You started your business because you were passionate about your idea, or because you saw a hole in the market that you could fill, or because you want to change the world. (Hey, I’m not judging!) That’s pretty freaking awesome, but…there’s more to running a business than just executing your idea. That’s why I’m here with this post to talk about how I set up my business finances!
Now, I’m not a financial professional of any kind (nor am I legal professional of any kind), but as I engage in conversation with other small business owners (whether they have a physical or a virtual business), I’m finding that many of them really don’t know what to do about their business finances. Plus, some of them are making the big, big mistake I’ll be talking about a little later in this post, which is no bueno. I figure that the more information that gets out there that gives some advice – from a fellow small business owner and solopreneur – the more likely it is to reach those who need it.
Without further ado, here is how I set up my business finances.
Separate Business Bank Account(s)
One of the very first things I did when I was setting up my business and preparing to launch it was create separate business bank accounts. This is the “big, big mistake” I mentioned above that most small business owners aren’t doing. First, I’ll explain why you need to have separate business bank accounts, and then I’ll explain my own setup.
Let’s imagine a scenario: You’re happily chugging along with your business. Let’s say you’re a Teachers Pay Teachers seller, and you create a product that you sell in your store, and it’s selling really well – yay! Unfortunately, what you don’t realize is that your creation violates another company’s copyright. Suddenly, you’re hit with a lawsuit. When you mix your business finances in with your personal bank accounts, that company can sue you for all of your business and personal assets. I’m not saying they will, but they can. Plus, from a legal standpoint, it becomes challenging to legitimize your business when your business finances are not separate from your personal ones. In other words, you are adding a great deal of liability to yourself and to your personal assets when you don’t create separate business bank accounts. Also, your accountant and/or bookkeeper will not be happy with you.
I hope you’re now thinking, “Um, let’s avoid all of that please! Tell me about separate business bank accounts!” If you are, then good. If you’re not, then I hope that means you’ve already done this step.
When I was still teaching, I had my bank accounts with Chase. But, when I left my teaching career and “worked from home”/struggled to find a new full-time job for the four months following, I had to leave Chase because they charge you a fee for your accounts when you aren’t receiving direct deposit at least once per month and/or don’t meet a required minimum balance. Many banks are like this, and these kinds of requirements can be a challenge for business accounts, as well as personal ones. So, I set about looking up every bank and federal credit union in my city, trying to find one where I could set up new accounts that would hopefully be free. I ended up deciding on University Federal Credit Union (of Texas), because they have free accounts – both personal and business! Therefore, that’s my first recommendation: Search around the banks and credit unions in your area to find one that hopefully offers free business accounts.
Next, I created separate business bank accounts. I had my personal ones all set up – and in the early days of my business, yes, I made some purchases from my personal bank account – but I needed business accounts. I went into my nearest branch of UFCU, and I got myself all set up with both a business savings and a business checking. I also got a business debit card with my account. Voila! I had separate business accounts for my spending and income, which adds more liability protection for me and my personal assets. I was just a sole proprietor at the time, so when I incorporated as an LLC back in December of 2016, it turned out that I had to close that original account and open new accounts. That was unfortunate, because it took me some time to update my payment information various places where I’d saved my old business debit card (like auto-pay for G Suite* and QuickBooks Online*), but I had to have the right kind of accounts.
Separate Business PayPal Account
Yep, you’ve gotta do this one, too! Having separate business bank accounts is super duper important, but PayPal offers business accounts, as well – and I’m sure it’s somewhere in the Terms of Service that you have to create one if you’re doing business using PayPal as a payment processor. When I first created my business PayPal account, I was still under my old branding of “The Whole Life Balance,” but once I re-branded back in the fall of 2016, I found the settings to update it to my new Leslie Auman, LLC branding (without having to create a new account). I currently use PayPal for receiving payments for editing work orders and for my monthly Teachers Pay Teachers payouts, and I also pay my annual Premium Seller membership to Teachers Pay Teachers through PayPal. That makes it super easy to go to the Reports tab in my account and download a financial summary, where I can see all of my payments received and fees paid in one place. Personally, I don’t like keeping money in my PayPal account, and I don’t often use it for paying for business expenses (and even if I do, it can just pull from my business checking account, which is linked), so I always withdraw the money to my business checking account. I’ll explain what I do with my income once it’s in my business checking account shortly.
App or Software to Track Income and Expenses
I use QuickBooks Online* these days, but I started out using FreshBooks. I made the switch because my business was growing in revenue, and I’d incorporated my business as a limited liability corporation (LLC). Plus, I have multiple income streams, and FreshBooks, unfortunately, doesn’t track income – only expenses. Overall, I personally felt I needed something more robust, so I switched to QuickBooks Online. It won’t be the best fit for everyone, and it really depends on what type of business you have to determine if it’s a worthwhile investment for you. Personally, I opted to hire an accountant, and one of the first things she did with me was help me make the transition from FreshBooks to QuickBooks. Ultimately, she did teach me how to do some of the more basic bookkeeping tasks so that I could do them myself on a weekly basis, but there’s definitely a learning curve!
