Being your own boss is both rewarding and challenging. Avoid these common financial missteps and get your new business started on the right foot.
Failing to Distinguish a Hobby as a Business
The real joy of being self-employed is getting a chance to turn a passion into a steady source of income. What starts as a sideline activity evolves into something bigger. Before long the hobby has taken on a life of its own. Customers are calling… there’s a steady stream of work… and money is starting to flow in. This is where things can get a little tricky. People who fail to understand that they’re actually operating a business (not a hobby) can quickly find themselves in hot water with a whole host of Federal and State agencies… particularly the IRS.
The IRS provides a fairly clear set of guidelines to help individuals understand the difference between a Hobby and a Business (http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions).
Example: Individuals who represent and sell cosmetics, housewares, cleaning products, etc. to their friends and neighbors as a sideline often fail to understand that they are in-fact operating a business, not a hobby.
Not Choosing the Right Type of Business
There are many different types of business in the eyes of the law. Here’s a basic listing of them:
- Sole Proprietorships
- Limited Liability Company (LLC)
Not understanding the differences between these business types can lead to significant financial headaches for a business startup down-the-road. Each business type has its own set of advantages and disadvantages. Some require more paperwork, others require less. Some provide a legal “buffer” that protects owners from lawsuits, others don’t. Some are better for the independent person who’s conducting a business alone while others are geared to accommodate multiple business owners.
Cloister Tax Services helps people understand the differences between business types and can even help new business startups file all the paperwork necessary to make a business a reality.
Some people starting a business pay for expenses and make business-related deposits into a checking account that also serves as a personal account. The same account that a family uses for paying everyday living expenses is also used for paying business expenses. Before long it becomes difficult to distinguish what payments or deposits were related to business activity and which were related to just everyday living.
Startups that open and maintain a separate bank account used specifically for business-related transactions find it much easier to keep track of their finances.
Let’s face it… aside from having fun, the reason for being in business is to make money. Businesses that maintain a current set of financial records can make informed decisions about a whole variety of financial matters. At its core, a proper set of financial records informs a business owner whether a profit is being made or whether money’s being lost.
Unfortunately, many startup operations fail to understand the importance of setting up and maintaining a proper set of books. Individuals make the mistake of confusing income with profit. Income is the money that’s received for providing goods or services. Profit is what’s left over after all the expenses necessary to make an income are paid. Businesses that don’t maintain a current set of financial records find it difficult (if not impossible) to know whether they’re gaining ground or losing it.
Fortunately there are a host of options available to help startups keep a proper set of books. Here are a few options:
- Dome Books – Great for very small business startups. This inexpensive record-keeping system allows businesses to track their finances and gives them an opportunity to see month-by-month whether a profit is being made
- Intuit Quickbooks – This software program is by far the most popular financial bookkeeping system used by small businesses today. Its basic interface makes performing the daily financial tasks of operating a business relatively easy.
- Contracting a Bookkeeper – Some business owners would rather not be bothered with trying to track their own financial records. They choose to do the absolute minimum necessary themselves and pass the more technical tasks (like balancing checkbooks, reconciling credit card accounts, issuing payroll, etc.) along to a qualified bookkeeper.
Cloister Tax Services assists startups to choose the bookkeeping option that best suits the owner. As Quickbooks ProAdvisors the professionals at Cloister Tax Services can setup and train business owners and employees how to use this impressive software program.
Setting Aside Little or Nothing for Taxes
If a startup is successful it will be be expected to pay a tax to federal, state and even local agencies on profits that are earned. How much tax depends largely on how much profit there is and what type of business (see “Not Choosing the Right Type of Business” above) made that profit.
Failure to plan for the eventuality of paying taxes on profits has landed many business startups in hot water. Businesses who don’t set aside a portion of their income to pay for taxes frequently find face the unsavory dilemma of not having enough money to pay the tax-man on April 15th.
Knowing how much money to set aside for taxes depends largely on maintaining a current and accurate set of financial records (see “Poor Record-Keeping” above).
Cloister Tax Services can assist business owners know:
- Whether to set any money aside for taxes
- How much money to set aside for taxes
- How and When to remit those taxes to the proper taxing agencies