Are you looking for reliable bookkeeping services for your business? Like many business owners, you may not know where to start. When you are passionate about your business but the numbers are overwhelming and challenging for you, competent and professional bookkeeping services can easily take care of the dollars and cents on your behalf. If you would like to be truly profitable and successful, you have to keep tabs on your business finances.
As a small business owner, if you do not know where you stand on a monthly, quarterly, or annual basis, your chances of surviving and growing can decrease considerably. There is no doubt that a bookkeeper can help manage your finances, provide valuable insight, and can have a big impact on the trajectory of your small business.
Here are five things you should consider when hiring the right bookkeeper for your business.
1. The Right Experience and Expertise
When you start researching potential bookkeepers or bookkeeping companies, find out about their experience level. It is no secret that every industry has its unique quirks when it comes to financial record-keeping. Check to see if the company or candidate has experience and confidence that they can navigate the ins and outs of your industry.
In addition, make sure you have the right experience for the right role. Instead of having one person try to tackle all your finances, look for a team of specialized individuals who work well together. Having someone who specializes in bookkeeping focus on your books and an accountant who specializes in tax do your taxes can improve accuracy and save you money.
While a company website will certainly offer some valuable insights into their experience, you should ask a few important questions. Some of them are:
How long has the candidate or company been in the bookkeeping industry?
What type of clients do they serve?
Do their services meet your business needs?
Accounting and bookkeeping is not an easy science. So, for a business that is starting out or growing, you need to have somebody who has been successfully doing this job for quite some time.
2. Communication is Key
If you are not good with numbers, you need a professional who will help you understand and appreciate the numbers. So, it is important to make sure that your communication style and the communication style of your bookkeeper work well together.
Some bookkeepers or bookkeeping companies charge extra for financial reviews or consultations. Ask about potential additional costs and be sure to factor those into your budget. It’s good practice to meet with your bookkeeper or accountant at least once per quarter to get a better gauge on your business finances.
Your bookkeeper needs to present your business finances in a simple way that makes sense and also keeps you informed at both the frequency and level that you prefer.
3. They Must Have Attention to the Detail
Numbers can be challenging and tricky to deal with. Keep in mind that even a small error or mistake in figures could impact your company. Look for a bookkeeping company or individual that has a thorough review process so you can have confidence your reports are accurate. A bookkeeper’s ability to give attention to the smallest details can ensure that mistakes or errors are minimized.
4. Look for Transparency and Trustworthiness
When it comes to bookkeeping, transparency must be among the first things that you should look for in a candidate. The bookkeeper you choose should be able to give you an instant and reliable quote for their services without any hidden fees that may pop up after several months of working together. There is no doubt that this is the type of transparency and honesty that you need in the bookkeeper who will be handling your business finances.
Also, note that any bookkeeping professional that you hire should be a reliable and trustworthy candidate. You will entrust this professional with confidential and sensitive financial details of your business. Choosing an individual or company that you could rely on and trust would give you peace of mind.
5. Up to Date on Tech
The financial industry is continually evolving, and while the principles of bookkeeping and accounting might not change, there are ways your bookkeeper can make your financial data more accessible and digestible than ever before. Look for a bookkeeper who is open to adopting innovations and can keep up with changing technology to provide you with the best experience.
The right bookkeeper for your business should be adept at using standard bookkeeping software and tools, and they should also have an innovative mindset to help you have better insight and make informed business decisions.
There is no doubt that hiring a bookkeeping professional or company can be an important decision for your business. An excellent bookkeeping partner will be with you and help you every step of the way as your company grows.
From location to branding, to management, and everything in between, there’s no question that business ownership comes with an array of difficult decisions. But settling on the right price to charge for the services you provide can be one of the most overwhelming decisions for many business owners.
Pricing will play an incredibly important role and prompting factor for your customers. At a glance, the price of your services will suggest the quality of service customers can expect from your business and may be the reason many clients will choose your business over your competitors.
Given the importance of charging your worth as a business owner, here are some points to consider when setting your prices:
1. Understand your value
Understanding your value comes down to the nature of your expertise. Your expertise consists of your professional qualifications, such as your continual professional development and the experience you have putting it all into practice.
Depending on how long you’ve been in the field, you might find that certain aspects of your work will come easily — almost automatically. Those are called unconscious competencies — what you are good at without even thinking about it. Don’t discount them. Being unconsciously competent is a value you bring to your business and something you should consider when determining a price.
The concept of understanding your value is particularly important for businesses that charge on an hourly basis because the better you get at something, the less time it will take for you to do the task. If you charge an hourly fee you can end up billing less than what your work is worth and end up losing out on big earnings. That’s why it’s important to understand your value and charge accordingly.
In the same vein, it’s also critical to know your competition and not overvalue yourself. If every business in your field is charging less than you, it may be challenging to market your services and persuade customers to choose your business.
2. Understand the pain points of your clients
The fact of the matter is that people use professional services to solve problems. When you’re determining what prices to charge for your services, it’s important to consider why your customers are hiring you. Ask your clients what they need to be done and why they are inquiring about your services. Consider what it’ll cost your customers if they don’t fix the problem. Soon you’ll begin to understand where your customers see your value and how much they are willing to pay for it. Remember that some customers will have an easier time seeing and understanding your worth and others won’t, and that’s okay!
3. Understand the difference between value and price
If you center your business around price, you will attract clients who focus on price. Determine how you want your services to be seen, do the upfront work, and help the clients understand the value of working with you. This approach will require some work on your part, but it’ll help customers become acquainted with your work and what you bring to the table. Consider implementing marketing tactics that will help drive this point to consumers, such as free trials, strategy sessions, consultations, and so forth.
If potential clients understand the value, potential ROI, and how your services solve their pain points, they will be ready and willing to make an investment in your business.
