Once you make the decision to start your business,  one of the most important next steps is getting your financial strategies in place.

There are several things you should do — in no particular order.

 Open a Bank Account

You never want to mingle your personal money and your business money.  You need to keep these two sets of money completely separate.  It will make life a whole lot easier when tax time rolls around.  If you are an LLC, a partnership, or a corporation, you are legally required to have a separate bank account for business.  You will need the documents showing that you are one of these three entities in order to open the bank account.

If you’re a sole proprietor, you don’t legally have to have a separate account but I highly recommend it.  Different banks have different fee structures.  A number of them offer free business checking if you keep a certain minimum in the account.  Check with the various banks in your area and compare fees.  Also ask what documents you will need to prove that you are a business.

Develop a System to Track your Expenses

Don’t make the mistake of putting your receipts in a shoe box until tax time.  Tracking your expenses, as well as your income, as you go along is the only way to know if you are making money or losing it.  You will need these records in order to justify expense deductions that you take on your tax return.

You can use any method you like, ranging from maintaining expense and income ledgers manually to using software such as QuickBooks.  There are a number of other software programs online that are much less expensive and simpler than QuickBooks.

One group of  expenses that you might not think of, but should keep receipts for, are receipts for meals in a restaurant where you conduct business.  Make sure that you document who you ate with and what you discussed.

If you travel out of town for business, your receipts provide a paper trail of your business activities.  The IRS is wary of people claiming personal activities as business expenses.

Vehicle Related Expenses are another expense that you should record carefully. In addition to the beginning and ending mileage, record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle related expenses.

For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorized as entertainment, rather than a gift. Note these details on the receipt.

Home Office Receipts: Similar to the vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home related expenses.

Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You’re able to deduct the portion of your home that’s used for business, as well as your internet connection, cell phone, and transportation to and from work sites and for business errands.

Any expense that’s used partly for personal life and partly for business must reflect the mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).

Develop a Bookkeeping System

Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting.

Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements. Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements.

As a new business owner, you’ll need to determine which bookkeeping method to use.  You can choose to go the do it yourself route and use software like Quickbooks.  Alternatively, you could use a simple Excel spreadsheet or even a paper bookkeeping system with a journal and ledger.

When your business is big enough,  you can opt to outsource your bookkeeping to a paid bookkeeper and/or accountant.

Canadian and American business owners need to determine whether they’ll use the cash or accrual method of accounting.  Once you’ve made that decision, it is difficult to change it with the IRS.

Let’s take a look at the difference between the two methods here:

  • Cash Method: Revenues and expenses are recognized at the time they are actually received or paid.
  • Accrual Method: Revenues and expenses are recognized when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables. Since most gift basket companies have inventory (unless they use dropship companies exclusively), the accrual method is usually used.

If you have employees, set up a Payroll System

As a new business owner, you’ll likely be a one-person show. However, as soon as you hire a part-time employee, you’ll need to determine whether he/she is an employee or an independent contractor.  The IRS provides a series of questions which will help you make that decision here.

If it is determined that they are an employee,  you will need to set up a payroll system that makes sure you are withholding the right taxes.  Keep good records of how much you pay each independent contractor as you will be required to file a 1099 form with the IRS if the payment is more than $600.  You will need their name, address, and social security number for this.

Decide how you will be paid for your products

From the time you make that first sale, you will need to know how you will accept payments.  Of course, the customer can pay with cash or check if local.

But if you are an Internet business and when local sales increase, you will need a way to accept payments other than cash or check.  You can establish a merchant account with your bank or another provider.  A merchant account is a type of bank account that allows your business to accept credit card payments from customers. Paypal is probably one of the easiest providers in the beginning.  There are also companies like Stripe, Google Payments, among others that are relatively easy to set up and use.  Their rates run about 2.9% plus 30 cents per transaction but there are no monthly fees and other charges that really increase your total cost per transaction with many merchant accounts. Your online shopping cart provider will most likely have recommendations and ways that you can compare the various services.

Register with your State Department of Revenue for Sales Tax Collection

Most states, cities, and counties require you to collect sales tax on your sales and then remit those taxes to them. Each one has different rates and requirements so you should check with your own individual state.

Determine how your business will be taxed by the IRS.

This will depend on how you have set up the legal structure of your business.

If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on Schedule C of your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee. Self-employed people need to withhold taxes from their income, and remit these to the government in lieu of the withholding that an employer would normally conduct.   In the U.S., you’ll need to pay estimated taxes quarterly.

I’ll be writing some additional articles that will provide more detail about some of  these such as which legal structure should you choose and why.  Watch for them.

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