Small Business Accounting 101 | A 10-Step Guide for Success
Being an entrepreneur means you have to wear many hats. From marketing to product design to accounting, there doesn’t seem to be any shortage of work to do for small business owners. If you’re getting started in your small business, one of the most important aspects to stay on top of is accounting. Luckily, we have your quick and easy guide to accounting 101 to get you started.
Register Your Business
The first step of small business accounting is registering your business. This will establish it as a legal entity, allowing you to begin building your brand, seeking out capital, and receiving certain tax benefits.
First, though, you have to decide what you will register your business as. There are a few options to consider:
Sole Proprietorship
This option creates an unincorporated business, which means there is no legal separation between you and the company. That means you personally are held responsible for everything the business does. The good news? This is the easiest and most affordable type of business to register.
Corporation
Registering as a corporation is a considerably more complex process, though it does offer some benefits that a sole proprietorship does not. Here, you and any business partners and your company work as a single entity, one that is considered a single taxpayer. That means you are eligible for lower tax rates, and legal protection.
Partnership
Rather than operating as one entity, registering your business as a partnership means you and your partner or partners split ownership, with each taking responsibility for some portion of the work. While these are simpler to register than a corporation, make sure to outline everyone's roles and responsibilities clearly before setting up the partnership to avoid confusion and complications later.
Limited Liability Company (LLC)
LLC’s are fairly common, because of their flexibility. This option borrows a bit from all of the other three. You can run an LLC alone as you do with a sole proprietorship, but still get the legal protection offered by other business types. You also get more leeway when it comes to taxes — if you are a single owner, you can file as a sole proprietor or a corporation, and if you run your LLC with multiple owners, you can file as a partnership or corporation.
Open a Business Bank Account
Once you have registered your business and business name, you’ll want to set up a separate small business bank account. In fact, it’s legally required for all types of businesses with the exception of a sole proprietorship — and highly recommended even for those.
Separating your business account from your personal one can simplify the tax process when it comes time, and make it easier to differentiate between your small business accounting transactions and your personal ones. A business bank account can also be used to prove financial accountability and strength when it comes time to seek out investors and capital further down the line.
There are a couple of types of accounts you will want to set up:
Business Checking Account
This account can be used to make deposits and withdrawals for expenses.
Business Savings Account
Having a separate account for savings allows you to put money aside for annual and quarterly expenses like taxes.
Business Credit Card
A business credit card can be used to make business-related purchases and help you build good credit for your venture. Some cards also can pay off in the form of points or cash back.
Before selecting a bank to open an account with, do your research. Consider the costs of doing your small business accounting with each bank, as well as the ease of use and your access and proximity to each bank's branches.
Establish an Accounting System
There are two main types of small business accounting systems. Once you select one, you’ll need to stick with it for the long haul, including for all future tax returns.
Cash Accounting
Cash accounting is the simpler of the two systems. Basically, it means recording each time money is received, and each time it is paid out for expenses.
Accrual Accounting
Accrual accounting, on the other hand, tracks even transactions that aren’t completed. That means recording each time money is earned, even if it hasn’t yet been received, and each time money is owed, even if it hasn’t yet been given.
When it comes to choosing the method for you, keep in mind that most sole proprietorships opt for the cash accounting method, as it is more straightforward. However, any business making more than $5 million must use an accrual system of accounting.
Develop Your Bookkeeping System
Bookkeeping is where the basics of all your day-to-day transactions are tracked. Your books are then used in the accounting process for more high-level calculations.
There are three main methods of bookkeeping small business owners can consider:
DIY Bookkeeping with the Help of Software
To keep costs low, many business owners opt to do their bookkeeping themselves. If you’re a freelancer with a relatively simple stream of income and expenses, something as basic as an Excel spreadsheet may work. Otherwise, programs like Quickbooks can make it easier to store and track information.
Outsource Your Bookkeeping
Outsourcing your bookkeeping to a CPA firm is oftentimes the most beneficial route for small business owners as it saves them time and effort with thor accounting.
Create a Bookkeeping Position
If your business experiences rapid growth or bookkeeping becomes too overwhelming to manage with the above options, you can always hire a full-time bookkeeper to add to your team.
Track Your Expenses
When it comes to small business accounting, there are many documents you will be required to keep in your records for anywhere from three to ten years. These are the kinds of things you will document in your bookkeeping, and having them on hand can make it easier to double-check your books if need be.