4. Understand how to communicate your value to your clients
This point is especially tricky for businesses in the service industry. One common issue is that business owners often get so good at solving a problem that clients often think they are overpaying for their services. It’s understandable. The customer may only see the short amount it took to fix something and not the amount of practice and experience it took to get to that point.
Remind your clients of their problems and how badly they needed them solved. You can communicate this message through clever marketing or by simply stating it in a professional manner. However you choose to communicate your worth, just remember that those who can’t understand the value of your work will never be your clients.
5. Understand money
It’s human nature to navigate away from the things that make us uneasy, so if you are uncomfortable with money, you’ll have a hard time charging your worth. You’ll have to be willing to talk about money, fees, and services without feeling guilty about what you are charging because, as time goes on, your rates will increase or you may add new services. This is why it’s important to take the time to understand your worth and evaluate your work, as well as keep an eye on the rate of the competition.
Final Warning — “Pigs get fed, hogs get slaughtered.”
In business, the meaning of this phrase is that it’s okay to make a profit, but when that profit is the result of price gouging or taking advantage of people, you’ll eventually lose in the end. No one likes to be taken advantage of, and that includes your clients. Keep your business honest and professional and you’ll see how much growth you’ll be able to achieve along with a good reputation. Being a pig (eating, or doing what is necessary for your business to survive, grow, and succeed) is good. Being a hog (overeating, or focusing solely on profits at the expense of the clients and quality) is bad.
Watch co-founder of Mazuma, Greg Nielson, explain the importance of charging your worth in the webinar below, and don’t forget to subscribe to our YouTube channel for more business advice!
Ready to see what your business can accomplish when you don’t have to worry about dealing with taxes and the IRS? Try Vyde FREE for 30 days!
Frequently Asked Questions (FAQs) about Charging Your Worth as a Business Owner
1. Why is understanding my value crucial for setting prices? Understanding your value, including unconscious competencies, helps ensure you charge adequately, especially for hourly-based services. 2. How can I grasp the pain points of my clients when determining prices? Ask clients about their needs and the cost of not solving their problems. This insight guides you in understanding the perceived value of your services. 3. What’s the difference between value and price in business? Centering your business around value attracts clients focused on quality. Communicate the value of your services to shift the focus from price. 4. How do I effectively communicate my value to clients? Remind clients of the problems you solve and the expertise behind it. Use marketing tactics like free trials or consultations to showcase your worth. 5. Why is understanding money crucial for charging my worth? Being comfortable discussing money is vital. Regularly evaluate your worth, track competition, and be mindful of rates to confidently set and adjust prices.
As small business owners, it is easy to get distracted by the length of our to-do list and lose sight of the important factors that drive our business’ success. It’s also easy to ignore financial reports when we don’t know how to translate the numbers on the report into key insights about the health and value of our business.
As a certified public accountant and founder of Vyde, I wanted to provide you with some of these key insights that can drive your business success.
1. Sales
Let’s start with the business basics—sales, also known as revenue. As business owners, we understand that the money we generate is our lifeblood. This is what allows us to function from day to day, earn a comfortable living, pay our employees, and invest in growing and improving our business.
But what do we do with those sales numbers after we see the reports? Increasing sales and revenue is important, but if that is the only number we focus on, we could run into problems in the long run. Driving up sales will not impact the bottom line if we have to increase spending to get there. That’s why the next numbers are important to evaluate as well.
2. Gross Margin
When you look at a profit and loss statement, you will see your revenue, your variable expenses (also known as cost of goods sold or cost of sales), your fixed expenses (expenses that don’t change from month to month, such as rent), your total expenses, and your net profit.
Gross profit is what you are left with when you take your total revenue and subtract your variable expenses. In effect, you are taking your sales and subtracting what it costs to make and sell your product or service. While this is an important number to keep tabs on, a much more telling number is your gross margin.
Gross margin helps you gauge your efficiency so you can work toward a healthier bottom line.
You can figure out your gross margin by dividing your gross profit (total revenue minus cost of goods sold) by your total revenue and multiplying that by 100 to get a percentage.
Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100
A low gross margin means you will want to make some adjustments to reduce your costs; a high gross margin means you are maximizing your profits.
Another way you can calculate gross margin is to simply divide your cost of goods sold (or variable expenses) by your revenue. You can then subtract that number from 1 and multiply it by 100 to get your gross margin.
Gross Margin = 1 – (Cost of Goods Sold/Total Revenue) x 100
As both your gross profit and gross margin increase, you will start to see improvement in your business. There is no one percentage that represents the ideal gross margin. Driving your gross margin higher at the expense of quality or customer service will have negative repercussions. As you are setting your goals, research healthy gross margins in your industry and look at the ways other businesses improve their efficiency. Understanding these numbers will help you set goals and work toward a healthier bottom line.
3. Net Profit
This is your bottom line. Your profit and loss statements should provide you with a net profit, but you can also easily calculate this by subtracting all your expenses (variable and fixed) from your revenue.
Net Profit = Revenue – All Expenses
Your net profit is the money you have available to pay yourself and invest in future ventures. It is also the money you will be taxed on at the end of the year, which leads us to the fourth number you should be tracking.
4. Taxes
One problem many first-time business owners run into is not properly preparing for their taxes. No one wants a surprise bill come tax season.
The best way to prepare is to meet with a tax professional to create a plan. We encourage all our clients at Vyde to meet with us twice per year to plan for the upcoming tax season. There are many variables that go into calculating your taxes, including spouses, dependents, what other jobs you hold, self-employment tax, deductions, tax credits, your tax bracket, etc. That’s why you can make a more accurate plan by sitting down with a professional. However, if that is not an option for you, the general rule of thumb is to set aside 25% to 30% of your net profit for taxes.
