First Year Small Business End of Year Checklist – Small Business Show 150

The Small business show episode 150 for Wednesday, December 20, 2017. Greetings, folks and welcome to the Small Business show here at BusinessShow Co the show by, for and about small business owners. Sponsors for this episode include storyblocks@storyblocks.com where you can get their special triple bundle on images, video and audio. We'll tell you more about that a little bit later. Here in Durham, New Hampshire, I'm Dave Hamilton.

And in Lafayette, California, I am Shannon Jean. How goes it, man?

It comes and it goes. How goes it with you?

Pretty good. It's ups and downs of the small business owner. And like we were talking before the show, just when I think I have everything figured out, I realize the only thing I don't have figured out is product. Pretty much everything.

All of it. Yeah. The one thing you've figured out is that you don't know anything. Yeah, I'm in that boat.

Yeah, yeah, yeah. But, you know, you just have to power through the problems. And it just seems like after all these years I wouldn't have to continue to solve the same problems, but over and over again. But you know, it's a new business that we're rolling out and of course you run into the same things over and over again.

So I guess that's true. Whenever I run into the same problems, I always try, like, I stop and think, like, the question I ask is, all right, how did I get here again? Like, is this my fault? And sometimes, like you said, you're starting a new business. So some of those problems are sort of predictable and perhaps unavoidable. But I always try and look like, could I have done this differently and not.

Well, I think, yeah, you could probably do things, but different. But if you're working with other people, that's always the unknown. Right. How things are going to work with them and that you can't, that you can't really control. So you're, when you see those things, like, oh, okay, we have to fix this.

Right? We have to fix it.

But, but it's all good. You know, it's the end of your stuff. And like we did our show a few weeks ago just, you know, end of year tasks that you need to take care of. And we thought today we would talk about end of year tasks for brand new businesses. If you're just getting started this year.

Yeah, yeah.

And things you need to do.

I've had, I've had a couple of conversations with people, you know, doing this show and just doing what I do. I'm sure you wind up in the same boat where, you know, friends will ask, hey, so it's, it's, you know, first year in business, like, what do I need to think about before the end of the year? And, and I, yeah, I thought that would be a good episode to do. I mean, I guess the, I agree the first thing to think about is did this hobby that you have, because a lot of times that's how you can couch your business. It might have started as a hobby or something, certainly on the side that began earning a little bit of money, did it earn enough to take it to the next level, to quantify it as a different type of entity? Because I think that's, if you're going to do something before the end of the year, like that's really important to think about. And I would say all in fact, as I look back, I think every business entity that I've created has been in the month of December. And that's because it can, it can, it can therefore then have existed for the entire year as far as the IRS is concerned. Sure.

And I think you have some history and you know, somewhat of a track record at least to see, okay, what, what kind of entity do I need to start or do I need to start? Right, yeah. Did it work?

I need to start one. And if so, yeah, I guess which really just sort of factors into answering the question what type of entity should my business be? And the answer might be a schedule C self employed entity. Right. Which is, which you can sort of do after the fact, certainly, because you don't need to create anything. You are already an entity and you're just attaching this to yourself. But there's, you know, there's reasons where maybe you want to turn it into an LLC or an S Corp or a C Corp. Probably not a C Corp, if you're even, probably asking the question.

Unless you're. Yeah, yeah, yeah, yeah. Well, and I think that like I have a standing rule that I think if you're launching a new concept, a new business or whatever, I think you need to give yourself 24 months, you need to give yourself a couple of years to, to see how things are going. But certainly after the first year or coming up on the end of the first year, you ought to have a good sense of what size, what kind of volume you're doing and what makes sense. And I think especially this year, as we're projected to have some new tax rules put in place. And from my cursory reading of them, and who knows, I may have read More than the people that are actually voting on this bill. The LLC and these pass through business entities are going to get a pretty significant, significant break over individuals running businesses. So I think that you definitely want to try to look into that and see if that can help you.

Yeah, for sure.

Especially if you made some money.

Yeah, I agree with that. From what I've read too, the separate entities that are pass through entities. So like you said, an LLC or an S Corp.

Right.

Are going to be treated much better than the individual sole proprietor Schedule C. The while we're doing this though, remembering that some of you listening are brand new to this, the concept of a pass through entity. What that is is you're going to create a separate company but that company has no income tax liability on its own. What it means is any profits or any losses pass through to the members of the company. If you create a single member company, well then they pass through all the way to you. A multi member company, if you have a partner, passes through to both of you and it doesn't have to pass through evenly.

