Small business owners are the backbone of our economy. I love meeting people who have the entrepreneurial spirit and hearing about their business ideas. If you’re thinking of taking the plunge into self-employment and being your own boss you may be wondering where to start.
As a serial entrepreneur, I’ve been an owner in eight companies. These steps will get you going in the right direction.
The first step
If you’re running a small business or just getting started with a small business, the first thing I do and recommend is to go to the bank and set up a separate business checking account.
Put any money you make into that account. And any expenses you have to pay should be paid out of that account. When you subtract your expenses from your income, you can easily see what your profits are.
When you sign up for a business checking account, you’ll get a debit card that you can use to pay for business expenses. If you’re responsible and disciplined, I would sign up for a credit card for your business as well. If you’re going to be spending money anyway on things like online services, travel expenses, office expenses, inventory, you might as well earn some credit card rewards.
Do not go into debt to run your business! The same rule applies to having a personal credit card – if you can’t pay your bill on time or don’t have the discipline and responsibility – stick with the debit card. Never put your personal finances at risk by going into debt with your business.
Don’t forget about your taxes
You have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Estimated tax payments are made on a quarterly schedule established by the IRS. Generally you should sock away about 25% for taxes.
For example if you make $2,000 profit every three months, you’ll need to pay around $500 quarterly for taxes. Consult with a tax professional, because any missed quarterly payment will result in penalties and interest.
If you keep a separate checking account and have a separate credit/debit card for your business expenses, the information gets much easier to track. Your credit card and bank statements have all of your business transactions listed.
How to organize your paperwork
As I said the easy way to know how much you owe in taxes is to look at the balance in your business checking account – your income minus your expenses.
But at the end of the year come tax time, you’ll need an accurate number. To figure out what that number is, use some tracking software.
QuickBooks is commonly used by accountants keeping the books for small businesses. My wife kept our books using QuickBooks when we started one of our companies. Later my father-in-law started keeping the books. We had to send him to an online class to learn the software. QuickBooks is very powerful but it has a steep learning curve.
FreshBooks is another online accounting software you can try. Don’t let the word accounting scare you. FreshBooks is built for small business owners like us. It’s easier to use than QuickBooks.
Both have free 30-day trials. I would suggest signing up for both and spending an hour with each of them to see which one works best for you. They have the ability to import your bank and credit card statements, which will cut down on the time you have to spend inputting data.
What’s most important is to add regular bookkeeping to your schedule. Just like with a family budget, to make it work and be successful keep your information updated. Try to block out 30 minutes a week where you can sit in front of the TV with your laptop and keep your account up-to-date.
Where should I store my paperwork?
I keep it super simple – I have an inexpensive plastic box that holds hanging file folders. Each file folder is labeled. You might have a folder for
- office expenses
- signed contracts
- credit card statements
- bank statements
- checks received
- legal documents (LLC, state business registration, etc.)
Don’t overcomplicate it. All you need is a box and some folders.
How long should I keep receipts and paperwork?
Keep receipts and paperwork for seven years, because of the potential for an IRS audit.
The IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error are identified, the IRS will not go back more than the last six years.
The IRS has all kinds of different time limits varying between three to six years for recommendations on keeping your paperwork. The safe bet is to keep your personal and business-related tax information for seven years.
I keep mine forever. That doesn’t mean I have boxes of my utility bills from ten years ago, but I keep my tax returns, summaries, and other important purchases I think might be of value.
If you scan in all of your receipts, store copies of your bank and credit card statements, electronically, you won’t need physical boxes in your attic to store information.
Stay out of debt
My most successful business I started with a $7 domain name. It went on to become a 7-figure/year business.
There are a lot of success stories about people who finance their company with:
- small business loans
- credit cards
- 401k loans
- home equity lines of credit
What you won’t hear are the stories of the countless other people whose business failed, and their personal finances ruined.
According to the Small Business Association two-thirds of small businesses make it past the two-year mark.
The odds are 33% a business will fail. Those are pretty bad odds if you’re taking out a bunch of debts to finance your dream.
Start small and grow slowly. Use some of your savings if you want to, but stay away from debt.
When should I set up an LLC?
When you start making more money and see your business going for the long term, then think about forming an LLC to protect your assets.
If you don’t own anything, you’re not likely to be sued. You can’t squeeze blood from a rock. But if you own cars, have equity in your house, some investments, and your business is growing – it’s time to incorporate. Separating the business and personal finances with an LLC helps protect you.
How long until I succeed?
I can’t speak enough about the benefits of owning your company. But I won’t sugarcoat it – it’s very hard work and long hours. But the payoffs can be huge and can be well above what you can make working for someone else.
Make sure you’re getting into a business you’ll love for a long time. Talk to other people who run a similar business and ask for advice. Most people (including me) will be glad to spend time with you and answer your questions.
You’ll find a common theme among successful business owners – they didn’t start their business to chase money. The people who do ultimately fail because they hate what they do. It’s no different than working a job you can’t stand waking up going to.
If you love what you do, stay out of debt, and get expert advice and follow it – the money will come.
Do you have a question on starting a small business? Please leave a comment below.