Now that we have covered properly structuring your business and maximizing your tax deductions, it's time to focus on some financial matters. These include opening up your bank accounts, setting up a bookkeeping system and getting insurance.
The first step is to go to your local bank and open up your accounts. I suggest that you open three (3) separate accounts: an operating account, a tax savings account and a financial freedom (savings/investment) account.
Operating Account: This is your normal business checking account where you deposit business revenue (income) and from which you’ll pay your expenses. You may want to have laser checks printed for use with Quickbooks.
Tax Savings Account: One of the most painful parts of operating a small business is the reminder you get from your accountant (usually in late March or early April) that you owe federal and state taxes. In order to ease the shock and pain, I suggest you set up a tax savings account. Each month (or each week if you need the discipline) make a deposit into the account so that during the course of the year, you’ve accumulated a sufficient amount to pay your fair share (and no more) of taxes. A good starting point is to deposit an amount equal to 1/12 of last years tax obligation. If your business is growing, stay in touch with your C.P.A. concerning any increases you may need to make in the amount you are depositing.
Financial Freedom (Savings/Investment) Account: Each month you should deposit money into a separate savings account that I call your Financial Freedom account. The first goal is to accumulate enough to cover six months of your living expenses. If you are in debt, you can use this account to first accelerate down your debt).
Once you are out of debt and you’ve set aside 6 months of living expenses, you’ll use the accumulated funds to make investments that will allow you to become financially free. You should consider this account “sacred” in that you should never make withdrawals from it for any reason other than a particular investment. This account is the goose that will lay golden eggs for you. If you kill the goose by making withdrawals, if will never provide you with golden eggs.
A good rule of thumb is to set aside ten percent (10%) of the amount of your living expenses into this account. You may have to start with less and gradually increase it over time. Just imagine where you would be financially if you were able to deposit 15%, then 20%…..
Each bank has somewhat different requirements for opening a business checking account (very little other than photo I.D. is needed to open a savings account). Keep it simple and bring you entire corporate kit (certificate of Incorporation, stock certificates, EIN, corporate seal, etc. Most banks will ask you to sign a corporate banking resolution along with signature cards.
Often, the bank will offer a small business line of credit (secured by you personally) or credit card. You may want to accept the offer – just in case you have a cash flow crunch at some point. You may also ask for periodic increases in the credit amount, so that if a particularly good business opportunity presents itself, you have the capital you need. CAUTION: Always use credit judiciously, it can be your best friend or your worst enemy.
Ask if the bank has on-line banking. This can make book keeping and transfers from one account into another much easier.
The whole bank set-up process should take 45 minutes to an hour.
These days it’s a waste of time to have a manual bookkeeping system. The last year I used one (a decade ago) it took me over 40 hours to manually create a general ledger for my C.P.A. The following year I used QuickBooks and the same process to seconds. Don’t even think of getting started without book keeping software.
Quicken and QuickBooks are great programs. Both are easy to use (Quicken is a single entry accounting system- an electronic check book. QuickBooks is a true double entry accounting system.) Ask your C.P.A. which one is right for your needs. There are great easy to learn materials like “QuickBooks for Dummies” and the “Video Professor” that make it simple and easy to learn the program you choose.
Liability: All businesses should be properly insured for business liability. This covers things like injury sustained by a customer while visiting your store or office. Your insurance agent can advise you as to your needs.
Malpractice: Professionals must also have Malpractice Insurance to cover them for Professional Liability.
Note: If you are changing from a sole proprietor to a corporation or P.C., make sure you notify your carrier of the change in writing so that your coverage is properly changed over.Health Insurance: Health insurance is fairly easy to get these days for small businesses. They now have policies for associations and groups of one. Remember to complete your written medical reimbursement plan so that the premiums, deductibles and co-pays are legitimate business expenses.
In addition to the credit card that you may be offered when you set up your banking, you may want to get a separate card that you use for day to day business purchases (things like gas, office supplies, airline tickets and hotels).
I like the American Express Blue Card because at this time, there is no annual fee, you can carry a balance if you must, and the card has your company name on it. (This becomes useful when you have more than one company) You also get monthly statements and an annual summary to help you track and document your business expenses. (Both of these are available online).
If you’ve been operating your business on a “cash basis” –by that I mean you typically pay cash for things – you’ll want to get into the habit of reaching for the card for all of your business expenses. This prevents the problem of forgetting to reimburse yourself for business expenses and provides part of the audit proof tax records that you’ll want to keep. You can order the Blue card on-line at americanexpress.com. You should now have a way to track your business expenses and keep accurate records. In the next article I will focus on marketing your business.
Sincerely,
Drew Miles, The Tax Saving Attorney
To learn more about starting your own business and saving on your taxes, please see our Tax Planning page.