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How to Organize Your Small Business Finances

by Ryan Guina

Many small businesses face a similar question shortly after they open their doors – how do we manage our money? Like your personal finances, there is no “one-size-fits-all” approach to manage your small business finances. But there are some good practices that you should follow.

Today, I’m going to give you a quick peek under the hood of how I organize my small business finances and give you some alternative resources to help you find the best products and services for organizing your business finances. The setup I use is applicable for many small businesses, freelancers, sole proprietors, and contractors. However, it may not be right for your situation (for example, I won’t cover payroll, maintaining or tracking inventory, and similar topics). Consult with a financial advisor or tax professional for more advanced needs.

Separation of personal and business funds

I recommend using separate accounts for your personal and business funds. Separating your funds may offer you protections and will make it easier to sell your business if you ever decide to sell (determining valuation, tax reasons, etc.). It also makes it easier to handle your taxes on an annual basis. You aren’t required to separate your personal and business finances, but it is generally a good idea if you are bringing in decent income.

Depending on the size and nature of your business, you may not need to separate your personal and business funds. For example, if you have what could be considered hobby income (arts and crafts, part time web design, and similar endeavors). Regardless of whether or not you decide to separate your funds, you need to keep accurate financial records for tax reasons, tracking income and expenses, and other business reasons.

Decide on your business structure

Shortly after my small business became profitable I decided to incorporate it as an LLC. The how’s and why’s for that decision will be left for another article, but one of the main reasons I did it was to create a clear legal entity for my business and facilitate opening a business savings account. Some banks or financial institutions will allow you to open a business account as a sole proprietor*, but many require you to have a business formed as as LLC, S-Corp, C-Corp, or other legal business entity. I recommend speaking with a business lawyer or doing further research on your own if you are unsure of which legal business structure you should use for your small business. (*a Sole Proprietorship is not a legal business entity, it is considered an extension of the person running the business).

Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a specific tax number for your business, similar to an SSN for your individual taxes. A specific tax number for your business is helpful when opening business savings and checking accounts, self-employed retirement plans, and separating income for tax purposes. This is also the number you give to people you do business with, so it is a good way for sole proprietors to avoid identity theft. Obtaining an EIN from the IRS is free and easy and takes about 5 minutes. You can apply for free at the IRS website.

Open Business Savings and Checking Accounts

As previously mentioned, separating your business savings and checking accounts from your personal accounts is usually a good idea. I recommend opening a business checking account with a local branch to make it easier to deposit checks and handle other tasks. Unfortunately, many local banks don’t offer high interest rates for their business savings accounts, so while I use a local bank for my business checking account, I use Capital One 360 Business Savings Account for my business savings accounts.

You will also want to consider how you will receive payments, so consider using a service to produce invoices, receive money, handle web transactions, etc. You may also wish to open an account with PayPal and/or Google Checkout to facilitate sending and receiving money. You can also consider Intuit’s QuickBooks, which has features that allow small business owners to send and receive payments, handle online transactions, create a payroll, and maintain their business accounting. It’s a powerful tool for small business owners and is scalable depending on your needs.

Open a Business Credit Card (optional)

Chances are you will have a debit card attached to your business checking, but you may wish to have a business credit card for your expenses. Advantages of using a business credit card include cash rewards, better protections, lower liability, and the ability to float expenses, if necessary. I currently use the Chase Ink Cash(SM) Business Card and pay it in full each month. Here is a list of featured business credit cards if you are searching for a credit card for your small business.

Small Business Accounting Software

You can always use a ledger to keep track of your income and expenses, but with the variety of high quality, low cost, or even free software options, there is no need to try to save a few pennies and do the work by hand. Software is often quicker, easier, and more accurate than pen and paper. You can use a simple spreadsheet such as Microsoft Excel or Open Office Calc (free), or go with a specialized business accounting program.

I currently use Quick Books Simple Start, which runs less than $100 and covers my needs (tracks income/expenses, create invoices, stores images of receipts, store client/customer information, notes, and more). I haven’t found a better all in one solution for my needs and for the price than QuickBooks Simple Start. Quick Books is an Inuit company, so it is compatible with Quicken and TurboTax.

A QuickBooks version to fit your needs. QuickBooks also has various product levels to meet virtually all business needs – Online, Simple Start, Pro, Premier, Enterprise, and a version for Mac users. There are also QuickBooks versions to accept payments, run point of sale software, or do payroll. In short, there is something for most small business applications. You can check out the details for each of the various QuickBooks products at the QuickBooks website or check out some QuickBooks coupon codes for more savings.

Other popular business accounting programs include:

*A note about Quick Books and Peach Tree: Most accountants should be familiar with QuickBooks and Peach Tree, so it’s not a bad option to check out those or speak with your accountant for advice before purchasing or selecting a software program for your accounting needs.

