4 things all new business owners must do

This article has been brewing for as long as I have been offering accounting and tax services to business owners. The four essential aspects for every new business owner to focus on is a crystallization of the questions I hear in my practice, and yes, the mistakes I see a lot of new owners make.

1. Know and understand your legal and tax structure

The subset of questions I receive daily are-if I am a sole proprietor-how do I pay myself? I am an LLC-how do I report my income for taxes? Can I put myself on payroll as a partner in a partnership?

Knowing and understanding what your business and tax structure entails is crucial in avoiding potential costly mistakes, especially from a regulatory and tax perspective. The common pitfalls to avoid are to not report your single member LLC income because you thought it requires a separate return (by default it doesn't), putting yourself on payroll as a sole proprietor (you can't), or not putting yourself on payroll as an S Corp owner/shareholder (you have to).

It is best to have an attorney and an accountant on your team from the start so that you can run those questions by them before you make decisions out of ignorance that will cost you.

2. Maintain Proper Accounting Records

It may come as no surprise that I am a big fan of a proper accounting system and not a huge fan of a proverbial spreadsheet. I know that software like QuickBooks can be intimidating but believe me, it will serve you well in the long run to get the system going from the very beginning. I wrote a whole article on the importance of a proper accounting system, but fundamentally, it is there for you to run your business successfully. The downstream effect of having proper records are proper tax reporting, proper tax planning and regulatory compliance.

It may seem daunting at first but with proper guidance and training from a trusted professional, business owners are able to do it themselves. I usually recommend some sort of regular oversight but an accountant or a bookkeeper if you insist on doing your own books in the beginning. The investment you make in your accounting system, and yes eventually accountants an bookkeepers, is ultimately an investment in your peace of mind and a building block to your business success.

My personal recommendation would be to stay away from QuickBooks self-employed version and go with either QuickBooks Simple Start or Wave. Xero is a good option too, even though I personally have no experience with it, and I really hated FreshBooks and wouldn't recommend it to anyone. An accounting software that doesn't have bank reconciliation as it's basic function is no good in my opinion.

3. Use Separate Bank Accounts

Separating your business and personal finances not only simplifies recordkeeping but may also help protect your personal assets. If your company is organized as an LLC, for example, co-mingling funds rises to what is called "piercing the corporate veil" which voids your legal protections and may jeopardize your personal assets in case of a lawsuit.

4. Understand and Fulfill Tax Obligations

Navigating the tax landscape is a fundamental part of running a business. Understanding your tax obligations, including sales and payroll taxes, will prevent costly penalties and ensure compliance.

• Sales Tax: If your business sells goods or services, you may be required to collect sales tax. Register with your state’s tax agency, collect the appropriate sales tax from customers, and remit it to the state. Here accurate sales records also come into play-make sure you have mechanisms which allow you to accurately track your sales so that you don't inadvertently under- or overstate you sales. State sales tax is probably one of the most difficult concepts to navigate especially if you sell in multiple states. Each state has different rules as to what is taxable. There are great tools out there like Avalara, TaxJar and many others than can help you navigate the everchanging state tax landscape and stay compliant.
• Payroll Tax: If you have employees, you need to withhold and pay federal, state, and local payroll taxes. This includes Social Security, Medicare, and unemployment taxes. I recommend to get a payroll service, even if you only have one employee-the penalties related to improper payroll tax reporting are staggering and will far outweigh your investment in a payroll service.
• Estimated Taxes:

The IRS requires individuals to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. This typically applies if:

You are self-employed or have income that is not subject to withholding, such as interest, dividends, alimony, capital gains, prizes, and awards.

The amount of income tax being withheld from your salary, pension, or other income is not sufficient.

You can avoid penalties by making sure you pay either:

• At least 90% of the tax for the current year, or
• 100% of the tax shown on your prior year's return, whichever is smaller.

Here again, your proper records of revenues and expenses are paramount. While you certainly can avoid penalties by paying 100% of your prior tax obligation to avoid penalties, it's equally important to make tax projections and plan for current year tax obligations which are impossible to do if you don't have a view on your actual income.

Starting a new business is an exciting venture, but it comes with a host of responsibilities and considerations. For new business owners, understanding and managing legal and tax obligations from the beginning is crucial for long-term success.