Starting a Business: Accounting 101
According to the Small Business Administration (SBA), only half of business start-ups survive more than 5 years (https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf). Success is never guaranteed, but risk can be reduced by applying some basic accounting and financial tips.
- Evaluate entity options. A sole business owner can easily establish a sole proprietorship, but other entity options such as limited liability company (LLC) or corporation may reduce liability exposure. Consider the tax and succession implications of each.
- Forming a general partnership sounds easy, but has legal and tax ramifications.
- Business and personal assets cannot be mixed. Establish a separate bank account. Avoid the temptation to run personal expenses through the business in order to generate a tax deduction. Don’t build your business on tax fraud.
- Leave yourself a financial cushion. Don’t pour 100% of your personal savings into the business.
- Avoid excessive debt. A rule-of-thumb is to limit total monthly debt payments (mortgage, credit cards, auto and student loans) to no more than 30-36% of your monthly gross income. Regardless of the business form, financial institutions are likely to require the owner to guarantee the debt. A business failure may lead to personal bankruptcy.
- Obtain proper insurance. Your personal insurance will not cover the business.
- If the business cannot run without a key person, consider a term-life insurance policy on that person. Term-life provides the most coverage for the lowest premium.
- Don’t quit your day job. The income stream and health insurance provide stability.
- Purchase an easy-to-use accounting software such as QuickBooks.
- Get expert advice. A well-trained accountant is more than a bookkeeper. They have broad business and tax knowledge and the ability to explain concept concepts.
Starting a new business is an exciting adventure. An accountant can’t guarantee that the journey will lead to treasure, but they can help you avoid the traps along the way.
For information on classes that could help guide you with starting a new business, visit morainepark.edu.