As you track these four different numbers over long periods of time, you will start to generate month-over-month and year-over-year comparisons that allow you to identify trends, strengths, and weaknesses in your organization.
Evaluating these numbers regularly will help you drive your business success to the next level.
Have questions? We’d love to answer them and talk to you about setting up a financial strategy for your business. Contact us today!
If you’re in a committed relationship you may have found yourself considering the idea of starting a business together. And why not? You love each other, you work well together, and if you have to work, why not work alongside your favorite person? Especially if you share a common interest! But, just like you would if you were starting a family or buying a house together, it’s a good idea to consider how starting a business could create challenges in your relationship; especially if you’re really enjoying the way things are now. Here are three things to think about, and discuss, before diving into this great journey together:
1. Home and Work Intertwine
It’s no secret that starting a business from scratch can take an incredible amount of effort. And depending on what industry you’re diving into, the workload can start even before you officially open!
It’s important to consider that work may bleed into your home and relationship. You could find yourselves talking about work or working more often than you’d like. Date nights could turn into business meetings and late-night talks might revolve around your business plans for the next quarter. It can all be exciting at the beginning, but as time goes on, you could find yourselves burning out or losing aspects of the relationship that you used to love.
To combat the potential drain on your relationship, it’s a good idea to determine now how both of you want to communicate about the business. Consider setting boundaries that you’re both comfortable with and that allow you to continue to have a romantic relationship while still being great business partners. You could decide to set aside certain days that are strictly off limits to work, or maybe you’ll determine that work talk is not allowed after a specified time.
Whatever you both determine, remember to respect each other and consider your partner’s perspective the same way you would with a colleague in any professional setting.
2. The Bad Days
Remember that there can be a lot of difficult days in business ownership. If both of your incomes rely on the success of this endeavor, it can become incredibly stressful if it feels like things are a little slow at times.
The good thing is you will have each other, and each of you can provide support when the other starts to feel overwhelmed. Additionally, both of you should keep in mind that you are not alone in this journey; there are countless businesses that are owned and operated by couples. Look to them for guidance and ask for advice when possible. Check out our Keep Going Podcast for inspiration from other business owners who share a similar story, like Suzy and her husband who started Grounds for Coffee in Ogden, Utah together.
The most important thing is to remember that you and your sweetheart are on the same team. When business problems arise, it’s not you and your partner against each other, it’s you and your partner against the problem. Always prioritize having a healthy relationship with each other! Having a good relationship (even if the romance fizzles) will help keep your business afloat for years to come.
3. Set a Clear Outline of How the Business Will Operate
Setting a clear outline or plan of how the business will operate will help if, and when, you disagree about how things ought to run. Business partnerships should share equal responsibility when it comes to management (unless you decide otherwise), but these responsibilities can easily tumble out of alignment.
There may come a point when one of you feels that they are bearing a heavier load than the other, and these business disagreements can easily become a slippery slope into relationship quarrels. An outline will help define all the specifics to avoid potential issues, from who owns what percentage of the business, what responsibilities pertain to each of you, the compensation structure, or what will happen in case of a dissolution.
It can seem tedious and even difficult to outline every aspect of the business with your significant other, but it will save you a lot of time and headache (or even heartache) in the future. When you do have a disagreement, you can refer to the outline to remember the business purpose and how you both decided things would run, then you can correct and pivot accordingly.
Starting a business can be both an exciting and an overwhelming experience for anyone, but you’ll find that being on this journey with your significant other can also be incredibly rewarding to your relationship. The most important thing for both of you to remember is that 1) open and honest communication can make all the difference, 2) neither of you is alone in this, and 3) that mutual respect is the key factor in keeping any business or relationship triumphant.
Are you and your beau ready to start that business you’ve been dreaming about? Eliminate the hassle of dealing with small business taxes and bookkeeping. Just let Vyde take care of it for you! Try our services FREE for 30 days to see what you can accomplish together and let us deal with the IRS!
Starting a business is a dream that many people have. The idea of creating something that is your own, being your own boss, and being able to turn your passion into a full-time job is compelling. In order to be successful and make your small business idea come to life, you have to take time to figure out all aspects of your business to see if it has potential. While starting a business can be challenging, watching your dream come to life is beyond rewarding. Below, we share some advice on how to get you on your way to making your small business dreams a reality.
Conduct Research
When building a business, it’s important to do your research. Taking the time to figure out what you want your business to be and where it will fit into a competitive market is vital to the overall success of your business. When doing your research, you should look into the type of companies that currently exist in the market that you’re trying to enter to see if and why they have been successful. Is there so much competition you might struggle to gain your footing? How can you stand out from the competition? You should also look into potential consumers to see how your business can help them.
Take some time to gain more insight as to whether or not your business can make an impact within that industry. Understanding your potential market will allow you to better form your business plan. It can also help to fine-tune your business idea so that you are not starting a business around something that is already well-saturated within that market.
You should also consider your potential competitors. It’s important to be able to diversify your business, so taking the time to research all aspects of your potential market and competitors will allow you to better understand where your business can fit in and how you can be successful in that space.
Create a Business Plan
A business plan is important because it outlines your overall goals and shows how you plan to achieve them. Creating this plan in the early stages will allow you to better visualize how you want your business to operate, allowing you the freedom to make any changes that you want before fully moving forward in this process.
When creating your business plan, be sure to consider all aspects of your business. A business plan should highlight:
Your goals and objectives
Your product or service
Market and industry research
Competitor research and how you plan to stand out
Consumer research and how you plan to solve their pain points
Your marketing strategy
Your financial approach
It’s important to address all of the major components of your business so that when you are at the financing stage of the process, there will be a clear explanation of what your objectives are and what you plan to accomplish with your business.
A business plan will also help you stay organized throughout the entire startup process.