Correct.

It can pass through 100% of the profits or losses to 1 and 0% to the other and of course anywhere in between. I will say this and I don't know if this is the, the way things work with the new tax rules, But Single Member LLCs, limited liability corporations in the past have usually been taxed as sole proprietorships. Multi member LLC get taxed as partnerships and get the benefits of being taxed as partnerships. A lot of times what people will do is create a multi member LLC say with their spouse and again you can have 100% of the profits go to one person and 0% to the other. That's still a multi member LLC. You got to check with your accountant on all this stuff. But.

Absolutely.

But bear that in mind.

And that brings up a good point is have you, or if you haven't already finding that an accountant and, or a bookkeeper. Often people find a bookkeeper first to kind of help them get things going and get set up their books and things. But you really will benefit by having conversation with accountant that can guide you here and say well what are you doing and what kind of volume and this is. Oh, let's. We would suggest structuring it this way. You can certainly go out and start an LLC. You can go to LegalZoom or you know there's, there's a bunch of sites that do it online for you now, relatively inexpensive and. But you'll be really well served by talking to an accountant this time of year. And you don't want to wait, you don't want to do it in February, you don't want to do it in. You know, as you start to get closer to tax time and things get really busy, it's going to be harder to get somebody to talk with you. So, you know, Christmas before the holiday, maybe even in between if they're open, probably a pretty good downtime where you may get an opportunity to speak to someone.

That's true.

Yeah, yeah, yeah, yeah. We had our meeting, we do two meetings during the month of December, financial wise. We met with our accountant last week and went over everything and, you know, spread all the papers out, let them know what's going on and they can give you advice and some significant advice about how you handle things and, you know, putting your spouse on payroll, benefits to your retirement. So they really can, you know, that's their job. They can really help you look through that stuff. So hopefully this new entity you started is making some revenue and throwing off some income and some profits. So you need some help with that in the next meeting. We met with our financial planner and did all our personal stuff and what's going on with that. So those are really two great meetings to have in December, I think.

I couldn't agree more. Yeah, I've had, and I know this, for a lot of people who listen to the show, especially that you're already running your business and you have been for years, this is going to seem a little pedantic, but it's not. I've had people ask me, what's the definition of a write off? How does that work? I'll explain it very quickly. You've got money coming in. Let's say you had $1,000 that you were paid to do a job, but in order to do that job, you needed to buy some parts that you were going to use in making that job happen. And you needed to consult with, say, an expert to make sure you were doing it right. And then you needed to drive to and from the job to get it done. Those three things cost you money, right? And every dollar that you spent on those three things comes off the top of that thousand before it's called profit to you. So let's say you spent a hundred bucks on parts, you spent a hundred bucks on the expertise of somebody else, and you spent, you know, you got to the IRS's math for mileage, but let's for the sake of argument, say it was 50 bucks worth of drive time and mileage that's expensible. So now you've got 250 bucks in expenses, your profit, that's your write off, your 250 bucks, that's your expense and that comes off the top of that thousand. You're now at 750. You don't necessarily have to classify everything by job though. You don't have to say, in order to make that thousand, I had to spend this hundred. As long as you have a reason, a reasonable reason, to spend money at your business, you can just add up all the income and add up all the expenses and subtract the latter from the former and come up with a number. So if you had to buy a computer for all of your business, you don't have to assign it to specific income lines that come in. You just, it's an expense, it comes off of everything else. That's. Yeah, yeah.

And I would, you know, the things that kind of always would sneak up on me that I would often forget because I'm running full steam trying to, you know, generate that top line revenue. That's what I've always paid attention to.

Yeah.

But it's often the little things that really seem like small expenses that really add up in the course of either, you know, if you, if you're an business that sells products, you know, getting your products out the door, or if you're consulting, you know, all the things that are required for you to do your job can help you tremendously when you're, you know, looking at what your tax liability is and things. And that's what you're, a good accountant can really quiz you on, you know, what's going on and help you set up your books to where that stuff won't be, won't be neglected.

Right.

Because it can really add up.

It can.

