By John Huddleston
Unless the business is an accounting firm, small business owners need to hire an accountant if they wish to see continued growth. During my time with my own tax consulting firm, I’ve noticed a number of issues seem to surface quite frequently when dealing with small business clients. To help boost your success I will share some of the most common accounting and tax issues encountered by small businesses so you can be a step ahead of the game.
Accounting starts with bookkeeping. It is important for excellent records to be kept that include receipts and expenditures. It is time consuming, which is why we always recommend hiring a professional accounting firm. The payoff is sizeable: if you keep your bookkeeping organized, things will be much easier when tax time rolls around.
When you first start your business, handling your books will be easy. However, as your business grows you will find it takes up so much of your time that you do not have time to run your business. By outsourcing this task, you can save your work hours and streamline the process in general. Lastly, an experienced bookkeeper will be familiar with numerous systems and can easily integrate a system that works best for your needs.
There are federal and state regulations and tax codes that small businesses have to abide by. If you do not do everything properly, you could find yourself with expensive fines and IRS penalties to deal with. Additionally, these regulations and codes can change on a yearly basis or sooner. This is something else that takes away from the business owner’s work hours, but is something that accountants do for a living.
Your accountant will be able to do more for you than just track your cash flow. They will also be your resource for other useful business knowledge. Your firm will be able to make sure you always are abiding by regulations, have the proper permits and licenses, and help you get the best tax exemptions.
In short, though their expertise is not free, accountants will save you a ton of money in the long run.
Not Having a Partner Agreement
If there are multiple people starting the business, a partner agreement is highly recommended. Even if you go into business with a friend or relative, you still need to have one. Think of it as a business-focused “pre-nuptial agreement.”
Some of the main things that this agreement should cover include:
- The main goal and vision of the business
- What happens when a partner fails to comply by the rules
- Section on selling the business
- Asset/cash contributed by each partner
- How daily decisions are made
- How someone is removed from being a partner
- Which salaries is the partner entitled too
- Roles and responsibilities of each partner
A partner agreement needs to be created before starting the business. This is something else that an accountant can help you with if you do not already have one drawn up.
Not Starting Out as an LLC or Corporation
One of the first things that have to be established is what the business will be referred to as for legal and tax purposes. You have the option of starting out as a sole proprietor, partnership, corporation, LLC, or limited partnership. If you plan to stay in business, it can be beneficial to start out as an LLC or corporation to avoid higher taxes.
Becoming a small business requires you to think about accounting and tax issues because financial matters can take up a lot of a business owner’s time, particularly if they try to tackle it alone. It is something that is best outsourced to an accounting firm or an independent contractor. When opening a business the goal is to succeed, but businesses often fail because of accounting and tax issues that they run into once their business is just starting to make a name for itself.
John Huddleston is the founder of Huddleston Tax CPAs, a firm based in the greater Seattle area which specializes in assisting small businesses with their tax and accounting needs. He frequently writes on issues relevant to small businesses. He is a graduate of Washington State University and the University of Washington School of Law.