6 Crucial Steps to Take After Forming Your New Business
So, you just completed your new business formation and registered with the state. You know what services and/or products you’ll be offering. Perhaps you’ve even started marketing and lining up new hires.
However, before diving in too deep, you have to take the essential steps of setting up proper accounting, payroll, and tax systems—this is true whether you’ve formed an LLC, partnership, or corporation! But how do you know where to start? And how do you ensure you don’t miss something vital?
We get it! Launching a new business and covering all your bases can be overwhelming. Below, we’re sharing the can’t-miss areas of your accounting and finance processes to ensure you’re set up for compliance and success from Day 1.
1. Establish a Business Bank Account & Relationship
Before anything else, open a business bank account. Your bank will likely require your Employer Identification Number (EIN) or federal tax ID number and business formation documents.
Keeping your business and personal finances separate is vital! It creates credibility, allows you to accept credit cards and checks in the business’s name, makes tax reporting easier, and gives you a clear picture of your business performance.
But most importantly, it provides legal and financial protection if your business is sued or goes into debt. When your business finances are separate, the court cannot “pierce the corporate veil” and come after your personal assets. Mixing business and personal finances, however, could cost you this protection.
Creating a positive relationship with your business bank is also beneficial, especially if you plan on growing and seeking funding. You want a contact who will be available to you and other company representatives for concerns and efficient account management and setup. Plus, a great relationship banker will ensure you receive the best solutions and rates for your business.
2. Implement a Bookkeeping System
A well-maintained bookkeeping system provides valuable insights into your business’s financial health, supports accurate tax reporting, and aids in strategic decision-making.
Are you planning to manage the accounting and finances for your new business yourself? Determine whether you will use a manual method, like an Excel spreadsheet, or an accounting software, like QuickBooks. While the manual route may be more affordable, investing in software will streamline your bookkeeping and ensure accuracy.
As you research software, consider features like invoicing, expense tracking, financial reporting, and integration with other tools. Does the platform do everything you need? Is it intuitive for you to manage?
Once you select a system, you’ll need to:
Set up your chart of accounts: This is a list of categories to track income, expenses, assets, liabilities, and equity. Organize your accounts logically (e.g., Sales, Rent, Office Supplies, Payroll, etc.).
Enter opening balances: Input initial balances for your bank accounts, outstanding invoices, loans, and other financial elements to start with accurate financial data. Most software will now connect and sync with your accounts.
Record transactions regularly: Set aside a weekly bookkeeping time to enter all recent financial activity (e.g., income, expenses, sales, purchases, etc.) into your software, categorizing them appropriately.
Reconcile bank and credit card statements: Reconcile your bank and credit card statements at least monthly with your software to identify any discrepancies or missing transactions.
Manage invoices and payments: Create and send invoices to clients promptly. Track payments received and attribute them to the correct invoices. Set reminders to follow up on overdue invoices.
Run financial reports: Generate financial reports such as your profit and loss (i.e., income statement), balance sheet, and cash flow statement at least monthly to gain critical insights.
Recognize capital assets and record depreciation: Most businesses have some kind of capital assets (i.e., big purchases required to operate your business) subject to depreciation, such as computers, furniture, or machinery. You’ll record these expenses in a relevant schedule.
Another major benefit of using accounting software is a detailed and accurate profit and loss (P&L) statement that tracks every income and expense and attributes it to the correct accounts. This is crucial, as incorrectly tracking these transactions could be detrimental to your business tax return. The primary buckets your P&L sheet should include are:
Payroll
Cost of Goods Sold (COGS)
Operational Expenditures (e.g., rent, marketing, insurance, office supplies)
3. Understand Eligible Business Expenses
Speaking of accounting systems and tracking, new business owners should also know what they CAN and CANNOT write off as a business expense! This largely depends on your business and industry. Keep these guidelines in mind:
Necessity and direct connection: A business expense should contribute to generating income, improving efficiency, or maintaining your business’s operations.
Ordinary and customary: Is it a typical expense that other businesses in your industry would incur?
