Today’s post is about some mistakes that can derail many startups or small business owners…
Not setting up your business, like it’s a business, instead of a hobby.
FACT: 8 out of 10 entrepreneurs will pack up shop within 18 months. Yes, that’s 80%!!
I don’t want this to happen to you and this statistic is not meant to scare you, it’s meant to make you aware. Many entrepreneurs go out of business due to poor cash flow, tax issues or inefficient systems.
So as someone who’s passionate about doing creative work, I totally GET wanting to just ignore all these irritating accounting, tax, and financial details and just focus on “the work”. But if you’re running any type of business, you won’t be doing what you love for long if you make some of these very AVOIDABLE mistakes.
When I owned my design firm five years ago I experienced first hand how accounting, tax, or bookkeeping errors could become VERY costly. To the tune of $14,000. To say I was upset is an understatement. I sobbed when I saw the dreaded letter come from the IRS. I was off being creative and left my business in the hands of someone who didn’t pay attention to these critical business systems. It hurt so bad, because it could have been prevented. But I learned the lesson well. So now I shout from the mountaintop to anyone who will listen, “Develop good accounting, tax and financial systems, create a profitable business model, and have several proven streams of revenue”! You MUST not leave these tasks off your list if you want to go the distance.
As a small business owner, you’re responsible for much of the day-to-day, maybe all of it, if you’re a company of one, and it can seem downright daunting to also have to do all of this, less than glamorous paperwork. Maybe you’re just getting started, or early in the life of your business and you’re still small so you think “I’ll just keep doing what I’m doing until I start making real money“. Let me caution you, even if you’re just getting started, it’s not too early to put good systems in place or develop good accounting, tax, and financial habits to get your business off to the best start. Having an abundance and growth mindset means you don’t expect to stay small for long because you know your business will grow. In fact, you expect it to.
Avoiding these 8 simple mistakes will help you legitimize your business and minimize the possibility of getting audited or worst.
- Not setting up the correct business entity. Figuring out whether you need to set up a SOLE PROPRIETORSHIP, PARTNERSHIP, LLC, S CORP or CORP is an important part of starting a new business. There are definite benefits to each and it is important that you determine how you plan to grow and expand your business so you know which one to set up. An appointment with your accountant is a good idea to help you get started.
- Not obtaining a sales tax permit if you sell products or services requiring sale tax. If you sell any products or services and are required by your state to deduct sales tax, you will also need to obtain a sales tax permit and file a return each quarter. If you’re a coach, consultant or creative and sell books, t-shirts, or mugs then you will most likely need a tax permit. Each state has their own requirements so visit your state’s comptroller website to determine if you need to get one. If you live in Texas go here if you need a sales tax permit.
- Forgetting to pay Federal taxes on employees. If you have someone who is helping you grow your business and they are working for you exclusively, they are an employee and NOT a contractor. You are required by law to pay him or her as an employee and to deduct the appropriate federal taxes plus set up a tax account for your company. You will likely need to file Form 940 and 941. Your accountant can help you get everything set up.
- Not filing your Franchise Tax fees at the end of the year, if you’re required to do so. In the state of Texas, if your business is structured as an S CORP or CORP you will need to file an end of the year state franchise report. Normally franchise fees are not owed unless you earn more than $250K in income. Even if your fee is $0, you still have to file a report. Franchise tax calculation is based on the net worth of capital held by the business. Please check your state comptroller’s website for requirements. For Texas businesses visit here: http://comptroller.texas.gov/taxinfo/franchise/
- Not getting an EIN (Employer Identification Number). Think of it as a social security number for your business. EINs must be used by most business entities–corporations, partnerships, and LLCs. Even some Sole Proprietors will need an EIN if they intend to hire employees. To decide if you need to get an EIN or to request one, you can visit the IRS to learn more.
- Not opening a business account. When you are just getting started it seems easier to just start depositing everything to your personal account so you have some operating expenses. DON’T! This is known as commingling funds. Keep your business and personal accounts separate. All expenses for your business should be deducted from your business account. The main reason you should avoid commingling funds is to prevent creditors from being able to get through the corporate protection you set up for your business. There are also tax implications. Here’s a great article that explains why you shouldn’t do it and what tasks fall under this description. Don’t walk, RUN, to your bank or your local credit union to set up a business account today. Plus it’s a great way to start a business relationship with a banker.
- Not keeping track of any personal funds you put into the business. So you transfer some money into your business account until a client pays you, as many entrepreneurs do, but you don’t notate it. MISTAKE! Every time you deposit funds make sure you note it as a deposit from your personal funds and not income from a client. The IRS doesn’t know the origin of cash into your account unless you denote it. A year or two from now you won’t even remember where that deposit came from and if you ever get audited you’ll want to be able to answer this question or you may end up paying even more taxes.
- Not keeping good records on all income and expenses. Use a good system for logging this information. Trust me it will make your taxes easier and give you a good way of looking at your profit and loss statements every month. It can also be a great way to set goals and look at the financial health of your business. A great option is to buy an application like QuickBooks Premier (a one-time $300 software purchase) instead of paying for cloud-based systems which usually end up costing more in the long run.
I hope this post helped you to understand the importance to taking care of the accounting and financial details of running your business. If you set your business up correctly from the start, it will make sure that you can grow a solid and sustainable business so you can focus on doing the work you truly love.