You’ve started a new business, now what?
You started a new business and registered it with the Secretary of State, congratulations! What next? There is a misconception that if you just open an LLC, register with your Secretary of State, and get an EIN then you are personally protected from all liability. That is a big myth. There are six things that are critical to protecting you and your business.
Operating, Shareholder & Partnership Agreements
The first thing that you should be doing is getting an operating agreement, corporate bylaws, or partnership agreement. The agreement that you draft and adopt will depend on the type of entity that you are. An operating agreement is for an LLC, corporate bylaws and the shareholder agreement are for corporations, and a partnership agreement is for partnerships. This document defines how your business operates. It lists who the owners are, defines who the decision makers are, lays out how the business will get capital contributions, and when it will get those capital contributions. You must have an operating agreement appropriate for your type of entity as part of protecting yourself and your business from a legal perspective.
I strongly suggest that you hire an attorney to draft your entity’s operating agreement. This is not something you want to do on your own or through Legal Zoom as this agreement needs to be custom tailored to your business. This document along with being compliant in your business and following all business formalities will help protect you personally from legal liability.
Employer Identification Number (EIN)
The next thing that you must do is get an Employer Identification Number (EIN) from the IRS. This is your federal tax ID number. You will need this to file your taxes, to open a checking account, and to stay compliant. Obtaining an EIN is a relatively simple process and costs nothing. Just head to the IRS website and follow the instructions. This is a critical step in securing your business.
You need to apply for and obtain a business license. This is a license that allows you to legally do business in the city or cities that you are operating in. This needs to be done for the city to assess property taxes on your business. Paying personal property taxes is one part of being a responsible business owner. A business license allows cities to track what businesses are operating within their borders.
A common question we receive is do you need multiple business licenses if you have multiple locations? The answer to that is yes. If you are in two different cities like let’s say in Colorado, I have a location in Denver and a location in Aurora, I need a business license in Denver and in Aurora because they are two different cities. If you have multiple locations in multiple cities, you are going to need a business license for each of those cities.
Business licenses are easy to set up. In most cases, you can do this online through the city’s website. It is something you can complete in less than half an hour and will likely include payment of an annual fee between $10 or $20.
Business Bank Account
Co-mingling of your business and personal finances sets you up for big issues in the long run. Opening a checking account strictly for your business is the easiest way to mitigate future problems. Same goes for credit cards or other financial instruments. If they are going to be used for the business, they should be set up under the business name using the business EIN. All your business income should be deposited into the business bank account as well. If you are receiving checks as payment for business services, ensure that the checks are made out to the business, not to you personally. Likewise, if you have business expenses, make sure they are being paid out of the business’ account.
How do you handle situations when your business is your sole source of income and you have personal expenses that need to be paid, for example the rent or mortgage payment for your personal residence? You will need to take a business distribution by transferring the money from your business to your personal account. Then pay your rent or mortgage payment from your personal account. You must take that step of transferring the money from the business account to the personal account before paying for your personal items.
Additionally, having a separate checking account keeps the tracking of business income and expenses much simpler. If all the expenses and income are being handled through the business account, you avoid having to sift through bank statements and highlight things that are personal or highlight things that are business to try to separate them out when it comes time to prepare your taxes or create financial statements.
Accounting software legitimizes your business. Staying up to date on the bookkeeping within your accounting software allows you to have monthly financial statements which are important for making sound financial decisions for your business. You will need accurate financial records to get financing, to know how your business is performing, and to make important decisions for your business. Clear financial records help you determine how you can grow, budget, and forecast to meet your goals. It is also important to have accurate financial statements so that you can easily file your taxes.
Most accounting software can link directly to your business banking accounts and easily import transactions into the accounting software. Then it is simply a matter of classifying those transactions. If you are in the market for accounting software, I would highly recommend Xero. It is similar to QuickBooks online, but the interface performs better, the functionality is better, and it integrates with a lot of other apps that can make your life easier.
Keep Good Records
The last thing that is important to do is to keep the receipts for all your business-related expenses. Your CPA or tax preparer does not need to see your receipts. Do not bring them a box of receipts at the end of the year. This will be an awfully expensive transaction for you if you expect them to filter through your receipts and re-create financial statements. Receipts are important in the case of an IRS audit. The best defense against an IRS auditor questioning your deductions it to have receipts that substantiate the business transaction or deduction. It is recommended that you store your receipts for up to seven years. You can store the physical receipts, or you can scan them and track them digitally. Typically, the IRS will not accept bank statements as a replacement to receipts. They want to see an itemized receipt that legitimizes the deduction. Many accounting software programs like Xero or QuickBooks will allow you to scan your receipts, upload them, and then link it to the transaction. This really streamlines the process if you get audited. The accounting software allows you to pull up the expense line and the receipt is right there if you had uploaded it and linked it.
We are here to help. If you need assistance in determining what steps you should be taking to set your business up for success, we’d love to help. Reach out to us at www.nguyencpas.com or email@example.com and schedule a complimentary consultation with one of our advisors.