Correct me if I am wrong here, but every year when you prepare to file your taxes, personal and business, you probably notice things you could have done better. You probably say, okay next year I will make this easier for myself. I will organize this better, keep better receipts, update my spreadsheet more often, separate your personal and professional finances, whatever it is, right?
Well having just completed my first full year as an LLC and preparing my business taxes, while also walking another start-up through the process, my hindsight is 2020. I thought that after 10 years of keeping other business’s finances and operations in order, I would breeze through the process, but there was more to it than I imagined and quite a few bumps along my road. So here are my 5 organizational tips for start ups or small businesses that I recommend you put into practice right now, before the year runs away with you. That way you can work more efficiently this year and be better prepared when tax time rolls around next year.
1. Register your business and trade name locally and nationally. This is really a 3 fold tip.
- Decide and research your preferred business name locally, national and on the web. It is critical that your business name and website clearly reflect your services. So if you find it is not being used, purchase the domain, for the company and register the name. If you are unsure of exactly what services you will provide, then it is valuable to form your company with a more general name now and specify a trade name when you arr ready. For example you could form XYZ Enterprises LLC doing business as (trade name) Xciting Parties and Events and have the room to expand your services to rentals, catering, etc. later. A more obvious example is forming Smith Services LLC for Joe Smith the business coach. Or you may create the Carolina Association of Tabbycats d/b/a C.A.T.S. There are many options, but it is good to have a plan of where your business is headed and how you want to present yourself now.
- Depending on your circumstance, you may need an FEIN (federal tax ID number). However I suggest asking an accountant, business consultant or reaching out to local small business resources, such as the Maryland Women’s Business Center, for their recommendation before going through this process. It won't hurt or cost you anything to acquire a number, but is time wasted if you do not use it.
- Research your state laws. In Maryland there is a personal property tax assessment for businesses. If you start your business at the end of a year and don’t actually do any business, you still owe the tax assessment (I speak from experience). In sum, register when you are ready to hit the ground running. Additionally in Maryland and Virginia, you can be your own Registered Agent (to receive legal information and documents) for your business. If you use Legal Zoom or another digital company to assist you in forming your business Articles, you do not need to pay for their Registered Agent services. An attorney can also assist in starting your business, drafting and filing the documents, and even acting as your Agent, if you so choose. So consider your options and research your state laws.
2. Pay estimated taxes – This is really a tip just for LLCs or self employed individuals and please consult your accountant to discuss your potential annual earning and tax filing plans. But in general, as an LLC or a sole proprietor you will owe quarterly estimated taxes on any income earned. I did not start earning income until halfway through my first year, at that point I had missed two quarterly payments and could have been penalized at filing time. So even if it is hard, I suggest paying something to federal government throughout the year to avoid fees. If you still have another source of income, such as a part or full time job, pay some additional withholding from your paycheck, based on projections of your gross annual income or historical income. Again, please consult with an accountant or tax specialist for details instructions.
3. Get your spreadsheets in order now – For many small start ups, finances are kept on spreadsheets due to the ease of use and access to Microsoft Excel, Google sheets, etc. This is a great way for you to keep track and share your finances with others when the time comes, however there are a few things I would suggest so that you are not the only one who understands the information.
- Try not to over complicate. Use columns for incomes and expenses, payee and dates. If you want to note the category for the income and expense in notes or next to the amounts, do. However breaking down the sheet into many columns and rows may just make your life and finances more complicated than simple.
- Use the “Accounting” format all dollar amount boxes and be sure to enter any expenses as a negative number. This will allow you to get a quick understanding of your finances at a glance will skimming through.
- Review your spreadsheet monthly with your bank statement to reconcile the transactions and be sure you didn’t miss anything. Taking an hour every month will be much more efficient that 10 hours at the end of the year.
4. Open up a business bank account and if you need it, credit card – While single member LLCs often file taxes as part of their personal filing, I can’t emphasize enough how important it is to separate your finances. A separate bank account will almost eliminate the “co-mingling” of personal and business finances as long as you use the account properly (e.g. dinner with the family on personal credit card and lunch with your client on the business card). Not only will you be able to view your financial situation in real time, but most importantly preparing for taxes will be exponentially more efficient. You will not need to track down the purchases within your personal bank account to pay yourself back or calculate how much you earned or lost. You may not even need the spreadsheet! Plus, your tax accountant will thank you. Bear in mind in order to open this business account, you will need your Articles of Organization or Incorporation from forming your business, your state registered filing, your company FEIN (if applicable), your proof of ownership, and your proof of identity. If you registered a trade name, that documentation as well.
5. Migrate over to accounting software – If you are opening a bank, have grown out of the simple spreadsheet functionality, or are just not great with them, the next step is to incorporate accounting software. To many people, it sounds complicated, but these days it can be very simply. I am partial to Quickbooks. For bookkeeping clients I use Desktop version for all of it’s versatility. But for myself I use the basic Quickbooks online. It costs me $25.00 a month. If you don’t want Quickbooks or are interested in other platforms, there are many that offer basic to intricate functionalities. Freshbooks is a common alternative. For most small businesses you will at least want: direct connection to bank accounts, reporting on finances, reconciling, email invoices, and ability to provide access to your accountant. However if you provide goods, you may need to ensure you have the ability to track and manage your inventory. So you will want to research and ask industry peers for recommendations. If you start now, you can back fill the information from the beginning of the year quite easily and go from there. Then preparing for your tax filing next year will be clean from Jan 1 to Dec 31. You can just send a copy to your accountant with your 1099s, W2s, or other tax documents and wait for additional questions.
Now I am not a tax accounting, an attorney, or an expert in any of these areas, but this past year has definitely shined some light on the process of starting, running, and keeping finances for my own business. So if you need help, reach out to your local resources, don't be afraid to ask a friend or peer ask for an attorney or accountant referrals, and request a consultation. You may have to pay a fee and put some effort into the process now, but it will be worth your time and energy further down the road. However, don’t let any of these things stop you from following you heart and starting your own business either. They are all navigable with the right resources and team behind you! I am happy to help connect you with resources and assist where I can in this process.