Create a System to Organize Your Taxes

I use an accountant for my taxes, but I like to do everything in my power to make it easier on both of us. Creating a system for organizing your taxes makes everyone’s job easier. My basic tax organization system involves using Quick Books for tracking income/expenses and storing images of receipts, and I maintain several manila envelopes for each tax year where I file my receipts and invoices. I also maintain a separate folder for all legal documents and correspondences (i.e. LLC articles of corporation, IRS documents, tax forms, business permits, etc.). Finally, I scan everything to my hard drive and back it up to an external hard drive for additional protection against data loss.

Hire an Accountant that Specializes in Small Business (optional)

Not everyone needs to hire an accountant, but you may find that your personal and business tax situation dictates the need for professional help. Chances are, a good tax professional can help you find ways to maximize your business deductions and find other methods to help maximize your return. An accountant will also help you calculate self-employment taxes and estimated taxes, both of which are essential for small businesses. A good accountant should stand by their work and help you if you are ever subjected to an audit and the tax preparation costs are a qualified business expense you can write off the following year. Finally, outsourcing this business task frees your time for more important tasks, such as working on revenue-generating tasks.

Self-Employed Retirement Plans

Even if you run your business part-time and have an employer-sponsored retirement plan, you should still consider opening a self-employed or small business retirement plan. There are many benefits, including investing more money for your retirement, tax deferrals, and more. Which small business retirement plans you are eligible for and which is best for your situation will vary depending on many factors, including your business size and structure, income, and other factors.

The most common SE Retirement Plans are:

I chose to open a Solo 401k with Vanguard. After examining the plans I was eligible for, I discovered a Solo 401k was the plan that offered me the potential to contribute the most money each year (business income allowing). I chose Vanguard because they offer a wide variety of low cost funds, excellent customer service, and I have had individual investments there for almost a decade.

There are many other financial institutions that may meet your needs, many of which are also among the recommended places to open an IRA. *Consult with a tax professional, business advisor, or do thorough research before choosing your Self-employed retirement plan.

This is not a complete guide on how to run a business

This article only covers how I manage my small business finances. Your needs may vary depending on your business situation, the size and structure of your business, the type of business you run and other factors. You may be required to obtain licenses, permits, or other documents based on your state and local laws. Other considerations include doing business as (DBA), trademarks, etc.

Customize Your Own Financial Plan for Your Business

This is my basic business setup, and it works well for me. It may also work for your needs if you are a freelancer or other small business owner who doesn’t deal with inventory or licensing issues. Feel free to use this as a rough template to get started, but your business is unique, so customize it where necessary.

Questions or comments? Leave a comment and I will address it in the comments section or in the article, whichever is more appropriate.


Published or updated September 3, 2014.
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{ 20 comments… read them below or add one }

1 Craig

Lots of great info here. I’ve been thinking about better organizing my small business. I need to better track my income and expenses and I’ve been considering business accounts.

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2 Ryan

Craig, I like having a business account because it makes it easier for me to keep everything separate, but it isn’t 100% essential for everyone. However, it is essential to keep accurate records.

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3 Kevin

GREAT article Ryan!

As a CPA, we always recommend having a separate business account. It makes for an easier defense in defending the business purpose of your organization (business vs. hobby) to the IRS in case of an audit.

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4 Kyle C.

Good stuff, I chose to setup as a sole proprietership at least for now. The costs associated with forming an LLC didn’t seem justified for me yet. I wasn’t aware that you could get an EIN as a sole proprietor.

How does taxes work when you are using both an EIN and SSN? Since both an LLC and a sole proprietorship pay taxes on their personal tax returns?

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5 Ryan

Kyle, I believe you would put your EIN and SSN on the same tax return (I’m not exactly sure where the info goes on the tax return because I use an accountant now). The IRS knows the EIN is tied to your SSN, so it all comes back to you anyway and is taxed as personal income.

Getting an EIN may be a good idea because you can handle all business activities through an EIN instead of an SSN, potentially reducing your risk for identity theft if your SSN were to be lost or misused.

Regarding LLC vs. sole proprietor: There is a cost involved with an LLC and it can vary widely. In my state the cost is only $125 for a lifetime LLC. In some states the upfront cost is close to $1,000 and there is an annual renewal fee. LLC’s are run by individual states, so there is variance in the cost and setup.

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6 Christina

I’m a freelancer who have started out a small business…info you shared here is just exactly what I need to organize everything because honestly, I get lost in the way with my finances…

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7 PT

Great write up, Ryan. I’m taking these same steps this year. Recently filed the LLC and made the SCorp election. I’m looking forward to an easier tax time next year.

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8 Ryan

Make sure to keep accurate records. That is the key.

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9 Financial Samurai

Definitely lots of great info here Ryan. Did you incorporate yourself or this site?