Determine Your Financial Strategy
Figure out your finances early on so that you can ensure you get your business off the ground. Without proper financing, it will be difficult to start your business. It’s important to create an outline of what your expected expenses will be so that you can budget your money wisely. Starting a business is expensive and there are many unexpected costs that will come up. It’s just a reality of being a business owner. When making your business plan, you should budget for not only the expected costs but also the unexpected costs so you are not overwhelmed or scrambling when they come up. That will also give you more flexibility when new opportunities arise.
There are many different ways to fund your business. Some people prefer to look into reaching out to investors for assistance, while others may consider taking out a loan. If you’re someone who is looking to go the route of working with investors, then it’s vital that you have a sound business plan to show potential investors.
If you are considering a loan instead, then it may be worth considering a small business loan. A small business loan is partially guaranteed by the government, eliminating some of the risks for the financial institution issuing the loan, but it can be difficult to acquire. Small business loans have specific requirements that have to be met in order to qualify, but if those requirements are met, then it may be a good option for your small business. If not, another long-term option to consider is looking into refinancing your home to a 30-year fixed mortgage, which will lower your monthly mortgage payment, allowing you to allocate the extra funds toward financing your new business.
Consider Your Accounting and Taxes
Once you figure out how you will finance your small business, you should also consider how to handle your small business accounting and taxes. Having a detailed understanding of your financial reports will help you make informed decisions for your business, and you want to ensure your company does not have any surprise tax bills or compliance problems with the IRS.
If the idea of doing your own accounting makes your blood pressure rise, consider looking into small business accounting options. There are affordable options for small businesses that will take care of your accounting, bookkeeping, financial reports, and taxes. In fact, at Vyde we often save our clients more in their taxes than our services cost for an entire year. Utilizing the help of an accountant or accounting service will save you stress and provide the security of knowing your taxes are done right.
It’s important that you take the time to finalize all aspects of your business idea before moving forward. Starting a small business takes time and is a big commitment. Making sure that you are well prepared with what to expect, can allow the process to run smoothly and your business to be successful.
Vyde Wants to Help
Vyde helps small business startups like yours with all their accounting, bookkeeping, and taxes. Our business is helping you stay in business. We’ve helped over 10,000 small businesses already! Contact us today to see how we can help you.
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Many obvious perks come with owning your own business, including setting your own schedule, being your own boss, and having control over your career. But there are also many tax benefits business owners that can take advantage of to maximize their profits.
Here's a quick guide that covers important tax deductions for your business.
What Will a Deduction Save Me?
A deduction, or write-off, is a business expense that can help lower your taxes. For example, if your business made $75,000 last year but you invested $10,000 in new business equipment, you would deduct that $10,000 from your net income. That means when it comes time to pay your taxes, you would need to pay tax on only $65,000 instead of the full $75,000.
How much will that deduction actually save you on your taxes? It’s important to weigh out the costs versus tax savings when you’re making a business purchase. Sometimes the tax benefits of owning a business don’t outweigh the expenses involved with a deduction. Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
For example, if you spent $2,000 on a new camera for your business and your tax rate is 25%, your savings would be $500:
$2,000 X .25 = $500
If you don’t know your tax rate, you can always visit IRS.gov to see the latest tax rates and brackets for the year. Keep in mind that if you are self-employed, you will also need to pay self-employment tax, which is a little over 15%.
Of course, you can’t write off every expense as a business expense. According to the IRS, you should write off expenses that are ordinary (i.e. common and accepted in your industry) or necessary (i.e. helpful and appropriate for your business). That doesn’t mean you can’t be creative regarding a tax deduction. Think broad. Just be sure you know and document the business purpose.
Common Business Expenses That Qualify For Tax Deductions
A great example of getting creative in maximizing your tax benefits for owning a business comes from a client I work with who wrote off her houseboat at Lake Powell. She is a photographer who takes senior graduation photos, and she also loves Lake Powell.
She came up with a promotional idea of taking a handful of her clients down to Lake Powell each year for an exclusive photo shoot. Because of these promotional trips, she decided to purchase a houseboat as a business expense. While she can still enjoy the houseboat throughout the year with her friends and family, the reason for purchasing the boat was to grow her business, which makes it a business expense. The chance to win a vacation to Lake Powell and the stunning photos that result from these trips help build her client base and generate more revenue. Overall, it’s a win-win!
This example illustrates that business owners should not feel limited in the deductions they take. Below, I have listed several common business expenses you should consider as tax deductions, but this is by no means a comprehensive list.
Business Travel
This includes plane tickets, transportation, gas, rental cars, meals, conferences, etc. If you have questions about what constitutes a business trip, check out our complete guide to writing off your vacation.
Business Meals
These include meals where you discuss business or meet with clients, partners, prospects, etc.
Retirement Contributions
Business owners have more flexibility that allows them to strategize around their retirement contributions. At the end of the year, you can determine how much you want to contribute to your retirement to help lower your taxable income. If you have questions, reach out to our team to develop with the best game plan.
Vehicles and Transportation
This can include purchases, leases, mileage, repairs, maintenance, insurance, etc. As we saw from the example above, it can even include houseboats!
Phones
This can include the initial purchase, repairs, and monthly phone bills.
Equipment
Some examples include tools, furniture, cameras, computers, monitors, printers, and machinery. Again, this can be broad depending on your business needs, so don’t limit yourself.
Depreciation on Assets
Depreciation on any capital under your name is fully deductible. Equipment, rentals, vehicles, and other depreciable items of contention are covered under a Section 179 deduction—up to $1,050,000 from new.
Inventory
One of the tax benefits of owning a business is that everything in your warehouse can be written off at the end of the year. This will be valid whether you’re producing these goods yourself or serving as a middleman.
Supplies
Do you need office supplies or marketing materials like brochures, business cards, or posters? What about cleaning supplies or hardware like memory drives, routers, or servers? Keep track of all these expenses because they are all great tax deductions.
