Saving wood for the winter.

Business accounting can be the last thing you want to think of when you start your business. But to stay in business, you need your ducks in a row. This article covers the minimum practical steps you need to do to start your business, money-wise.

(Disclaimer: I am in no way legally qualified to give advice for which you need to be legally qualified.)

Get a business checking account.

Separating your business income and expenses into a separate account is essential for an organized business, and makes things infinitely easier when tax time comes. It also makes it easier to track expenses – just use your business check card instead of your personal one.

I recommend U.S Bank as I know they have free business checking accounts, but others probably do as well. Check with your current bank.

Plan for the taxes you will owe.

Paychecks have taxes taken out and paid every month; the IRS expects small businesses to do this themselves, and they don’t want you to wait until the end of the year. You owe federal and state estimated taxes every quarter. At the end of the year you will also need to pay local taxes – in Portland, Oregon that includes the Multnomah County Business Income Tax and the Trimet Tax. Google will provide plenty of information on the topic of estimated taxes and your local tax laws.

For simple planning, put aside 1/3 of all your income (after expenses). For more complete planning, set up a spreadsheet that mimics the 1040 and put in your actual numbers as you earn money through the year.

Set up a minimal paper file system.

You need at least these three files: Income, Business Receipts, and Taxes for each year. Each January, create a new set of three files for the current year. If all your income is received online and you never get a paper check or invoice, you may not need the Income file. You do need to keep your business receipts, and separate them from your personal ones. You need receipts to back up any statements you make about your expenses if you get audited.

Optional/Advanced

Create an LLC

Being an LLC isn’t strictly required, but it gives you some liability protection. Either way, as a single person LLC you are still a sole proprietor and are taxed using the 1040 (income passes through to your personal taxes). You file the 1040 with Schedules C (business income or loss) and SE (self-employment).

Do NOT create an S-corp unless you have an accountant and are prepared to keep them.

Some accountants recommend an S-corp structure, but I’ve observed that the hassles of filing paperwork and paying yourself as en employee (think payroll taxes) are not worth it for most small businesses. Normal sole-proprieter business taxes are simple enough that most people can do them without help. Becoming an S-corp elevates your paperwork requirements to those of a corporation and are usually too much for an individual. Having an accountant do your taxes each year can run you $1000 or more–plus, you need to oversee them and understand what they are doing. Keep it simple–stay a sole proprietor.

Understand the fundamentals of accounting and use real accounting software.

Read Radically Simple Accounting. It’s short, easy to understand, and it gives you the basics–and that’s all you need. Reading this will let you understand enough to make a chart of accounts in Quickbooks and keep track of your income and expenses.

Quickbooks: no, it’s not intuitive. No, it’s not fun. But it will make taxes far easier. If you can’t face Quickbooks, then find another double-entry bookkeeping program to use. Quicken and many personal money management programs are single-entry and are not sufficient for business accounting. (The difference will make more sense after you read the accounting book.)

Do not try to use it for everything. There are much better tools for estimating cashflow, sending invoices, and processing payments. Just use it for what it’s best at: accounting.

Set up a spreadsheet to track your monthly cashflow.

Tracking your cashflow is like balancing your checkbook, with extras like tracking how much tax you owe and how much you can expect to earn this month.

Your spreadsheet needs to answer these questions:

1. How much money did you start the month with?
2. How much do you expect to earn and spend this month?
3. Will your expected earnings cover your expected expenses this month, including taxes and paying myself? (and if not, what can you adjust so they do?)

You can also use your spreadsheet to project to future months, by entering known expenses and expected income. This will tell you what kind of income you need to earn to ensure you stay afloat.

Here is an example template of a cashflow spreadsheet. Each business is different; use it as a starting point to create a spreadsheet that works for you.