Be Organized. Stay Organized.
Remember those movies where one of the principal characters is dealing with some financial crisis and pulls out a box filled with scraps of paper receipts. Don’t do that!
If you own/run a business, you need to be disciplined and organized when it comes to your business finances. You should have a structured, organized and reliable system for tracking and managing your business finances. You shouldn’t need to spend hours searching through documents, boxes, drawers, file cabinets, digital records and so forth. You should be able to pull up financial information, records and history pertaining to your business finances quickly and easily.
If you keep paper records, organize your records in a file cabinet and/or properly labeled storage boxes. If you keep digital records, organize your records into well-structured folders and keep copies of your records both locally (ex: external SSD) and offsite. If you use cloud storage, be sure to use a reputable, reliable, and secure provider but keep in mind that no system is 100% foolproof.
Separate Business Accounts from Personal Accounts
Set up a separate business checking account for your business. Likewise, set up a separate business credit/charge card for your business. If you need petty cash for your business, you can have an ATM/debit card issued for your business checking account. Do not co-mingle business and personal finances and expenses! Your business checking account, business debit card, business credit/charge card are for legitimate business purposes only. They are not to be used as a personal coffer! You risk piercing the corporate veil. Keep your personal finances separate from those of your business.
Keep Good & Accurate Records
Keep good and accurate records of all business financial transactions. You should generate invoices for your sales accompanied by any required backup, you should receive bills from your vendors for any legitimate business expenses. Out-of-pocket business expenses should be documented and reconciled via a business expense report with the corresponding receipts attached. Business credit/charge card usage should be properly tracked on an ongoing basis and reconciled after each closing date and the reconciliations should include copies of all corresponding receipts. Funds drawn using business ATM/debit cards should be tracked carefully with the corresponding business expenses reconciled as expenses are incurred and as part of month-end reconciliation. Again, business debit/credit/charge cards are intended to be used for legitimate business purposes only. Do not use your business debit/credit/charge cards or any business monies for your own personal use.
Keep accurate records of all deposits, cash receipts, bill payments and withdrawals. Carefully track your cash on-hand/cash-in-bank and the clearing of checks (both deposits and payments). Reconcile your bank statements at the close of each month and retain/file a copy of your bank statements along with the monthly bank reconciliations.
Tip: When working with outside vendors, ask each vendor to complete and send over an IRS Form W-9 along with their initial vendor bill so that you have each vendor’s taxpayer information should you need to issue a Form 1099-NEC (previously Form 1099-MISC) to the vendor for year-end tax purposes.
Invest In Good Accounting/Finance Software
Don’t use Word documents and Excel spreadsheets, Google docs, etc. as a makeshift approach to managing your business finances. Sure, you may be able to get away with it in the very short-term, but in the long run, this will be a disaster. Invest in good Accounting/Finance software. There are plenty of affordable software solutions available that come in desktop, hosted and online/cloud versions. Intuit QuickBooks is an extremely popular, simple to use, and adaptable software solution for managing business finances.
While QuickBooks is not difficult to setup, you may want to consult with an Accounting/Finance professional or CPA to help with the initial setup and get the ball rolling. If you really aren’t comfortable managing your own books, you can hire a bookkeeper or outside Accounting/Finance firm/professional but for most startups and small businesses just getting started, this may be outside your budget.
Using software like Intuit QuickBooks gives you robust reporting to help you manage and track your business finances. You can pull up reports to quickly view your current account balances or review your cash receipts, accounts receivable, accounts payable, open invoices, aging of receivables and payables, profit & loss, balance sheet and so forth. Obviously, the reports are only as good as the information you input so it’s crucial that you input the correct information.
At year end, you will also have the necessary financial reports you’ll need to provide to your CPA for them to prepare your business tax returns. You can also export your company files and send them to your CPA to perform periodic reviews, internal audits, make adjusting and year-end entries and/or as needed/requested.
Consult with a CPA
It’s important to consult with a CPA early on to get you moving on the right path and help you better understand the tax implications, obligations, and liabilities you may face with your type of business.
Tip: When consulting with a CPA, ask whether you should report on a cash or accrual basis for tax purposes. For internal purposes, you’ll typically want to report on an accrual basis but for tax purposes, your CPA may suggest reporting on a cash basis. If this is the case, when providing financials for year-end tax purposes, be sure to provide financials on a cash basis and not on an accrual basis.
Tax liabilities for a sole proprietor/single-member LLC, LLC taxed as a Partnership, LLC taxed as a Corporation (C or sub-chapter S), S-Corp and C-Corp vary so you want to know what you are in for. In addition, how you get paid varies based on the type of business classification you have elected and may have various tax implications. A member of a LLC taxed as a Partnership does not go on payroll but instead receives Guaranteed Payments which are not subject to typical payroll tax withholdings. Instead, the LLC member pays their share of income and self-employment taxes on those Guaranteed Payments directly to the IRS, state and local tax agencies/departments on a quarterly basis. A member of a LLC taxed as a sub-chapter S does not receive Guaranteed Payments but should be paid a reasonable salary through payroll which are subject to typical income and payroll tax withholdings and those payroll tax withholding reports and taxes should be filed/paid by the employer/business (or through your payroll company, if you use one) to the IRS, state and local tax agencies/departments on a quarterly basis. This is just one example of how the tax implications and responsibilities vary greatly so it’s important to seek guidance from a CPA. It’s also important to record these transactions properly in the books to ensure your CPA has the proper information at year-end to prepare the business tax returns. Again, the information in your books is only as good as what you input.
Speak with your CPA in early fourth quarter of the year to ensure you are on track to close out the year. Your CPA may ask you to send over preliminary financials like your P&L and balance sheet (again, using good Accounting/Finance software will really help) so that they may gauge how you are tracking for the year, what the potential tax implications/liabilities may be for the tax year, whether you need to make an advance or additional tax payment to avoid penalties/late fees, etc. and based on the financials they may advise you of what steps you may need to take and/or adjustments you need to make to stay on track for year end.
The Corporate Veil
As I mentioned earlier, do not co-mingle business and personal finances. Set up a separate business bank account and business debit/credit/charge card for legitimate business transactions. Never use monies from the business or your business debit/credit/charge card to pay for your personal expenses. Document and keep good records of all your business transactions with the appropriate backup to document those legitimate business transactions.
If you co-mingle your business and personal finances, you risk piercing the corporate veil. The corporate veil separates and protects you and your personal assets from that of your business (aka limited liability). Piercing the corporate veil removes that layer of protection and potentially exposes you personally to any potential liabilities of the business.
The corporate veil does not apply to sole proprietorships as a sole proprietor is not considered a legally distinct business entity from that of the individual. In lieu of operating as a sole proprietorship, consider establishing a separate, legally distinct business entity (ex: limited liability company or LLC).
Though a single-member LLC with default tax treatment is treated like a sole proprietorship for tax purposes, the LLC is still a legally distinct business entity and does afford limited liability protection. Avoid co-mingling business and personal finances to maintain the corporate veil.
This is just the tip of the iceberg so consult with a CPA who can better address your specific business and tax situation.