One of the biggest obstacles when I was starting out was accounting and everything that went with it. I went to design school not business school, so I knew what looked good, but didn’t know how to legally sell it and be recognized as a legitimate business. Luckily, long time personal accountant, Mike Brandt was available to take on a new business account and help guide me to establishing Pixie Chicago as a documented business.
He was also kind enough to answer my questions to help out other small companies and wrap their heads around this whole accounting thing we all dread doing every month.
What form of business entity should you establish?
The form of business really depends on the size of your business and any personal exposure you might have. Generally, starting out if your annual sales are less than $75,000 you can be a sole proprietor. Then as your business grows you should look at incorporating either as an S-Corporation or a LLC.
What are the most important things to have when starting a business?
You want to show the IRS that you are in business to earn a profit and not just writing off losses from a hobby. The best way to show this is to apply for a federal employment identification number (FEIN), get a bank account with your business name, insurance for your business if needed, letterhead with your business name & address, a city business license and other things of this nature that show you are a business. This will help you deduct any losses you might incur in the early years.
How often would you recommend small businesses update their accounting?
This would depend on the amount of business being done, how many business transactions you have. Every 3 months would give the owner a pretty good idea of how their business is performing. If the business generates a lot of activity, you should update your records every month.
What is the best way to pay yourself or an employee out of your company?
As a sole proprietor, you can draw money out as needed. Since you report your company’s net income on your personal income taxes, there is no need to formally set yourself up on payroll. If you incorporate, you have to pay yourself through payroll which involves paying income taxes -social security, federal and state. Anytime you have employees you have to pay them through payroll whether you’re a sole proprietor or incorporated. You could pay employees as independent workers however the IRS prefers everybody to be payroll employees.
When do you need to start paying estimated taxes?
I recommend paying estimated taxes once you figure your federal tax liability will be more than $1,000.
Advantages of Hiring an Accounting Professional (via Freelance Folder)
There are some definite advantages to hiring an accounting professional to take care of your business accounting needs. Having an accountant handle your finances can:
- Ensure that your bookkeeping is set up the right way, legally and practically
- Make things easier for you when your taxes are due
- Help you discover potential problems
- Provide a second set of eyes to eliminate math mistakes
- Reduce your tax bill by making you aware of all the deductions and credits that may be available to you as a self-employed person
- Give you pertinent advice customized to your specific situation
- Free up your time so that you can focus on tasks that are more central to the core of your business
Why Pixie Chicago uses an accountant vs. QuickBooks:
After signing up for QuickBooks, I soon realized it was a mistake. I still needed an accountant to answer my tax questions, it was too expensive, and it’s also quite complicated; filled with features that were not relevant to my company. When I found myself emailing Mike questions about QuickBooks and how to use it, I decided to narrow down my sources (and expenses) to only an accountant.
If you find a knowledgeable accountant, they should be able to answer business questions for you which QuickBooks obviously cannot as it’s just a software program. Mike was kind enough to provide Oh My Handmade Goodness readers with his email, if anyone is looking for an accountant or if they have specific questions feel free to contact him: Mike Brandt: firstname.lastname@example.org.
Do you have any other questions about small business accounting? Share them below in the comments!