Quick Tips for New Business Owners

Starting a business? Here's a list of do’s and don’ts to ensure you have good records for running and measuring your business, as well as satisfy IRS requirements:

DO:

1. Keep good records. From an bookkeeping/accounting perspective, this can be accomplished with other-the-shelf software that’s relatively inexpensive to purchase (e.g., QuickBooks, PeachTree, etc.). Talk to your CPA for their input. If you do not keep adequate records, the IRS has great latitude in “reconstructing” your income for tax purposes and disallowing what they deem to be excessive deductions or losses.



2. Open a separate checking account for the business. All cash receipts and other income (e.g., credit card receipts, checks, etc.) generated by the business should be deposited into a bank account that handles only the business activity. Likewise, all expenditures should come from this account.


3. Dedicate a separate credit card(s) for the business. For many new and/or small businesses, you may not have been in business long enough to establish credit. That’s O.K., simply identify one or more credit cards that will be used exclusively for business purposes. DO NOT use any credit card designated for business for any personal purchases.



4. Keep your receipts. This doesn’t mean in a large box that you pass to your accountant at year end for your tax return, this means in a reasonably organized fashion. Credit card statements and bank statements are not sufficient documentation of your business expenditures. Even if you use accounting software such as QuickBooks, PeachTree or something else, the fact that you spent money at a Staples doesn’t mean you bought office supplies, it could have been furniture or computer equipment that needs to be capitalized and depreciated. Hotel receipts are very important to keep because they break out charges separately for means, room charges and other charges. These are all treated differently for tax purposes, so keeping receipts is important.



5. Cash contributions and withdrawals from the business. When you startup your business, you’ll need startup funds. Deposit any such funds into the separate bank account discussed above and then use that account to pay all business-related expenditures. If income from the business is not sufficient to meet all of your operating expenditures, add additional funds to the business account by depositing additional checks from your personal account into the business account. If there business is operating profitably and builds up surplus funds, periodically issue a check to yourself (this is commonly referred to as a “draw”) from the business account. Never pay personal expenses through the business account as a means of distribution profits to yourself.



6. Keep a mileage log. If you maintain adequate records, business use of your car and other expenses (e.g., insurance, maintenance) may be deductible. If you’re in a sales, consulting or other business, that requires use of a personal vehicle, keep a good mileage log of your business miles. A mileage log book can be picked up at an office supply store or you can create one for yourself. You should record the date, mileage and business purpose for each business trip. There are some key points to be aware of regarding deductions for mileage, be sure to talk to your CPA about what’s deductible, what’s not (e.g., commuting) and/or if you maintain a home office as your primary work location.



7. Separate phone & utilities. If you’re running your business from your home, you should have separate phone line(s) installed that are used exclusively for business purposes. Same applies to cell phones. If your house has only 1 phone line, the IRS will treat it as personal. Of course, you could go through and highlight the business-related long-distance charges on your personal phone bill, but it’s generally more cost effective to simply have a dedicate line(s) installed. If you have a separate structure on the property that you use exclusively as your office, you should have separate utilities run to it. Have a separate cell phone for your business. Not only does this allow easy identification of your business use but also gives you a mechanism for being “off” during evenings and weekends if you so choose. The downside is that you may need to carry two cell phones during the day.



8. Insurance. Of course you should carry the proper liability coverage for your business, however, in addition, if you have employees regularly drive your car or other business vehicles, be sure your insurance company knows. You’ll pay more for business insurance coverage than personal coverage, but the alternative is having a claim disallowed because your policy doesn’t cover business or employee use of the vehicles. Same applies to informing your insurance carrier if you see customers/clients at a home office.



9. Register with local authorities. Be sure to find out what the local rules are for registering your business. Even home-based businesses typically have registration requirements with the local municipality. The registration fees are usually minimal but failure to comply can incur interest, penalties and other sanctions you business.



10. Make a business plan. Many new business owners think this is not necessary or only required if you’re looking for external funding. However, it’s a very useful exercise even if you only used for internal purposes. It forces you to think through various aspects of starting-up and running a business including developing your product or service, marketing, revenue goals, etc. You should revisit your business plan at least once per year as it will serve as benchmark measure your progress toward meeting goals.



11. Choose an appropriate entity type. Business entity selection is an important first step in setting up a new business. Liability protection, taxation, regulatory requirements and many other factors influence the choice of entity. Sole proprietorship is the simplest form in which to operation and a corporation is generally the most rigid, but there are other entity types that may be relevant for you.



12. Technology. You’re more than likely going to run at least some parts of your business on a computer. Be sure that the data on the computer is backed-up regularly with a copy of the back-up going off-site on a regular basis.

1. Comingle business and personal funds. Never use your business accounts (checking, credit card, etc.) for personal purchases. Always move personal money into or out of the business accounts by check in lump sums and infrequently if possible. Use the memo section of the check to note whether it’s a “capital contribution” to your business or a “draw” from it.



2. Fail to keep records. As mentioned in #1 in the “Do’s” section, the IRS has great latitude in adding income and/or disallowing deductions if you fail to keep good records of your business. I have never once seen a case where the taxpayer liked the IRS’s reconstruction of their income!



3. Try to do it all. You’ll be very busy trying to run your business. Identify those things that you do well and those things that you don’t. Focus the bulk of your efforts on those core things that it takes to run your business and find outside resources to help with (or do) the rest.

September 14, 2007