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

You have finally taken the plunge and decided that you’re getting started on 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!

Is getting started in business giving you a headache

So how can you be different? Let’s look at how you can put your small business 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.

You have to consider many things when it comes to getting started in your business. Knowing what challenges and problems might come your way can help you to be on the front foot and possibly avoid common pitfalls.

Paperwork and bookkeeping are often the last things to be considered. However, a bookkeeping system is essential in order to meet your legal obligations. These systems can also help you to make better business decisions.

What’s first

Just by reading through this guide, you will be well on the path to making better, more informed decisions about your small busines. 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?

“A business is anything that produces something of value (either goods or services) to its customers, be they members of the public or other businesses. Interestingly, the business need not necessarily receive payment from its customers; it could be funded in other ways. Examples are charity income such as such as donations or grants.

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?
  • Are particular expenses higher than expected? How have they tracked over time?

What does accounting do in my business?

Your accounting system identifies, records, and communicates events that have an economic impact on your business. It would otherwise be very difficult to understand the overall effects of these events. While cash is king, sometimes the effects on events in your business don’t show on your bank balance straight way. Your accounting system gives you valuable information when you are aiming to make a profit or to stay within your budget.

The advantages of setting up a company

There are many reasons when getting started to setup a corporation or company, as opposed to other entity types.

Limited liability in most cases.

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. In most cases they would already have done this at the time of purchase.

    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 an 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. Australia has 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, effectively resulting 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 an unlimited number of shareholders.

Should I use a separate bank account for my business?

“In nearly all situations — and certainly when using a company — the answer would be yes. If non business transactions are mixed in with business ones, there will be consequences. Therefore, 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 transactions.

Even 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.

If you choose to mix these transactions, you may have to justify to tax authorities the business nature of each and every transaction in the account that you use. That may very likely be much more inconvenient than simply segregating your business transactions in a separate account.

Never fear: you won’t be prevented from being able to access your business profits for private use, as you can clearly identify those transactions.

Where to next?

Guide

Return to Bookkeeping 101 guide homepage

Documents

Invoices

Reports

Tax Authorities