What should I consider when deciding what form of entity to choose?

The form of entity you choose should be guided by many factors, including the size and structure of your business, differences in taxation based on form of entity, legal considerations, and your business goals.

What are the most common types of business entities?

The most common types of business entities are sole proprietorships, single-member and multi-member limited liability companies (LLCs), partnerships and corporations.

What are accounting methods?

An accounting method is a set of rules used to determine when and how income and expenses are reported on your financial statements and tax returns. There are several methods of accounting available to small businesses. The most common methods are the cash method and the accrual method.

How do I choose an accounting method for my small business?

The decision of which method to use should be based on several factors, including which method most clearly reflects your income and expenses. Other considerations include the size of your business and your plans for future growth, and the number of owners you plan to have in your business. Once you choose an accounting method, you must follow it consistently.

What are typical deductible expenses for small businesses?

Deductible business expenses might include salaries and related payroll taxes, rents, taxes, licenses, repairs and maintenance, advertising, travel, dues and subscriptions, insurance, office supplies, and telephone. In addition, there may be industry-specific expenses that are deductible. For example, a dentist will have dental supplies expenses, and a retailer will have costs for inventory purchases. You may also qualify to deduct business start-up costs, costs for machinery, equipment and furniture purchased by your business, car and truck expenses, and an office in your home, if requirements are met.

How should I keep track of my business income and expenses?

It’s important to keep track of all of your business income and expenses. It’s also important to retain documentation to support your expenses, such as receipts and paid bills. There are several options available for tracking business information. You can use software like QuickBooks Online, Wave and Xero. These options offer features like invoicing, expense tracking, financial reporting, and integration with other business tools. As an alternative, you can use a spreadsheet or handwritten log sheet. The method is less important that ensuring your records are complete and accurate.

Do I need an accountant for my small business?

It depends on how complex your business is. If you have a simple business and a limited number of transactions, you may be able to manage your business finances without assistance. However, if your business is more complex, or is growing, or you are not knowledgeable about business finances, it may be helpful to hire an accountant. Consider your comfort level, time availability and the complexity of your business activities when making this decision.

What is a chart of accounts?

A chart of accounts is a listing of the accounts your business will use to record and track your financial transactions in your books (also called your general ledger).  This listing is used to organize your transactions in a way that is meaningful for the business owner and for other parties, like your bank.  These accounts will also provide the summarized information needed to prepare your business’s tax returns.

There are five types of accounts in your chart of accounts. Here’s a brief description of each type of account.

• Asset accounts include bank accounts, accounts receivable, furniture and equipment, etc.  Asset accounts represent things of future value that a business owns or is owed by others.
• Liability accounts include accounts payable, loans payable, payroll tax liabilities, etc.  Liability accounts represent what the business owes.
• Equity accounts represent ownership interests, profits and losses.  These accounts may include owner’s investments, retained earnings, and capital stock, depending on the form of entity your business uses. 
• Income accounts include sales income, interest income, and other income accounts, and
• Expense accounts, including accounts like wages, payroll tax expense, office supplies, travel, and other expenses.

Each of your transactions is categorized according to the type of account it belongs to.  For example, if your business pays for pens and paper, this transaction will be classified as “Office Expenses”.  If you need to take a business trip and pay for airfare, this transaction will be classified as “Travel Expense”.