosing:
- Do you need to have a physical branch or will most of your banking be online or through apps?
- Does the account come with free checks or debit cards?
- What are the opening balance requirements?
You can find a list of free business accounts at Nerd Wallet.
Once you have your account started, keep ALL business transactions separate from personal. Also, don’t forget to consult a CPA as soon as possible to learn best practices for your business. A CPA can teach you how to maximize tax write-offs, how to estimate quarterly taxes, etc.
Step 2 – Choose an accounting software or process
If you are good at bookkeeping, you are welcome to track your expenses with a pen & paper or Excel spreadsheet. However, if you have no clue what you are doing, I recommend using accounting software instead.
I use Quickbooks Self-Employed for all my accounting needs. Here’s why I chose them:
- Quickbooks Software is accessible online and via a mobile app – making it easy to use from anywhere.
- Syncs with my bank account, so I don’t have to hand-enter every transaction.
- Notifies me when there are new transactions so I can categorize them. Categorizing is simply marking what each transaction was.
- Automatically tracks mileage. By this, I mean all mileage. It knows when you are driving somewhere and tracks the distance for you. At the end of the day, you swipe left or right to categorize it as a personal trip or a business trip.
- Inexpensive. Quickbooks usually offers a month free or a sale price for the first six months. Full price is only about $10/mo (as of this writing).
- Tracks what I should pay each quarter for my estimated taxes. All entrepreneurs are required to pay an estimated income tax quarterly. If you don’t, the IRS will penalize you. Don’t risk it, make your quarterly tax payments.
- Tracks my total deductions for tax time so I can maximize my deductions.
Step 3 – Determine if you need to pay sales tax
An area people don’t always remember to check is whether they need a Sales & Use Permit for their business. Permits are usually required when you sell physical products to the public. But, you will want to check with your state to learn about their specific requirements.
A simple search online for “your state + sales and use permit” should lead you to the information you need.
You’ll want to verify the following:
- What do they say needs to have sales tax (is it just products or something more)?
- What tax rate do you need to charge to customers?
- How often do you have to make sales tax payments to them?
- How do you apply for a permit?
- Is there anything else you need to track (any particular forms or documents)?
If you are purchasing products from a wholesaler to sell to the public, chances are you will need a Sales & Use Permit. But, if you pay tax to them, this usually satisfies the sales tax requirement. Be sure to check with your state to confirm.
If you discover you do need to charge sales tax, then you’ll want to set up a system for tracking those collections. A program like Quickbooks can do this for you (not the Self-Employed version, but one of the others).
You may want to set up a separate checking account to hold the sales tax collections. You don’t want to miss a payment to them because you forgot to keep the money aside.
These three steps are all you need to get started with a small business with no employees. If you have employees, you will also need to set up a payroll system as well. Several companies offer inexpensive payroll services, such as Gusto.com. Check with your state for specific requirements.
These three steps lay the foundation for a strong accounting system for your new business. It will also help to make sure you are legal and don’t find yourself on the IRS’ radar.