Employee Expenses or Contract Labor
Whether you have employees or pay someone to help set up your office or website, you can count those payments as a deduction. In addition, any money you spend on business equipment, education, travel, meals, gifts, etc. for employees can be written off.
Insurance
This includes health insurance as well as business-related insurance expenses, such as data breach insurance, liability insurance, property insurance, etc.
Financing
If you finance expensive equipment, vehicles, or more for your business, you can write off the full purchase price of the asset using bonus depreciation in the year you financed it, even though it might take you years to pay off
Website and Software
Are you paying to maintain your website or domain? Do you use editing software, subscriptions, or Microsoft products for your business? Make sure you write those expenses off!
Education
Say there’s a seminar, class, or workshop that could help you gain important skills for your business. Take advantage of the learning opportunity and then take advantage of the tax deductions by writing off the expenses related to that education. That includes books, travel to and from seminars, meals purchased while attending a workshop, etc.
Taxes
Since you are self-employed, you will need to pay self-employment tax, which covers Medicare and Social Security taxes and is roughly 15%. While there’s nothing fun about paying extra taxes, you can deduct half of the self-employment tax to lower your tax bill.
Marketing and Advertising
This is another great area for thinking outside the box. You’ll likely have expenses related to ads, signs, logos, brochures, etc. but you could also sponsor community events, host a client retreat, or hold a promotional treasure hunt to build up your business.
Home Office or Rent
Whether you rent an office space or work from home, you can take advantage of tax deductions. With rent, it’s easy to calculate your business expense because you have a monthly bill. For a home office, that can get a little trickier. Check out our guide for getting the most from your home office tax deduction.
Utility Costs
One of the significant tax benefits of owning a business: Every single one of the utilities required to keep you in operation is totally tax-deductible. The only limitation? Double services—if you have a dedicated phone line for your business on-site, you can’t also claim this same deduction for your home line.
Interest
Any interest accrued on a small business loan, credit cards, or other borrowed money your business depends on can also be written off. As long as you, the owner, are legally liable for the debt, you should be good to go, making this one of the best tax benefits of owning a business.
Internet, Phone, and Other Bills
Water, heat, air conditioning, internet, phone, hotspots, monthly subscriptions for marketing tools or video conferencing—these could all be important for your business to function. Don’t forget to add those as tax write-offs.
Professional Fees
Do you have to maintain a license for your job? Or do you need permits to operate? Those are additional tax deductions you’ll want to take advantage of.
More Questions About Tax Benefits of Owning a Business?
Have additional questions about how to write off your business expenses and the tax benefits of owning a business? Reach out to our team for advice. At Vyde, we help small businesses save time, money, and stress by staying on top of their taxes and finances. We’d love to help you in any way we can.
As a small business owner, there are many decisions you will need to make many decisions that will impact your company for years to come.
Among these decisions is which corporate entity is best for your business. In this blog, we will review 5 different types of business entities (single and multi-member LLC, C Corp, S Corp, Partnership, Sole Proprietorship) along with their advantages and disadvantages so you can decide which works best for your business.
Sole Proprietorship
Many small business owners form a sole proprietorship when they’re just starting out.
If you are a sole proprietor, this means that you own and operate your business by yourself. You have complete control. All the profits of your business are yours.
However, with a sole proprietorship, you have no liability protection, which means you are responsible for all losses and debts as well. If any legal issues arise, you will be held personally responsible and those debts will need to be paid from your personal account.
A sole proprietorship is one of the simplest and least expensive entities to form because no legal paperwork is needed. However, your city or state may require you to obtain a business license, so be sure to look into the requirements for your specific state. In addition, you will want to register your business name with your state.
When it comes to your business taxes, filing is quick and easy. You can file your business taxes with your personal taxes using a Schedule C form.
In addition, you can deduct expenses and losses from your business against any other income you might earn, which will lower your tax bill overall.
The one drawback about taxes for a sole proprietor is that you are expected to pay a 15% self-employment tax on all your net income, which covers Social Security and Medicare taxes.
You are also required to pay estimated quarterly taxes throughout the year. These payments are usually due April 15, June 15, September 15, and January 15. If you fail to pay estimated taxes quarterly, you may have to pay a penalty and interest on what you owe.
Overall, the advantages to forming a sole proprietorship are that it is the least expensive entity to form, you have complete control of your business, and tax preparation is quick and easy.
The biggest disadvantage is no liability protection.
General Partnership
A general partnership is simple to form. Like a sole proprietorship, your city or state may require you to obtain a business license, and you will want to register your business name with your state.
I’d also strongly recommend that you set up an operating agreement for your partnership. What are the roles and responsibilities of each partner involved? What percentage of the profits will you share? Determining this at the start will benefit your business as you get up and operating.
Like a sole proprietorship, a general partnership does not give you liability protection. This means each partner in the business is personally responsible for any debts or legal action.
General partnerships are also required to pay the 15% self-employment tax on all their net income as well as quarterly estimated taxes. However, as a partnership, you have a lot of flexibility and can deduct any losses in your business against other income to lower your taxes.
That’s where the similarities between a general partnership and a sole proprietorship end. Partnerships add more complexity because there are multiple owners involved.
In a partnership, you will file a partnership tax return every year on Form 1065. Then, each partner is given a Schedule K-1 showing their individual share of the profits and losses, based on your agreement. That means you will need to file a form as a partnership as well as the Schedule K-1 as part of your personal tax return.
Single Member LLC vs Multi Member LLC
The main two types of LLCs are single member LLC and multi member llc. Comparing single member LLc vs multi member LLC, you want to account for how many owners are involved in the business. More of the similarities and differences between these two business structures are discussed below.