Those include:
- Bank and credit card statements
- Bills
- Invoices
- Financial statements
- Proof of payments
- Tax returns
- Employment tax records
You will also need to track your expenses by saving receipts. That includes receipts of everything from office supplies and business travel to meals and gifts. You are not required to keep receipts for any expenses under $75 in the US.
All of this tracking can be done either physically, with a filing cabinet, or electronically, either on your computer or with a cloud-based storage system.
Set Up Your Payroll
If you are working with a team chances are you are either hiring them as employees or paying them as independent contractors. The way in which you manage your taxes will depend on which type you use.
If you are hiring them as employees, you will need to set up a payroll system to ensure they are paid on time, and that the correct taxes are withheld. You can do this either with an accountant, or use an online payroll system.
If you are relying on independent contractors — often hired by project or by the hour, and with more freedom to work on their own schedule — you will not necessarily need to set up a payroll system for them. You will, however, need to set up a schedule to be sure they are being compensated on time. In addition, you will need to track how much you have paid them, and fill out a 1099 form for each freelancer when it comes time to do your taxes each year.
Determine How You’ll Receive Payments
The most convenient way for you to get paid and accept and process sales will really depend on the nature of your business and the volume of transactions you are dealing with.
Online Payments
If your main platform for sales is on the web you can use an online payment processor like Paypal, Stripe, or Shopify. You can also set up a merchant account, which is a type of bank account that allows customers to purchase from you using their credit or debit cards.
These platforms usually charge a fee of some kind for their service. For instance, they may charge a small percentage of the sales cost for processing, a flat fee per transaction, or a monthly fee.
Mobile Payments
Some businesses conduct more in-person transactions than others. Services and pop-up vendors, for instance, may find themselves needing a way to accept payments that they can take with them. In this case a mobile card reader can come in handy. One of the most popular is Square, but keep in mind that fees here may be high.
Automatic Invoices
If you have a lot of clients to invoice for your services, consider a small business accounting software that allows you to automatically invoice your customers. Freshbooks and Quickbooks are among the most popular with this capability.
If you are also accepting cash payments, you will need to keep a detailed record of each of these transactions, whether electronic or manual, so you can track the deposits back to the purchases.
Figure Out Your Tax Obligations
So, you have your systems in place to make things as simple as possible when it comes to tax time. The next question, of course: what exactly will your taxes entail?
Businesses have to pay taxes on three different levels: Federal, state, and local. On top of that, your exact taxes will depend on your services and the type of business you are registered as.
Here are some of the taxes you need to keep in mind:
Income Tax
Just as with your personal taxes, a company has income taxes to pay. If you are registered as a sole proprietorship, you can file your personal taxes in conjunction with your business taxes. If you run a corporation, it will have a separate income tax. Your income from that corporation will then be taxed as if you were an employee.
Self-Employment Tax
Those who are self-employed, meaning you do not generate income from employment under another business, have to pay self-employment taxes. This is income that would normally be withheld by an employer, paid instead directly to the government come tax time. Business owners who will owe more than $1,000 in taxes will need to pay quarterly self-employment taxes.
Employment Tax
If your business has employees, you will need to pay this tax for social security and insurance.
Sales Tax
In North Carolina, there is a 4.75% sales tax. You will need to register for a sales tax permit before you can collect sales tax on transactions.
Research Funding Options
As your business evolves, you may find yourself needing to seek outside sources of funding. Whether that be because of an economic downturn, a slow season, or an exciting expansion, there are a few options for generating extra financing: Investors, lines of credit, and small business loans are all tried and true methods often used.
When it comes time to do this, having your financial statements in order, thanks to steps like establishing your small business accounting and bookkeeping structure, retaining documents, and setting up that business bank account, can all come in handy to make your case to your financier.
Find Your Accounting Partners
Many small business owners rely on a local CPA to help them organize and understand the nuances of their finances, and plan better for the future. Having a certified accountant on your side can alleviate some of the stress, and give you peace of mind.
Bookkeeper
For the day-to-day, a full-time or even part-time bookkeeper can handle the work of tracking and recording transactions, managing accounts, and categorizing expenses.
Tax Preparer
Taxes can be one of the most confusing and complex parts of owning a small business. A tax preparer can work with or for you to prepare and file documents, and even estimate tax payments.
Accountant
An accountant can help with many aspects of your business’ financials, from monthly bookkeeping to end-of-year tax preparation.
Small Business Accounting in Raleigh
If you are a Raleigh business owner looking for guidance when it comes to small business accounting, you can turn to C.E. Thorn, CPA. Give us a call at 919-420-0092 or fill out the form below for more information.