Are you an entrepreneur starting a new business in Vancouver?
We meet with many local business owners who have so much creativity, drive, and passion for their new venture — it’s inspiring! However, not everyone puts enough consideration toward the financial and legal aspect of their business.
From business entity selection, audits, taxes, payroll, bookkeeping, deadlines, and more, there is a lot to understand and do! We’re here to help. This guide will help you start the financial side of your business on the right foot. By laying a strong foundation, you’ll avoid headaches (and fines) in the future to set up your new business for success.
There are a few important legal matters new business owners need to take care of right off the bat. The goal it to legitimize your business and make sure you’re operating legally in the state of Washington.
Determine your legal business entity
It’s important to choose the most advantageous business entity type for your new company. How you classify your business will affect taxation and flexibility of ownership.
Depending your goals, there are different options available, such as:
- Sole Proprietorship: Sole proprietorships are a good choice if you plan on working alone. However, this type of entity offers a lot of risks, as you’re held liable for any liabilities the proprietorship suffers.
- S-Corporation: As an S-Corp, the income and losses of the business are divided between all stakeholders and pass through to their personal income taxes.
- C-Corporation: As an C-Corp, you’ll be a separate taxable entity from the business. This is the preferred structure if you’re planning on seeking equity investments.
- Limited Liability Company (LLC): Think of an LLC as somewhere between a corporation and sole proprietorship. Your responsibilities for liabilities as an individual will be limited, but you’ll have less paperwork.
Always consult with an attorney when making important legal decisions for your business — including determining the best legal classification.
Register with IRS and state and local tax agencies
Business must register with the IRS and receive an EIN. An EIN is necessary to…
- Apply for loans/business bank account
- Hire employees
- Rent an office
- File taxes
- Register with state and local revenue agencies
- And more
You’ll also need to register your business with your operating state(s) and local municipalities.
Establish separate bank accounts
Don’t make the mistake of using your personal bank account for your business. Not only will this make tax season more complicated, it makes it more difficult to decipher business vs personal expenses and get a clear view of your financial picture.
File for patents
If your new business is dependant on any intellectual property, it’s important to apply for a patent. Not only will a patent keep you safe from accusations of intellectual property infringement, it will help you secure financing if necessary.
Financing new business costs
You have a few options for determining how you will fund the startup costs of your new venture.
Procuring investor money is not always achievable or realistic for everyone. In these cases, a bootstrap funding method is often necessary. This could include…
- Personal savings
- Credit cards
- Borrowing from friends and family
Bootstrapping is a great way to get a new small business off the ground. You may need to keep it simple to start, working your way to more advanced forms of financing as you get on your feet.
Small business loans
A common method of financing a new startup is a small business loan. Since the terms of this loan often require you to start paying this money back right away, this type of financing is great for business that can turn a fast profit.
Equity fundraising involves selling company stock to raise capital. If this is an option for you, this is a good option as you limit your personal risk, on’t have to risk your own money, and avoid debt payments.
However, a big downside is you’ll be losing some control over your company, and potentially some decision making, as you sell more stock.
Tracking expenses the right way
Once you’ve established funding, you need to understand how to properly track and manage these business finances.
Establish organized bookkeeping
Poor record keeping is considered the cardinal sin of bookkeeping. If you don’t track and keep accurate records, you won’t be able to reconcile accounts, manage payroll properly, or track your accounts payable and receivable.
Every expense, no matter how big or small, should be tracked and categorized. Everything else flows from there.
Some important expense to pay attention to and record include:
- Business meals – Log the intent and members of the meeting on the back of the receipt. Remember, most meal expenses are 50% deductible. However, food brought into your office for all employees may be 100% deductible. Make sure you know and log the difference.
- Travel – The IRS considers personal vs. work travel different, so document these separate.
- Driving expenses – Track both the total miles for business and total overall miles. Your accountant can then help you make the proper calculation when writing off these expenses.
- Home office – Do you work from home? Keep track of all these home office expenses, and discuss with a CPA the most beneficial way to capture this deduction. The amount you can deduct is a percentage based on the square footage of your office relative to your space, or you can elect a standard cost per square foot.
Don’t let reconciling bank accounts get pushed to the back burner (or off of the stove completely!).
Reconciling your accounts is the process of ensuring the money leaving your business account matches the amount being spent. In order for your accounting to be effective, you must properly maintain your books and reconcile your accounts.
Failing to reconcile your accounts will compound over time and can can comes back to bite you when it’s finally time to untangle the mess.
Backup your financial data
There’s no excuse for not maintaining backups of important financial data. Whatever method you choose — whether it’s a cloud backup or physical copies — don’t play with fire by forgetting or failing to run regular backups of your financial information. You may need this data when it comes time to do taxes or when faced with an IRS audit.
Know how to properly conduct payroll
Whether you’ve hired a few employees or just want to start paying yourself, doing payroll right is absolutely crucial. Your responsibility as a business owner to conduct your payroll legally and on time.
There are many variables that can affect your payroll processing that you need to plan for. For example:
- What time of day does your payroll processor need all data to be entered
- What if payday falls on a weekend? Or a bank holiday?
- What if you forget to run payroll or make a mistake?
Then there’s the process of managing benefits, withholding payroll taxes, and taking deductions. Plus you need to track and analyze all these payroll expenses, including wages, payroll taxes, benefits, overtime pay, and office expense.
Consider hiring a payroll company to process payroll for your company — they are experts and will ensure your payroll is conducted properly.
Tax season happens every year, yet many new business owners don’t take the time to properly prepare and limit surprises. For instance, the two biggest tax planning mistakes we see with new businesses are…
- Not having sufficient funds left to cover tax payments.
- Not knowing key yearly tax dates, and running out of time to prepare relevant forms and submit them on time.
Though these are often innocent mistakes, they can cause a lot of headaches and issues. Partnering with an accountant who specializes in tax planning and preparation will easily help you avoid these types of problems.
Hire a trusted small business accounting partner
As a new business owner, you have a lot on your plate. Taking the time to learn this complex world is time consuming and tedious. Still, it cannot be ignored. Thankfully, you’re not alone.
At Opsahl Dawson, our small business accountants are here to help your business hit the ground running from a financial position of strength. Our team of experienced CPA will give you a clear picture of your businesses financial health and offer all the accounting services and expertise you need to be successful.
Whether you’re thinking of starting a new business or are already a few months in, our team offers the latest tools and technology, the best and most experienced CPAs in the area, and a partnership focused on your long-term success.