Single-Member LLC
A limited liability corporation, or LLC, is more expensive to form than a sole proprietorship.
An LLC must be registered in the state where it does business. Each state varies slightly, but most require you to choose a distinct name and to file articles of organization. These articles of organization include information like your business name, address, and the names of its members. Many states charge a filing fee for the articles of organization. For most states, you file with the Secretary of State; however, each state is different, so carefully check the requirements in your state.
Unlike a sole proprietorship, an LLC offers liability protection, which means your business assets are separated from your personal assets. So, if your business is sued or runs into financial trouble, the business will be responsible for paying any fees, not you personally.
In addition, with a single-member LLC, you have complete control and flexibility. All the profits of the business are yours, and you can deduct any losses in your business against other income to lower your tax bill.
However, like a sole proprietorship and partnership, you will be required to pay self-employment tax on all of your net income to cover Social Security and Medicare taxes, unless you elect to be taxed as an S corporation. You are also required to make estimated quarterly tax payments.
As a single-member LLC, you can elect to be taxed as a sole proprietorship or as an S corporation, which we will discuss in more detail below.
Multi-Member LLC
A multi-member LLC shares many similarities with a single-member LLC. For example, you get the same liability protection. You also go through the same formation process and file documents with your state. And you can elect to be taxed as an S corporation.
The main differences between a single-member and multi-member LLC revolve around the fact that multiple business owners are involved. Because of this, you can not elect to be taxed as a sole proprietorship. Your LLC will need to file a business tax form and each partner will need to fill out a Schedule E on their personal tax return, unless you elect to be taxed as an S corp, which we will discuss below.
In addition, some complexities arise with sharing control of the business, which is why you will want to have an operating agreement in place.
S Corporation
S corps have the benefits of a corporation but are taxed as a partnership. Like an LLC, an S corp separates business owners and their assets from the business. Creditors can only go after the business but can’t touch the business owner’s assets.
However, establishing an S corp takes more leg work and paperwork than an LLC. Most S corps spend a considerable amount on attorney and accounting fees.
An S corp also requires more maintenance. For example, to be an S corp, you must develop a board and bylaws, issue stock, hold board meetings, and keep records of each board meeting.
In addition, the IRS also has the following requirements for S corps: 1) shareholders must be US citizens, 2) you cannot have more than 100 shareholders (spouses count as separate shareholders), and 3) you can only have one class of stock.
The taxation of an S corp is what sets it apart from other business entities. When you have an S corp, your business is taxed through the shareholders’ income, and those taxes are taken out throughout the year.
Any shareholder who works for the company must be paid a reasonable wage. After the wages are paid, the rest of the income from the business is passed onto the shareholders as dividends. The benefit of an S corp is that dividends are taxed at a low rate if they are taxed at all. An LLC taxed as an S corp can also take advantage of these benefits.
To take advantage of these tax benefits, you are required to set up payroll for your owners and employees. The laws for S corps are not the same in each state, so you will want to look into individual requirements for your state.
C Corporation
Unlike an S corp, a C corporation protects the small business owner or owners by acting as a fiduciary barrier between the income a business brings in and the progenitors and stakeholders responsible for its operations as executives.
While S corps are considered “flow-through” entities, C corps are not. C corps exist separately as a taxable party in the eyes of the government. This “double taxation” notion is the key reason many small business owners opt to establish themselves as LLCs or S corps instead.
The decision between LLC vs. S corp vs. C corp vs. partnership is often fraught with pitfalls. While many publicly-traded companies are C corps on the books, this classification is typically only chosen by those with the means to dodge double taxation at the end of the year. Two common examples are lawyers at the helm of their own firms and doctors in private practice.
So, which entity works best for your business?
Unfortunately, there is no simple answer. Depending on your business, industry, structure, and revenue, different benefits might outweigh some of the disadvantages.
In addition, what entity works best for your business might change as your business grows. So the best advice I can provide is to know these pros and cons. Then, as the complexity of your business increases, seek the advice of experts who can analyze what works best for your situation. Paying extra for expert insights now can have significant payoffs in the long run.
If you want customized insights into your business, reach out to our team! We would love to help. We specialize in small business accounting, bookkeeping, and taxes, and we enjoy having ongoing discussions with our clients to help them make decisions that will lead to their business success.
Running your own business is rewarding, but it can also be overwhelming. There are dozens of administrative tasks to keep tabs on besides your day-to-day work. I’ve been there, and I’ve felt that nagging feeling that I am letting something important slip through the cracks.
That’s why I wanted to put together these tips to help you stay on top of your finances while growing a successful business.
1. Plan for Current Business Needs
First, let’s talk about the importance of a business plan. How does an idea develop into a fully functioning business? It takes vision, work, and a good plan. To reach any destination, you need a good map. For entrepreneurs, we call this map a business plan.
Some essentials of a business plan include:
Researching competing products
Determining what sets your company or product apart
Conducting research into your market and client base
Estimating your costs and profit margin
Creating a marketing plan
Strategizing around how to pay yourself, your taxes, and other expenses
While there is a lot we could cover on the topic of business planning, for today we are going to focus on 3 important financial elements.
Tax Planning
Calculating tax rates can be tricky for small business owners. In addition to paying taxes on their income, many small business owners need to pay a 15% self-employment tax—which covers Social Security and Medicare taxes.
Because of this, I recommend that most business owners set aside 25% to 30% of their net income for taxes. Your net income is how much you make after you factor in all your expenses, so it’s your income minus any business expenses.
For example, if you earned $10,000 one month but spent $500 on new equipment, $250 on marketing, and $1,000 attending an educational conference, you would set aside 25% to 30% of $8,250 (your income minus all those expenses), not $10,000.
Expense Planning
How much will it cost to keep your business running? This should be something you evaluate and update regularly.
