Understanding your accounting and reporting requirements can be daunting for any startup owner. Compliance is time consuming, and mistakes can lead to hefty fines. This new business checklist will give you the framework necessary to educate yourself on accounting processes for startups and small businesses. Following these steps can help you launch your business on the proper footing.
The first step in any new business checklist is to understand what accounting is and why it matters. Founders without a business background usually need to sign up for a fundamental accounting course or hire a trained finance professional.
It’s critical to understand the two different methods of accounting and how they impact your business’s financial reporting. It’s also important to become intimately familiar with the three basic financial statements. Every business decision you make will require understanding and using these statements. You’ll use them to create budgets, forecast financial performance, and model different scenarios. Financial ratios such as operating margin, debt-to-equity ratio, and return on assets help you further understand the health of your business.
The next step is to understand the benefits and drawbacks of different legal structures. You’ll need both an attorney and a certified public accountant (CPA) well versed in the intricacies of the corporate tax code. Based on that advice you can decide on the appropriate legal structure and file the necessary paperwork. You’ll also need to understand the ongoing compliance requirements to maintain your business entity. If need be, put all the important reporting dates in your calendar.
One of the easiest ways to stay in compliance is to open a separate bank account and credit or debit card for all business transactions. Check with your local bank to see what documents you need. You usually need to bring your articles of incorporation or organization, employer identification number (EIN), and personal identification.
Once you’ve created a separate account, it’s time to purchase bookkeeping software customized for small businesses. Load all of your previous bank transactions, set up your chart of accounts, and start categorizing transactions. Make sure to have a CPA or tax advisor check any transactions you don’t understand. Never, ever “guess” when it comes to accounting issues. Those mistakes can lead to hefty fines from state or federal agencies.
Your software will let you produce and review your financial statements. Compare the results to past periods and to your budget targets. Use these numbers to enhance financial forecasts and communicate performance to management and investors.
You also need to be prepared for an audit, so keep your records organized and up to date. This makes the audit process easier and less intrusive.
Payroll can be tricky, especially when it comes to finding the right labor classification for your hires. Every new business checklist should include reading through the IRS 20 Factor test for guidance. Once you’ve classified your labor force, collect a W9 from contractors and federal and state W4’s from employees.
You also need to choose a payroll provider, set a payment frequency, and register with the appropriate tax jurisdictions. Any employee benefits need to be recognized by payroll since they will be taxed as well.
You’re also bound by state labor laws and workers’ compensation requirements. Each employee will need to receive a W-2 and contractors earning over $600 will receive a 1099 so they can file their taxes.
Your business will also have to file taxes. Work with your CPA to determine which form is required to file for your entity and its due date. Depending on your business entity, you may make multiple tax payments throughout the year. Ensure that you regularly set aside money to meet these obligations. For example, retailers are required to collect and remit sales tax. You may also need to pay annual “franchise taxes” for your business entity to be recognized in certain states.
If you have questions about tax obligations, ask your CPA. You usually will need that expert advice to evaluate tax treatment of any overseas holdings.
A new business checklist requires keeping track of many moving pieces. You need to understand how your business performance is represented in multiple financial statements. You need to establish a legal identity and the bookkeeping processes to track how you deploy capital. Tax compliance is critical and can be complicated depending on your industry and location. This framework should help you identity the key processes to get your business running and avoid some of the most common mistakes. If you follow these steps and rigorously analyze your financial statements, your small business will be ready to carve out its piece of the market.