9 Things Every Small Business Owner Needs to Know About Getting Your Small Business Started [Small Business Bookkeeping 101 – How to Start a Business]

So you have finally taken the plunge and decided to start your own small business!

Can I be totally honest with you?

It’s a familiar story and it usually goes like this: You set up your new small business with all the enthusiasm in the world. You’ve thrown everything into it – even some capital from your own home!

You sacrifice a LOT.

You’re working harder than you ever did in your previous job.

Your earnings seem to be less than you ever received in your old job.

You worry that you’re never going to get on top of all that paperwork!

Ok, I know what you’re thinking… this is sounding a bit depressing!

Newsflash: Most new small businesses fail in the first few years.

Yes, it’s true!

Astonishing isn’t it? So how can you be different?

So let’s get down to business and look at how getting started in small business will look different for you. How do you get on the path to success?

Getting Started

First of all, if you have great ideas and the dedication to see your ideas through, then perhaps you are finally ready for starting up your small business.

There’s so much to consider when it comes to getting started in business. Knowing what challenges and problems that might come your way can help you to be on the front foot as you get going.

If you are prepared for the unexpected, you can possibly help avoid common pitfalls.

Many people focus on the business itself. Often the very last thing you will consider is the paperwork or bookkeeping side of things.

Here’s the thing:

You will need to set up a bookkeeping system to meet your legal obligations.

Is getting started in business giving you a headache

Let’s get started

Ok, so just by reading through this guide, you will be well on the path to making better desisions about your small business that are more informed.

Perhaps unsurprisingly, effective accounting provides you with quality information. This gives you insight, and this insight is available to you quickly.

Want to know the best part?

Quite simply, this quality insight is what helps your small business from failing.

What is a business?

Let’s get to the point.

Your small business can be anything that produces something of value to an audience. This could be goods or services to the public or other businesses that pay for it.

Interestingly, those that receive this value don’t need to necessarily pay for it in order for the operation to be a business. A business could be funded in other ways, such as donations or grants to a charity.

Why do I need accounting in my business?

In the rush in getting started, some people forget about accounting altogether. Then the tax max comes knocking.

It all boils down to this:

Many people use accounting systems because of tax. This could be for both reporting to tax authorities and also to determine tax payment obligations.

But the truth?

Accounting can benefit your small business far more than simply helping you with tax.

What it means is this: You can gain insight about your business that can help you run it more effectively:

  • What parts of your small business produce more revenue?
  • How profitable is your small business?
  • Do some parts of your small business produce less revenue but more profit?
  • How are your small business expenses tracking? Are they growing faster or slower than your revenue?
  • Have you found that particular expenses are higher than expected? How have they tracked over time?

What does accounting do in my business?

But first a warning:

Events like how your small business is registered, spending money and getting paid have a financial impact on your bottom line.

That’s where accounting fits in.

Accounting is use of an information system where events that have some economic impact on a business are identified, recorded and communicated.

Put it another way:

It would be very difficult for someone to understand what the overall effects of all of these events are on any non-trivial business.

In other words:

Accounting systems allow us to capture all the events impacting your small business and through reports or outputs, to understand these effects.

So you can make more money.

After all, isn’t that one if the reasons you started your small business in the first place?

It’s that simple.

Should I setup a company?

Now you’re ready to go.

Ok, so there are many reasons when getting started to setup a corporation or company (as opposed to other entity types).

Limited liability in most cases.

What does this mean?

Limited liability means that if your business fails, then the shareholders and directors (those who are in charge of the company) are protected from unpaid creditor claims.

This is a key advantage of a company when compared with operating your business as a sole proprietor:

  • In the United States, Limited Liability Companies (LLC), C Corporations and S Corporations all limit liability. This protection can be lost if your filings are not up to date, you don’t keep minutes of company meetings or you have no registered agent.
  • In Australia, both Limited and Pty Limited companies limit liability to the amounts paid to the company for share issues. Nearly all small companies formed are these types. For these companies, the shareholders are not liable in insolvency beyond paying for their shares. Shareholders often have done that when initially purchasing their shares. Directors may be liable in some cases for various unpaid taxes and some employee entitlements.

Income Tax treatment.

In the United States, tax advantages of companies are limited. In case of a LLC, the company does not pay tax, but tax obligations flow through to the owners. An S-Corp is similar, but there are some concessions where profits above reasonable wages are charged as such. A C-Corp pays tax in its own right, and then shareholders have to pay tax again on dividends. A C-Corp may still make sense where profits will be retained in the business for an extended period of time as the C-Corp may enjoy lower rates of tax than its owners.

In Australia, all non exempt companies pay tax. There is no United States flow through scheme. Instead, an imputation credit scheme operates that effectively provides a credit to owners of any tax the company pays. These credits are attached to dividends and effectively results in the owner paying tax only once.

Pooling of resources.

Allow me to explain:

Companies are effective when there is more than one owner of the business.

Some structures allow convenient management of small numbers of owners (shareholders) with light reporting burdens, while public companies may allow for unlimited number of shareholders.

Should I use a separate bank account for my business?

In nearly all situations, that answer would be yes.

Certainly when using a company, yes.

Because there will be consequences for allowing non company transactions to be mixed with company ones, use a separate bank account for your small business. Check out this article for more information about the consequences of mixing personal transactions with business ones.

Reality is, that if you choose to operate your business as a sole trader, it still makes sense to operate a separate bank account.

Furthermore, having banking kept separate will help you to be disciplined in running your small business. Hence, making it easier for you to see how your small business is performing, and making it far easier for you to maintain good accounting records for performance and tax reporting.

Let’s not forget:

These considerations won’t stop you from being able to access your business profits for private use as you can clearly identify those transactions.

Where to next?


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