Reasonable: The expense should be reasonable relative to the nature and size of your business. Extravagant or excessive expenses might not be considered legitimate business expenses.
Documentation: Retain receipts, invoices, contracts, and other relevant records that prove the expense was business-related.
Typical business expenses include:
Office supplies
Rent and utilities
Salaries, wages, benefits, and payroll taxes
Marketing
Business travel
Professional services (e.g., consultants, lawyers, accountants, etc.)
Business equipment
Depreciation and amortization
Insurance (e.g., liability or property insurance)
Employee training and development
Business meals and entertainment
Interest and bank fees
Software and subscriptions
So, no, you can’t expense your manicure—unless you own a nail salon and it was part of an employee training! On the other hand, a doctor’s office can expense their Spotify subscription because they use it in their waiting room.
4. Set Up a Payroll System
You’ll need employee documentation and a payroll system if your new business has employees. Employees must complete all relevant personnel information, including Forms W-9, W-4, and I-9. Maintaining and organizing these documents properly is critical—you’ll need them if you’re ever subject to an IRS or Department of Labor (DOL) audit.
And yes, you could calculate payroll taxes on your own, but this is an extremely time-consuming, complex task. Instead, invest in a payroll system to manage this significant area. Platforms like ADP:
Perform automatic calculations to ensure you pay staff and withhold Social Security, Medicare, federal, and state income taxes correctly
Calculate your employer payroll taxes, so you know how much you owe
Provide you with the necessary information to complete your quarterly Form 941 for payroll tax filing
Ensure employees get paid by pulling funds and issuing paychecks or direct deposits for you
Provide supporting documentation to validate employee wages and proper tax filings/payments
5. Purchase Business Insurance
It may not be directly related to your accounting and finances, but business insurance is vital to protecting your business assets. It’s also another important reoccurring expense to consider. So, how do you know what type you need?
Most businesses should at least have general liability insurance, which guards you against third-party claims of bodily injury, property damage, and personal/advertising injury (i.e., slander or libel). Another common type of insurance is professional liability insurance, also known as errors and omissions (E&O) insurance. This coverage protects professional service providers against claims such as negligence, errors, copyright issues, and undelivered work/results.
You may also need specific coverage based on your business and its particular risks, industry requirements, and if you have employees.
For example, healthcare and construction companies are often subject to specific insurance mandates. And businesses with employees are typically required to have workers’ compensation insurance.
Determine what kind of business insurance you should have by:
Identifying the potential risks and liabilities, including those common in your industry and specific to your operations
Researching and understanding legal requirements for insurance in your industry or jurisdiction
Consulting with industry peers to learn what type of coverage they carry and their experiences
6. Register for Taxes
Ah, taxes—another joy of business ownership. Not so exciting, but essential nonetheless to ensure you remain compliant and don’t put your new venture at risk. Once you form your new business, register it with your state and/or local jurisdiction’s tax agency.
Depending on your location, business structure, what you’re selling, what states/jurisdictions you’re selling in, and whether you have employees, you could be responsible for:
Sales and use tax
Employment and payroll tax
Income tax
Unemployment insurance tax
Franchise tax
Be mindful of what state(s) you’re conducting business in, as each state has different tax laws and rates. Certain states also require a seller’s permit (i.e., resale permit) in order to sell products or services in the state and collect sales tax on them. If you do business in multiple states, you may need to obtain permits for each state.
Launch Your Business on the Right Financial Foot
Choosing your entity structure and obtaining an EIN are just two early steps toward launching a successful new business. Many fresh entrepreneurs skip several of these essential accounting and finance areas—only to end up paying for it down the road with their time, money, or both.
While these tasks may seem daunting, spending your time and energy on them upfront will protect your business and help you make it more profitable in the long run!
And you don’t have to manage it all on your own. Make sure your accounting, payroll, and taxes are set up and executed properly from the start with a partner who will take the weight off your shoulders. JLS Accounting will happily manage these areas and give you more time to do what you love most. Book an intro call to learn more today!