Any idea how much it costs to incorporate a business? I’m assuming it can’t be that hard or much < $1,000?

thnx,

Sam

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10 Ryan

Sam, I created an LLC that encompasses all of my websites (I have more than just Cash Money Life and The Military Wallet). For tax purposes I track income and expenses for each site under the LLC and one EIN, but I also track each site individually for personal reasons, that way I know what each site is bringing in. That info is good so I can compare trends or if I were to ever decide to sell one or more sites.

The answer to the second part of your question really depends on the details for your specific situation. The cost for forming a legal business entity varies depending on many factors. I formed an LLC, which in OH is a one-time $125 filing fee. Some states are closer to $1,000 and may have an annual fee on top of that. I also formed my company myself because the paperwork was a simple one or two page form (it’s been a couple years, so I don’t remember the details). However, some business formations are more detailed and may require legal assistance.

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11 Barney

Very informative article!

If you could just clarify a couple things? I’ve done bookkeeping for several small businesses, but they were all incorporated. I completely understand how and why company and personal expenses must be kept separate – and have had to deal with people who did not. But my understanding is that a sole proprietor and his company are one. So as long as I’m diligent about allocating all income and expenses to the proper accounts (separating business from personal) it seems like overkill to have separate companies within QuickBooks Pro or, even more expensive and time-consuming, record all business transactions in QuickBooks and have other software, like Quicken, for my personal finances.

I’d also rather not apply for, have to keep track of and possibly pay an annual fee on yet another credit card solely for my business use – especially when I often buy both personal and business items in one shopping trip. Likewise, since all my income goes to me, and all my expenses come from me, it seems an unnecessary complication and expense to have a separate bank account for my business.

For a small sole proprietor, isn’t QuickBooks Pro robust enough to keep business and personal finances adequately separate if I use its features correctly?

Lastly, if my understanding has any validity in the first place, would that all change if I were to someday form a LLC?

Thanks for a great article.

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12 Ryan

Barney, the most important thing to remember is to maintain clear records of which expenses are business, and which are personal. I know a few small business owners who keep track of everything (personal and business) in Quicken and they don’t have any problems with it. Quicken and QuickBooks are both powerful tools. I personally use QuickBooks for my small business because I prefer to have everything completely separate – it makes things much easier for me.

But everyone has a different situation. If you find it easier to maintain one set of books but you can clearly segregate personal and business income/expenses, then it probably isn’t an issue for your situation. But if you have a business that you may sell at some point, then this probably isn’t a good idea because the buyer will want to see all tax records (would you really want a potential buyer going through your personal tax records?).

The key take away is this: Be sure you can clearly separate business and personal income/expenses for tax purposes, and find a method that works for you. Best of luck!

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13 Ed

Thanks for the great tips Ryan. I’ve had a mess to sort out the past several years at tax time for not keeping my business and personal spending separated. I think I need to start by getting a business checking account and keep the money separated.

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14 parx

i think reducing unnecessary expenses towards zero is a key

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15 Katie

Myself and other members of my financial accounting class found these tips very insightful when trying to understand how accounting works. Although not meant for academic purposes, this article helps personalize business-directed financial activities in way that is identifiable. Thanks!

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16 Sarah

I work for a small business. I recently relocated back to work in the office from working remotely. I am in management position and have noticed many red flags with the accounting department. The accounting lady rarely comes in, there have been unposted bills from last Sept., there have been many vendors calling lately demanding payment. I work closely with the owner and he respects my opinion. How do I tell him there is a huge problem and we need to fire the accounting lady or find someone to do the job? She is also responsible of HR department and yes she lacks this area also. She is the owners sister in law. How do I approach this situation to my boss, the owner?

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17 Ryan Guina

Sarah, this is a big red flag, and may indicate more that just poor performance. It could also indicate the company is in financial troubles. My recommendation is to be discrete and non-adversarial. Just mention to the owner (so no one else can hear you) and say that you have noticed a few issues with vendors and creditors and ask if there is anything you can do to help. It may be that the person in the accounting department is having some personal issues and just needs help, or it may mean that the company is having financial problems. There could also be other issues at hand. Best of luck.

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18 Sarah

Thank you Ryan for feedback. Very appreciated!

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19 Rose

Hi Ryan,

I think this article is great! It really layer out a plan for how to set-up the financials which is exactly where I’m at currently. My questions is what tool do you use for your personal finance tracking? I’m considering purchasing Quickbooks and was looking to understand how I can also track personal expenses better so I can keep everything separate. I recently opened a separate business account and a separate paypal business account and I want to make sure that everything is separate, however I’m also looking to track personal finances better as well.

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20 Ryan Guina

Rose, I use QuickBooks for my business. I use it to track income, expenses, mileage for business trips, and some other info. There are some other options out there, including FreshBooks, Wave Accounting, and more. For personal finances, I have used Mint.com and Quicken for general budgeting and net worth. For investing, I much prefer Personal Capital or FutureAdvisor (both are free). Here is a list of some other online money management tools. I hope this helps!

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