But I digress. I chose FreshBooks originally because I’m a virtual assistant, and it was mostly an all-in-one stop for me. I could add clients, create projects, add tasks, track time, invoice clients, manage expenses, run accounting reports (like profit and loss), and so on. One of my main complaints with FreshBooks was that it didn’t track all of my income, like I mentioned above – only that which I received from clients paying their invoices, which were sent via FreshBooks. Therefore, the “profit” part of my profit and loss was never accurate, since I also receive income from other sources.
QuickBooks Online, on the other hand, does a lot more from an accounting/bookkeeping perspective (although you can’t track time with it, since that’s not a built-in functionality like it is with FreshBooks). You can track your income from various sources, track your business expenses, run tons of different types of reports, create and send invoices, reconcile your bank accounts, and so much more that I don’t even use or know about! Like FreshBooks, you can add your accountant to your QuickBooks account so that they can log into your account directly and find what they need to find when they’re doing your bookkeeping or working on your income tax return. You can also set up contractors in QuickBooks, if you’re working with a virtual assistant or another type of independent contractor, to make it easier for sending the right IRS forms at tax return time. QuickBooks allows you to choose between card and ACH bank transfer as payment options on their invoices, but if you receive income from PayPal, Stripe, or somewhere else, then you can categorize it as “Sales” (or whatever works best for you and your accountant) and still track it in your banking transactions.
As far as expenses go, you can sync your business bank accounts, and then you can update it at whatever frequency works best for you (I do it weekly) to categorize your income and expenses. Don’t forget to attach a receipt! You can upload PDFs for the receipts, or you can do image files like JPEGs or PNGs. QuickBooks also has a mobile app, where you can do all of these things, as well.
You don’t have to use QuickBooks Online* or FreshBooks, of course, but whatever you choose, make sure you have a system in place for tracking your income and expenses. It’s not a good idea to not have a system for doing so, because you’ll probably end up spending too much money and making your finances a mess!
Paying Myself and Paying Quarterly Estimated Taxes
I mentioned earlier that I’d explain what I do with my money once it’s in my business checking account. The first thing I do is calculate 25% of my earnings, and then I transfer that amount of money to my business savings account. I use my business savings account to accumulate 25% of my income (after PayPal fees) each quarter to make my quarterly estimated tax payments. (This is what I’ve been advised to do by my accountant.) Once the end of the quarter hits, and it’s time to make the payment, I transfer the total saved back to my business checking account and make the payment to EFTPS from that account.
As for paying myself, I currently just transfer money from my business checking to my personal checking, which is really easy since all of my accounts are with UFCU. I try to keep at least a couple hundred dollars in my business checking for covering expenses (especially my monthly health insurance premium – yes, that’s a business expense!), so I pay myself with however much is left after setting aside 25% for taxes and deciding how much to leave in my business checking. Like I mentioned previously, my business is an LLC now, and when it comes to tax time, LLCs have the option of making what’s known as the “S-election,” which means they can actually file taxes as an S-corporation, which offers certain tax benefits. When you do that, though, you have to have payroll set up and pay yourself that way. I don’t yet earn enough with my business to warrant making the S-election (someday soon!), so I don’t have this system in place. However, it’s something you should know is a possibility. Beyond setting aside money for taxes and paying myself, I use an app called You Need a Budget to manage my budget for my various business expenses.
One other fun thing I’ll note here is that it may be a good idea to give your business income a purpose, especially if you’re still working a full-time job that’s covering all of your monthly expenses already or if you’re adding a new piece to your business puzzle that doesn’t really need to contribute to your monthly expense coverage. What I mean is that you can decide that your business income (or your income from a certain aspect of your business) is dedicated to your vacation fund, or to your continuing education fund, or to your business development fund, and so on. This was an idea shared with me by Melissa of The PVA, and it totally rocked my world. My earnings from my Teachers Pay Teachers store are still growing, but my client invoices (for those who are on retainers) cover my monthly expenses. Therefore, I dedicated my earnings from the first launch of my Teacher-Seller Virtual Assistant School to business development, and I used it to upgrade my Tailwind* account, to buy an Autonomous SmartDesk 2, and other such things that would help my business run more efficiently. I have continued to do something similar – for example, I once put a portion of my earnings from a launch of TSVAS toward buying a new smartphone when I switch cellular carriers, since most companies now seem to require you to pay the full price of the phone upfront (ugh!).
I think that about wraps up my suggestions for business finances! The only other thing I can think of to share as inspiration is that you might be interested in opening a business credit card. Personally, I don’t do this (obviously, or I would’ve discussed it above). But, I do know that many business owners have credit cards for their business, so as long as you have a plan in place for making sure you’re paying it off, that might work for you, too.
What business finance step are you going to take next? Let me know in the comments!
*Links denoted with an asterisk indicate my referral links to those apps. If you sign up for an account using my referral link, then I receive a small commission, usually in the form of deducting a certain amount of money from my annual renewal fee.
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This post was most recently updated in March 2019.