12 Mar Bookkeeping Tips for Sole Proprietors
The simplicity of opening a sole proprietorship makes it a popular business structure in the United States. Under this set up, the unincorporated business may operate under a registered business name (known as a fictitious name or “doing business as” name) but it has no separate legal existence from its owner. Thus, the sole proprietor owns the business and its assets, and reports the business income as part of his/her personal income for tax purposes. Unfortunately, this arrangement also exposes the sole proprietor to unlimited liability because he/she is held personally liable for the business’ debts.
Because the business is indistinguishable from its owner, combining of personal and business property is allowed. However, accurate bookkeeping is necessary even if there is still a need for business owners to submit a report to the IRS (Schedule C) itemizing the business income and expenses (with the resulting net profit/loss amount then fed into the owner’s individual income tax return Form 1040).. In addition, properly maintaining books of accounts would help the sole proprietor determine if his/her business activity is actually making money or not.
Here are a few tips to make bookkeeping easier for sole proprietors:
- Separate the business and personal finances and records. Using a separate bank account, checking account, or credit card for business transactions makes it easier to track and record income and expenses for tax purposes.
- Keep a good filing system for records and receipts. Having an organized system will not only keep office clutter at bay, but it will also make record keeping and retention (for audit purposes) more efficient.
- Implement a good bookkeeping system for tracking and recording daily transactions, using a ledger or even a computer spreadsheet. However, since ledgers can get lost or spreadsheet data can get corrupted, it might be best to use software, such as QuickBooks, which also offers convenient cloud-based services.
- Set a regular schedule for updating the books. Making regular entries and reconciliations will help in timely monitoring the financial status of the business, and computing for the estimated quarterly tax payments due. This also helps prevent last minute cramming come tax return filing time.
- Ask for outside help if necessary, especially if it’s uncomfortable to set up ledgers or determe tax liabilities. Doing the books in-house may save money, but consulting an expert might save the business owner from a lot more headache in the long run.
With the sole proprietorship business structure, there is no requirement to file a separate income tax return or prepare a full set of financial statements for the business (since everything flows to the business owner). However, as the business grows, the business structure might need to evolve into a corporation or a limited liability company (LLC).
The owner might need to seek further financing from banks and lenders who might require audited financial statements. Thus, even at the early stages of operating as a sole proprietorship, the business owner might do well to devote time and resources in the practice of good bookkeeping as a foundation for further growth and in preparation for more complex accounting requirements in the future.