Run A Small Business? Here's How To Stay Out Of Trouble
This article was written by Mike N. and is the opinion of the author.
I am an Enrolled Agent. I am enrolled to practice before the IRS, which means that I can prepare taxes and represent people before the IRS. I do taxes for individuals, partnerships, and small businesses.
As such, I get to see the details of many people's businesses and even their personal lives. It is really stunning to see how careless people can be with their personal and business finances. I have compiled a list of some of the most frequent ways professionals like me see how business owners get into trouble, not just with their taxes but in their businesses overall.
As you will see, in the Venn diagram of bad practices, these all overlap to some extent. While these will all seem obvious, it is amazing how many otherwise smart people fall into these traps.
Not Adjusting Their Lifestyle To Fit Their New Circumstances
Perhaps the one thing that drives most of these other issues is when a new business owner does not adjust their individual or their family's lifestyle to a lower and less predictable income.
Completely burning through all your savings puts everything at risk. The temptation to "borrow" from the business with the rationalization to repay it later is also a slippery slope.
You must estimate how long your investment money will last and determine how you need to live in order to survive at least that long.
Mixing Business And Personal Finances
One of the most frequent mistakes business people make is not separating their personal and business accounts. They use their personal checking account as the business account or use the business checking account as their own personal account.
In either case, they have not put a firewall between these two different sets of financial activity. Compound this with sloppy record keeping and they are not able to differentiate which expenditures are personal and which are for the business.
Simply establishing a separate account for your business and using it exclusively for that purpose is the obvious way to avoid this situation. Yet many sole proprietors aren't diligent about this.
Since many small businesses operate on a cash basis, and the IRS treats single-member LLCs and sole proprietors essentially the same, a separate account isn't absolutely necessary and many can operate without one. If you establish a corporation for the business, such as an LLC or C Corporation, this should come naturally.
Establishing all aspects of the business as a separate legal entity helps strengthen its protective aspects against liability and builds the case against creditors or other litigants "piercing the corporate vail" and accessing the owner's personal assets.
Not Using Metrics
If you don't separate your business from your personal finances, understanding how well your business is operating becomes much harder. How did you do last month or last quarter? What is your profit margin? Are your costs increasing or decreasing?
Without creating the most basic of accounting metrics, an income statement and a balance sheet, how will these questions be answered? Many business owners may have a fairly accurate idea of what a "good day" or "good week" looks like from receipts and revenue but what about costs and profitability?
Without separating personal and business expenses, understanding costs becomes much harder.
Year over year, month to month, and other comparisons of revenue and profit become difficult. If you (justifiably) want to spend more time selling or doing your best work rather than tracking financials, then hire an accountant or bookkeeper. At the very least, use one of the payment systems like Square, PayPal Here, Intuit GoPayment, Flint, or others that provide built-in accounting and analytics functions.
Not Paying Their Taxes
Finally, you knew this was coming. One of the most frequent ways business owners get into trouble is not paying their income taxes or, especially, payroll taxes.
Unfortunately, there are times when cash is tight and owners must decide between paying employees or suppliers and making their quarterly payments. However, if this becomes a habit, the owner may find themselves owing large amounts of money that they do not, and may never, have.
Paying the debt is something they likely will not be able to avoid, even if the business fails or they declare bankruptcy. Do everything you can to make these payments timely. Consider that the IRS never rests. Should you negotiate a settlement with the IRS for less than you owe and you later increase your income or assets, the IRS can come after you for a greater repayment.
As obvious as these issues may seem, they are difficult to avoid when money becomes tight. If you can plan to avoid them in advance, you will be far better for it.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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