You have a great idea for a brand new online business, and you are well on your way to making your dream into a reality. You set up an online store, purchase inventory, advertise, and start selling to customers...and you probably wonder when is the right time to take care of bookkeeping, accounting and tax. Well, our answer is now!
Whether you are an eCommerce store, retailer, a technology startup or a services business, it is important to set-up your accounting processes and strategy as early as possible in your business' life, so you can form and operate your business in a financially beneficial way. In this blog, we set-forth our 5 accounting tips for starting a business.
1. Carefully Choose the Legal Entity for Conducting Your Business
There are a few options to manage a business when it comes to its legal form: an LLC, a Corporation or a Partnership. You may also choose to not incorporate an entity at all and conduct your business directly, under your individual capacity.
One of the most important decisions to make before starting a business concerns its legal form. This decision can impact your business from a few perspectives:
- From a legal perspective, the legal form of your business dictates your personal liability for the business' debts and liabilities and the process of making decisions on behalf of your business.
- For instance, if you choose not to incorporate a legal entity for your business, you will be personally liable for any debts or liabilities associated with your business activities. Incorporating an entity such as Corporation and an LLC will protect your personal assets from potential claims, under the so-called 'Corporate Veil'.
- The legal form of your business may also affect its ability to raise venture money and get financing, and other administrative obligations.
- For instance, most technology startups choose to incorporate as a Corporation. This is typically a requirement of tech investors or venture capital funds, before agreeing to invest funds in the startup. On the contrary, small businesses that do not expect external equity funding will typically incorporate as an LLC, a more flexible form of incorporation. Certain independent contractors may even decide not to incorporate an entity at all.
- To read more about choosing to incorporate as a Corporation or an LLC, click [here](https://www.finaloop.com/blog/corporation-or-llc).
- From a bookkeeping perspective, the legal form of your business affects the way you record transactions, and the structure of your chart of accounts.
- From a compliance perspective, the legal form or your business will determine your registration obligations with the State you incorporate or operate your business and with the local government (counties and municipalities).
- From a tax perspective, the legal form of your business sets its default tax status. For example, if you form your business as a Corporation, its default tax status is a C corporation, resulting in double-layer of taxation. If you form your business as an LLC, its default tax status is of a pass-through - either a disregarded entity or a partnership.
2. Consult with a Tax CPA Regarding Your Business Status for Tax Purposes
Your business status for tax purposes affects the compliance and tax obligations applicable to you and to your online business. As was noted above, your legal business form sets the business' default tax status. In most cases, the business can elect to have a different tax structure, as further explained below.
In case you choose not to form a separate legal entity for your online business, you will be considered a Sole-Proprietor for tax purposes. You will report your business taxable on Schedule C of your Form 1040.
If you form your online business as an LLC, and you are the sole owner, the business will be considered a disregarded entity. In this case, you will still be considered a Sole-Proprietor and report your business taxable income on Schedule C of your Form 1040. Under certain conditions, you may also elect your LLC to be taxed as a C Corporation.
If you form your online business as either an LLC and it has more than a single owner, or as a partnership - it is a partnership for tax purposes. The partnership reports its taxable income on Form 1065. The partnership by itself will not pay tax on its income. Rather, the income of the partnership will flow-through to the partners and taxed at their personal level. Under certain conditions, you may elect your LLC or partnership to be taxed as a C Corporation or an S Corporation.
If you form your business as a Corporation, it is considered a C Corporation for tax purposes. A Corporation is a separate entity and a separate taxpayer. The Corporation will report its taxable income on Form 1120 and pay Federal and State tax. A second layer of tax is due when you, as a shareholder, receive a dividend from the Corporation. Under certain conditions, the Corporation may elect to be tax as an S Corporation.
As shown, legal form and business structure affect the tax treatment and the required compliance of your business. The time-period following incorporation for making entity classification elections is limited. Dealing with these issues early in the game is important and valuable.
3. Set-up Your Accounting Processes Sooner Rather Than Later
You set up a business bank account, started an online store (Shopify, Amazon, Woocommerce and alike) and integrated payment processors (Stripe, PayPal, Shopify Payments, Amazon Pay or others) – now, it is time to set-up your bookkeeping and tax processes.
First, you need to set-up your bookkeeping and accounting processes. Bookkeeping is the process of recording and classifying income and expenses, and reconciling them with bank and credit card transactions. There are several options for conducting your business bookkeeping: (i) you can perform bookkeeping yourself using Excel or a DIY bookkeeping software such as QuickBooks or Xero; (ii) hire traditional bookkeeper services, or (iii) engage with a modern platform that performs bookkeeping for you and present your financial information on personalized dashboard (like Finaloop). Your ongoing bookkeeping work will be the base for your business tax planning and tax filing.
For the preparation and filing of your business tax returns, you can engage a tax CPA. Finaloop, offers both bookkeeping and tax services under one roof.
If you have started your business a few months ago or even a year ago, and did not yet set-up your accounting processes, this should not be a big concern. Many of our customers approached us some time after they formed their startup, eCommerce, retail or online business, and we could help them catch up on their accounting and bring it up to speed before tax season.
4. Choose Financial Apps that Integrate With Your Bookkeeping Solution, or Vice Versa
You and your team should be focusing on growing your eCommerce business, brand or startup. Setting up scalable financial operations will help you channel energy to your core business.
To achieve that, it is extremely important that your accounting solution will have strong and, preferably, native integrations with your preferred financial applications.
Your business derives financial information from many different sources: invoicing and payment systems (apps like Stripe, Invoiced, PayPal and AndCo), vendor management systems (apps like Bill.com or Tipalti), payroll services (Gusto JustWorks, Expensify and others) and Inventory management platforms (e.g., StitchLabs). Instead of you manually extracting and combining these sources of information, you should attempt to have a bookkeeping service that consolidates all these pieces of information in a single place, and provides you the data you need to run your business.
5. Keep A Record of Your Financials
Are you a startup looking to grow with investment or an online business seeking financing? You should take into consideration that most investors and lenders will ask you for your business' financial information. It may become very helpful to have the following available:
- Balance sheet for the end of a fiscal year
- Profit and loss statement for the end of a fiscal year
- Cash flow statement
- Bank statements for the end of fiscal quarter and years.
- Income tax returns
- Payroll documents, including W-2
In this regard, note that the IRS requires that records that support an item of income, deduction or credit shown on your tax return will be kept and available by the business until end of the period of limitations for that tax return.
Thankfully, today everything can be stored in the cloud, making organizing and keeping documents much easier and safer. Many use Google Drive or DropBox to store their financial records.
As an online business leader, you want to focus on growing your business, not on accounting and back-office tasks.
We started Finaloop to help people like you to navigate their bookkeeping and tax tasks, so you have more time and mental capacity to focus on what matters the most. We offer a reliable bookkeeping, accounting and tax full service, integrating with the most popular eCommerce digital applications. Setting up scalable and streamlined financial operations, Finaloop will help you free up time, while being able to stay compliant with your tax obligations, and make data-driven financial decisions for your business.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.