Starting a new business? You’ve got all sorts of ways you can complicate your accounting and your taxes. But if you want to keep your small business finances clean, lean, and low-cost, follow these five tips:
Accounting Tip #1: Don’t Incorporate
Yes, incorporation may reduce your taxes (in same cases). And, true, incorporation typically reduces your legal liability. But unless you really need a standard, old-style corporation, you should keep your accounting and your taxes simple and more straightforward by staying “un-incorporated.”
Here’s why: Incorporation means annual corporate income tax. And even if you’re the only person working in the business, incorporation means annual and quarterly payroll tax returns. That’s just too much paperwork for your new business.
By the way, if you are concerned about your legal liability, know that you have another great option for protecting yourself. You can set up a limited liability company. You should get the same legal protection. And if you’re a one-owner LLC, you’ll be able to treat your business just like any other sole proprietorship, which means no corporate income tax returns and maybe no payroll tax returns.
Accounting Tip #2: Setup a Simple Accounting System
If you own and operate a business, you really do need a simple accounting system. Don’t fool yourself. Invest the time (an hour?) and the money (about $100?) to get a simple accounting system like Quicken Home & Business or Microsoft Money Home & Business.
You’ll need an accounting system to track your profits anyway. That’s actually the law. Furthermore, by starting out with a good accounting system, you’ll much more effortlessly capture tax deductions that will later save you money.
Accounting Tip #3: Use a Separate Bank Account for Your Business
You don’t want to co-mingle your personal and business accounting. Get your business its own business bank account. Use that account for your business’s deposits and for your business’s payments.
Only bad things happen, accounting-wise, when you pay personal expenses out of your business account and business expenses out of your personal account. For example, you’ll miss tax deductions. You’ll inappropriately count personal expenditures as business expenses. And you’ll lose your ability to precisely measure how much money you’re making or losing.
Accounting Tip #4: Make Quarterly Estimated Tax Payments
One of the responsibilities you shoulder when you become self-employed is paying quarterly tax payments using the 1040ES form (both form and instructions are available from www.irs.gov). But this makes sense.
Someone who is an employee doesn’t have to worry about paying income taxes on their wages. Their employer automatically deducts taxes from their payroll checks and then remits that money to the Internal Revenue Service.
But you need to pay the income taxes on your business profit. And you should do so in quarterly chunks as the year progresses: one-quarter of your tax bill on April 15, another quarter on June 15, another quarter on September 15, and, finally in the next year, the last quarter on January 15.
In general, you’ll owe a combined tax of about 20% to 25% of what your business makes. So you want to use your accounting system to regularly estimate your profits and then you want to set aside 20% to 25% of that profit in a savings account for later paying your income taxes.
If you make $80,000, for example, you’ll owe $16,000 to $20,000 in tax. And you would pay $4,000 to $5,000 a quarter in estimated taxes.
By the way, the big crisis you want to avoid here is not a penalty. That’s the least of your troubles, in a sense, if you don’t make quarterly payments.
The big crisis is having April 15th roll around and then finding you need to pay a surprise $16,000 or $20,000 tax bill. Ouch.
Accounting Tip #5: Don’t Put Personal Assets into the Business
And a final tip for keeping your accounting clean, simple and low-cost: Don’t put personal assets like cars or home computers into your business and then think or try to write off the purchase.
The accounting rules for expensing these kinds of “easily-used-for-personal-stuff” assets are cumbersome. You’ll find the rules hard to follow and easy to break. And if your accountant charges for the extra work he or she needs to go to on your tax return, the money you save is embarrassingly modest.
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As a small business, you’re probably already aware of the importance of your website as a great marketing tool. However, if you want to increase traffic and potentially generate more sales, you might have also thought about doing some advertising. The question is, do you go online or stick with the tried-and-trusted medium of print?
Online Vs Print Advertising
Although expensive, print has traditionally been one of the most effective mediums in which to advertise products or services. However, it looks like the internet is now taking over. The internet has many advantages over print advertising; it is cheaper, reaches a larger audience and can be more versatile. This makes it ideal for small businesses that want maximum exposure for a minimal cost.
Google and Online Advertising
Google are the undisputed leaders of online advertising, pioneering the ‘Pay Per Click’ method of advertising. This advertising method allows small business to explicitly target their ideal clients and – as the advertiser only pays for the customers who have actually clicked on their online advert – it is also an affordable way of advertising for smaller companies. However, online advertising certainly doesn’t end with Pay Per Click.
Advertising on Social Networking Sites
Arguably the most popular websites in the world today, social networking sites such as Facebook and Myspace are also massively popular with advertisers. They offer a huge audience of young web users, rendering them ideal for advertising new music, films, beauty products and fashion.
Because they boast such potent advertising power, social networking sites are constantly looking for new ways to offer space to potential advertisers. Myspace is currently in the process of testing Community Builder, a new advertising platform that will maximise the potential of their advertising space.
Myspace Community Builder
Myspace’s Community Builder has been designed to let advertisers build and manage their own brand profiles on the site. MySpace had previously let advertisers promote their brands by featuring profiles on the site, but it had handled both the creation and the updating of these profiles on behalf of the advertisers.
The site’s Community Builder platform is different, as it will allow advertisers to have more control over their own profiles, allowing them to update content and features without Myspace’s involvement.
By making a Myspace profile for their products, advertisers can attract Myspace users to visit them online and perhaps even add their product or service as a MySpace friend. Having a Myspace profile for a product or service also allows Myspace users to interact with the brand by playing videos, entering competitions, and listening to songs.
There are a number of other websites who are keen to build on the success of internet advertising, so small businesses who are looking to advertise their products or services online will soon have more options than ever to do so.