In today’s gig economy, many people are starting a small business from home or turning a hobby into a part-time job. What do you need to know about business finances when you are just getting started? These are the five financial aspects of running a business you must consider.
1. Business Formation
Consider whether you need to form your business as something other than a sole proprietorship. Organizing and registering your business as a corporation separates you and your personal finances from the business and shields you from any liabilities the business incurs, whether it is debt or a money judgment from a lawsuit.
If your product or service has the potential to harm others, consider incorporating.
2. Keeping Track of Operating Expenses and Sales
You can use something as simple as an Excel spreadsheet or purchase any of the many good accounting programs available, but you must keep track of both expenses and sales.
When logging expenses, do not forget the following, especially if you operate your business from home:
- Utilities (partial, considering the space you use and for how long each day)
- Cost of website and domain name
- Cost of software
- Office supplies
- Postage, if not paid by the customer
3. Do You Need Insurance?
Whether or not you need insurance depends upon whether you offer a product or service that has the potential to harm others in any way and whether you allow customers or clients on your business property.
Premises liability insurance will protect you if customers, clients, or passers-by are injured on your commercial property. Product liability insurance will shield your business from liability for harm from the product you make or sell. Professional malpractice insurance, also called Errors & Omissions insurance, will protect you if, while performing your service, you cause harm to your client.
4. Do You Need to Collect Sales Tax?
The answer to this question will depend upon what service or product you offer and what state you operate your business in. Even if you operate your business virtually, you may need to collect sales tax on sales in certain states.
Be advised that sales tax is one of the few debts you cannot discharge in bankruptcy.
5. Do You Need to Pay Quarterly Income tax?
If you were surprised by owing a substantial amount of income tax this spring, chances are the IRS will require you to pay quarterly income tax. The IRS will supply you with a packet of invoices based on last year’s earnings, and you will simply write them a check for that amount each quarter and mail it.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy lawyer in Philadelphia, PA.