Setting up a work-from-home business, whether it's selling your crafts or trying your hand at professional blogging, requires more than just making money. You also need to put into effect accounting processes to help track your earnings and expenses, or you could find yourself in trouble come tax time. The following guide can help answer some of your questions about the tricky financials.
How should you set up your business?
One of your first decisions will be how to set up your business structure. You have several options, but the two most common choices for a small business with no employees is either a sole proprietorship or a limited liability company (LLC). The deciding factor when choosing which to go with comes down to liability. If you are producing a product that could leave you liable for damages, an LLC is the best choice. For example, an artisan candy company could leave you liable if someone were to get food poisoning, so an LLC is the better option.
Should you separate your work and personal financials?
No matter how small your business, start on the right foot by keeping work and personal financial items separate. This means setting up a business bank account and routing all business transactions through this account before making a deposit in your personal account. You should also apply for an Employer Identification Number (EIN) through the IRS, as opposed to using your personal social security number. You don't need to actually have employees, but the EIN will help separate your work and personal financial life.
Is it really necessary to set up a bookkeeping system?
The short answer is yes. Although you could just save all of your receipts and income statements in a box and deal with it at tax time, you will be just making more work for yourself and increasing your chances of getting a tax penalty. Instead, start off on the right foot and put in place an accounting system. You can go with a computer program or you can just use a simple ledger – the trick is to pick something that you know you will use. Record all incoming and outgoing money. Also, keep a file of invoices, receipts, and payment stubs – preferably organized by month and type. Most businesses are required to pay quarterly taxes, which is much simpler to do every three months if your financial information is already organized.
When should you get outside help?
Many small business owners put off hiring an accountant until their business grows to the point where it is too hard to track everything on their own. A better option, though, is to consult with an accountant at the outset. An accountant can help you set up a viable bookkeeping method and apprise if you have any financial or tax laws that will apply to your situation. You can then simply meet with them once yearly when you file your taxes. By having an accountant from the beginning, you are more likely to avoid any pitfalls with the IRS or your state tax authority. Your accountant will also be familiar with your business, so they will be well-situated to take on more responsibilities if you need further services in the future as your business grows. Contact a local accountant for business consulting if you have more questions.