By Lauren Rosson, Thrive Outside Consultant and CPA at Rosson CPA
Every business owner knows there’s no room for costly mistakes. Counting down from number five, avoid these mistakes to prevent financial loss in your business:
5. Mixing Personal and Business Finances – This is an absolute must: create a business bank account. Do not mix your business and personal bank accounts. That doesn’t mean you can’t ever take money out of your business for personal expenses, just don’t pay for your personal expenses with business funds. Simply stated, if you need money to pay your personal expenses, write a check from your business account and deposit it into the personal account. Don’t start writing checks from the business account for your groceries, utilities, etc.
Your accounting records are much easier to maintain if you have separate bank accounts. And with that being said, always make sure you are reconciling your bank account at the end of each month. A lot of business owners use accounting software such as QuickBooks, which is fine. This software allows you to download the banking activity into the software, but don’t stop there. The final step is to reconcile business bank accounts to the bank statements. Every year I work with new clients who don’t reconcile their bank accounts and upon reviewing previous years’ information, we find that previous deductions were missed because the bank accounts were never reconciled. You might discover that customer deposits have bounced too, which could result in uncollected money. There is a simple solution to this problem: make sure the reconciliations are complete and done on a regular basis.
4. Choosing The Wrong Business Formation and Structure – Choose the formation and structure that is best for you and your business. There are different business structures to choose from. The most popular consist of sole proprietor, partnership, corporation and LLC. There are some additional ones to that might be of interest to you.
Investigate and learn the advantages and disadvantages of each structure. Don’t just listen to your friend, relative or neighbor. Find the one the meets your situation and end goal.
There are two key people who you might want to engage to help with your decision: an attorney and accountant. In addition to its’ different requirements, each structure has a different taxing obligation.
There could be two identical businesses, such as two electrical contractors; one might be an S corporation and the second might be a LLC. From the outside looking in, it might be difficult to understand why one formation was chosen over the other. Hopefully each owner selected the correct structure for their individual business. It is key to know how the entity structure you choose will affect your taxes and obligations.
3. Missing Deadlines – Make sure you know all the deadlines for your business. Every business owner has different deadlines depending on their business and business structure. Business structure refers to the type of entity of your business, such as sole proprietor, partnership, Corporation (C or S) or even a LLC. Each has different deadlines and due dates. Make sure you are aware of when you are required to submit information because the penalties and interest can really hurt a business’ cash flow. An accountant can help you plan for due dates, but you should still be informed about your requirements.
Other deadlines include payroll returns and payments, sales tax returns and payments, excise tax returns and payments and the list continues.
Stayed tuned for the second part of this post where Lauren will share the final two ways to avoid costly mistakes!