From marketing and production costs to rent and employee salaries, the expenses your business needs to keep functioning will be unique. Carefully think through any tools, equipment, and resources you need for your business. Once you’ve determined the estimated time and expense you will need to put in to your business, triple it!
No matter how carefully you plan, life happens and unexpected expenses will occur. Make sure you have enough wiggle room in your budget to handle the complications that will come your way.
Succession Planning
Setting up a succession plan includes planning for changes in your company and developing future leaders. Although succession planning doesn’t directly relate to finances, it can impact your financial planning and liability.
Think about and plan for how your business will continue to function if a key owner, partner, or employee leaves. Document processes and keep records so that if changes do occur, you still have the information you need to keep your business running smoothly.
2. Plan for Future Business Needs
Though there is a lot of uncertainty that comes with starting a business, begin with a long-term mindset by planning for the future success and growth of your company. Here are a few financial tips that will help you start on the right foot.
Set Up a Safety Net
Protect yourself and your investments as a business owner. Once your company begins generating revenue, set aside enough money to cover 2 to 12 months of expenses. Markets can change quickly. Having an emergency fund set aside will ensure you can keep your business running if an unexpected dip occurs or if you need a buffer to figure out new solutions.
In addition, diversify your investments as well as your markets. Having a diverse portfolio will protect you from sudden drops in any revenue source.
Plan for Retirement
Business owners have additional flexibility when it comes to their retirement contributions. Instead of being tied to a fixed percentage, you can adjust your retirement contributions to help lower your tax bill or bracket.
As you near the end of the year, talk to an accountant or a financial advisor to maximize your retirement contributions and tax savings. You can always reach out to our team for guidance about what is best for your specific situation. We would love to help.
3. Prioritize & Delegate
Small business owners are go-getters. But while we would love to do it all, we have to recognize that doing it all isn’t good for our sanity or our business.
Be smart about how you use your time. A survey by Sage showed that businesses around the world spend an average of 120 working days per year on administrative tasks, which impacts productivity and profitability. For small businesses, that number can climb even higher.
The takeaway is that the more time you spend figuring out books the less time you have to focus on growing your business. Find ways to lessen that burden so you can focus on what makes the biggest impact.
As a business owner, you will find there are a million and one things you can focus on in a day. Use your business plan to set a few realistic goals each month or each year. Then, use those goals to set your priorities.
Once you know your priorities, figure out what you can delegate or outsource. Find trusted partners or companies that can help you maximize your time.
4. Maximize Your Tax Benefits
There are several perks that come with owning your own business, including tax deductions. Take advantage of these benefits and understand how these deductions can impact your expenses in the long run.
You might be wondering, “How much will a tax deduction really save me on my taxes?” It’s important to weigh the costs of a business expense versus the actual tax savings to decide if that purchase is worth your money.
Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
If you don’t know your tax rate, using 25% to 30% will give you a close estimate.
Once your plans and goals are in place, review them often. I’d suggest keeping a printout of your goals someplace you can see them as you work.
When you start to feel overwhelmed, look at your goals and focus on what you can do today that will get you closer to accomplishing those goals. That will help you tackle what matters most.
In addition to reviewing your plans, review your financial reports often. Get familiar with these reports and learn what they mean and how to read them. These will help you budget, make projections, secure loans or funding, and build a foundation for financial success!
If you still have questions regarding your business finances, taxes, or accounting, reach out to our team at Mazuma USA. We help small businesses save time, money, and stress managing their bookkeeping and taxes, and we would love to help you!
FAQs for Managing Business Finances:
Why is a business plan essential for financial stability?
A business plan outlines your vision, market research, costs, and strategies, crucial for financial stability and growth, offering a roadmap to success.
How should small business owners approach tax planning?
Set aside 25% to 30% of net income for taxes, considering self-employment tax. Deduct expenses from income and allocate a percentage for tax obligations.
What considerations are vital for expense planning in businesses?
Regularly evaluate and anticipate expenses, accounting for operational costs, marketing, salaries, and unexpected events, ensuring financial resilience.
Why is succession planning important for business owners?
Succession planning ensures continuity amidst personnel changes, safeguarding operations and financial stability by documenting processes and preparing for transitions.
How can business owners maximize tax benefits effectively?
Understand tax deductions and their impact on expenses. Utilize a simple formula to estimate tax savings and explore common deductions like business travel, equipment, and retirement contributions.
Financial planning is essential for anyone who wants to achieve financial independence. The goal of financial planning is to help you reach your financial goals, whether that be retiring by a certain age or having the money to open a new business. For small business owners, financial planning is especially important because you need to ensure you’re planning for your business as well as yourself.
Here are four tips to keep in mind:
1. Establish personal & business financial goals.
Because the purpose of financial planning is to help you reach your goals, you need to decide what you’re trying to obtain. It’s best to make these decisions with your family or business partners.
First, get with your family and decide what short-term and long-term goals you have for your finances. Do you want to buy or build a home? Do you want to go on a nice vacation every year? Are you planning to save for college for your children? When do you want to retire and what will retirement look like? How much money will you need for retirement? Once you set your priorities, you can begin to plan for those goals.
For your business, you’ll still need to set goals. How big do you want to grow? Do you want to get to the point where your business provides a passive income? While these goals are a big part of business financial planning, you also need to take into account how you’ll run your business. Are you setting aside money for taxes? What will happen when you (or a partner) leave the business? Do you have funds to pay your employees?
Determining what you want from your life or business can help you and a certified financial planner determine what steps you need to take to reach those goals. We’ll focus on business financial planning for the rest of this article, but talk with a financial planner to determine how you can meet all of your goals.
2. Set up a safety net.
Owning a business is a risky endeavor. Changes in the market can affect your business and leave you powerless. In order to brace for these changes, it’s smart to set up a safety net. With your financial planner, determine how much money you should set aside for your safety net.
One of the best ways to build a safety net is to diversify your income. This way, if one aspect of the market crashes you don’t lose everything. Typically small business owners have their money tied up in their own business, but you need more than that to build a safety net. Learn about different investments (stocks, real estate, precious metals, securities, etc.) so that you have multiple income streams. When you diversify your portfolio, you carry less risk.
3. Plan for your retirement.
Retirement planning is an essential aspect of financial planning, especially for business owners. Just because you love what you do doesn’t mean you want to do it until the day you die.
People who work for someone else often have retirement benefits through their job, but business owners don’t have that luxury. They have to plan for retirement on their own, which is why it needs to be on your radar. There are many different retirement options (401k, IRAs, etc.). Speak with a financial planner about which option is best for you. You’ll also want to look into the best way to fund your retirement plans. Since you don’t have your employer contributing, learn how you can contribute the maximum amount.
4. Plan for your current business needs.
As a small business owner, you have a lot of financial responsibilities. You aren’t just responsible for making money; you’re responsible for taxes, employee wages, business assets, and the list goes on. Here are a few things to keep in mind when you’re planning for your business:
Taxes
Taxes should always be at the forefront of your mind when it comes to business finances. You should always be setting aside at least 25% of your income for taxes. You also need to make sure you’re paying estimated quarterly taxes.
Different business entities (sole proprietor, S corp, LLC, etc.) all have different tax responsibilities. Make sure you know what your business entity requires. An accountant can help you determine how much you need to be setting aside for taxes according to your business type and can help you strategize how to maximize your tax return. If you have questions, reach out to our team at Vyde USA. We specialize in helping small businesses save time and money on their accounting, bookkeeping, and taxes.
Business Costs
When you are planning finances for your business, you need to factor in the cost of doing business. Every business has expenses, whether that be the expense of creating a product, employee wages, rent, equipment, etc.
It’s important that you find a way for your revenue to outweigh your expenses. Without that, you’ll never have a successful business.
Succession Planning
Setting up a succession plan, which includes strategizing around how to develop and grow future leaders in your company, should be a part of your financial planning. Although it doesn’t directly relate to finances, it can carry a lot of liability. You’ll want to make sure that your business has a succession plan for a number of scenarios: business partner leaving the business, death of a business partner, retirement, expansion, etc. No matter what the situation is, you’ll want to have a plan in place so that your business doesn’t suffer. Learn more about succession planning in this informative post.
There are a lot of other aspects of financial planning that small business owners should consider. It’s best to go over these with a professional to ensure you don’t overlook anything crucial.
If you're wondering, "How many years can I claim a loss on my business?" then you're probably reaching a point where you've been claiming too many losses on your taxes. The Internal Revenue Service (IRS) only allows your business to be in the negative for a certain number of years before it declassifies it as a business. We'll teach you the rules regarding business losses and help you determine if you can still claim your business on your taxes.
How many years can I claim a loss on my business?
The IRS will only allow you to claim losses on your business for three out of five tax years. If you don’t show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes.
After you claim a loss for three of the five years, the IRS will classify your business as a hobby. Hobbies are not tax deductible so you won’t be able to claim any of your expenses on your taxes. This declassification is called the Hobby Loss Rule.
How can I prove my business is more than a hobby?
If you want to continue claiming your business on your taxes, you need to show the IRS that it’s more than just a hobby.
First, you’ll have to show that you are running your business as a business, not as a hobby. You should meet these three criteria:
Have a business plan.
Show that you have plans, or at least intentions, to turn a profit.
Present business records that show you understand how to report business income accurately.
The IRS will also consider the following factors to determine if your business should qualify as a business or hobby:
Have you made a profit in the past?
Do you live off of the income made from the business?
Were your losses beyond your control?
How much time do you put into the business? Are you spending enough time to make it profitable?
Did you change your business methods in an effort in increase profits?
Do you have the knowledge to run a profitable business?
Your business should be able to positively answer at least a few of these questions. It takes more than just one to be considered a business.
What do I need to know about still claiming my business after it’s been classified as a hobby?
First, you need to understand that if you try to claim a loss on your hobby (even if you consider it a business), it could trigger an audit by the IRS. You need to determine if you want to still claim losses on your business after it’s been classified as a hobby. Typically, you can determine this by going through the questions we outlined earlier.
The best way to show the IRS that you’re a serious business owner is to keep records. Most people don’t keep records regarding their hobbies, so this simple tip can help prove that your intention is to run a profitable business.
Just because you feel like your business is more than a hobby doesn’t mean the IRS will agree. It’s best to talk with a professional accountant to assess the auditing risk associated with claiming your business on your taxes again.
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FAQs about Claiming Business Losses on Taxes:
How many years can I claim a loss on my business?
The IRS allows you to claim business losses for three out of five tax years. Afterward, it may classify your business as a hobby, making it ineligible for tax deductions.
How can I prove my business is more than a hobby?
Demonstrate you’re running a legitimate business by having a business plan, showing profit intentions, and maintaining accurate business records. Factors like past profits, time investment, and business knowledge also influence the IRS’s assessment.
What happens if my business is classified as a hobby?
Once labeled a hobby, claiming business losses triggers an IRS audit risk. To avoid complications, consider the questions outlined earlier to assess if your business qualifies, and keep meticulous records to demonstrate your seriousness.
Can I still claim losses after my business is classified as a hobby?
Attempting to claim losses on a hobby may lead to an IRS audit. Evaluate the risks and, if determined, consult a professional accountant for guidance on proving your business’s legitimacy.
How can Vyde assist with tax and accounting concerns?
Vyde supports small business owners with expert tax and accounting services, saving time, reducing stress, and optimizing financial management. Reach out for personalized assistance and stay on top of your finances.