Yeah. And things like, you know, if you're working out of your house, what business related expenses are you incurring from your house? I mean, and what to your point, what is reasonably reasonable to write off as an expense on your business versus a personal expense? And whether that's your Internet access, your, you know, your part of your rent or your mortgage, insurance, you know, maintenance, all those kinds of things that you would be able to write off if you had a building or an office somewhere and you're paying all those kinds of things. You don't want to forget those things. Especially now, you need to keep, as it's your patriotic duty to keep as much of that cash in your pocket as you can to keep the economy rolling. Good. Not to necessarily Give it to the government.

That's right. A lot of the people that I talk with, and I know some of you listen to this show, are my fellow musicians out there. And one thing that happens in this particular business, but it's applicable everywhere, is one person generally is the one that gets the gig, right? And so that person sometimes has to give their tax information to the club or wherever it is that you're playing. And so let's say that that gig was worth 500 bucks and there were five people in the band, right? So that person goes, at the end of the night, they collect the 500 bucks. They give everybody in the band 100 bucks. They keep 100 for themselves. And now the end of the year comes and that. And let's say you played at that club twice. There's a reason I'm saying that, but we'll get there. So you've got $1,000 worth of revenue from this club, and now the person who runs the band in January gets a piece of paper from the club, a 1099 that says, we paid you $1,000. And you go and look at that, and you say, well, now I have to pay taxes on $1,000. Well, yes, taxes on that thousand dollars need to be paid. And if you get a 1099, know that the IRS got a copy of that, and they're going to be looking to match that up when you send your taxes in. So they are going to track that whether they're actually going to hunt you down if you don't do it or not. You know, that's just rolling the dice. But they do have that information. However, everybody in your band is a freelancer that works for you now. And so each of those people, you paid 200 bucks. So you paid 800 out. You got 1,000 in. Really, you only need to be responsible for $200 worth of profit and the taxes on that. But you have to keep records of that. And you might need to send out 1099s of your own. If you paid any one Freelancer More than $600 in a year, I think it's still 600, right? That number.

I think so, too.

Yeah. And so that's how this works. And that it's an important thing to remember, especially for people that are doing. I know I've had people that start, like, an ad hoc landscaping company, and they pick up their friends or whatever, and they have them help mowing lawns and cleaning things up. And that can turn into not just a real business, but a really Thriving business. But you need to keep track of how much you've paid out to other people so that you're not eating the taxes on that all on your own.

Yeah. And I would say that you also need to consider the cost to manage the, you know, finances and the paperwork, and that there may need to be an administrative fee that you are deducting from what you're paying everybody else. If you're going to have to file, if you're going to have to keep track, you're going to have to possibly send out 1099s to these folks. Well, that takes some time, and it may not be something you want to bring up and talk to people about, but when it's taking your time and at the end of the year, and especially if you're doing something that generates some good revenue and there's lots of people involved, it can take a significant amount of your time. So don't forget about that.

Yeah, don't forget about it. That's right. Yeah. Yeah. No, administrative fees are fair game. I mean, again, you've got to make sure that, especially in a scenario like I described where it's a band, where everybody knows what the gross total is being paid, that should just be discussed up front. Like, okay, I'm gonna take 10% as an admin fee for getting the gigs and organizing everything. And, you know, I actually, for every band that I'm in, and I realize I'm probably a little different, but for every band that I'm in, that's the first thing I talk about. I mean, once we figured out if we can, like, play together or whatever, then it's okay. I want to tell you that you have my permission for any gig going forward ever. If you don't already take an admin fee, you should. And you don't even have to ask me, just tell me so that I know. But, you know, you're never going to get grief from me on that. I mean, if they turn it into 50%, then I want to talk about it. But yeah, like 10%, maybe even 15, depending on, you know, how much work is involved. Okay, Yep. No problem. Because I'm not doing it, you know, well, and you're.

And you're spreading that across everyone else.

Right.

Because that comes off the top. So if you made that thousand bucks and they. They would take a hundred, everybody's really kicking in 10 bucks or whatever to be a smaller amount, and it works out. Otherwise, I, you know, you're really not making what you think you are, and I Think it's also very easy to the person who's managing it to really, you know, kind of maybe have some animosity about, man, I'm taking care of all these guys and they're getting. I'm getting the same thing they are, right?

Oh, yeah. No, and that. Then it is. Yeah. Gravy train ends. For those of you on the other side of it, my reason for suggesting it is purely selfish. I want the person that's doing all that hard work to want to continue to do that hard work.

Right. Makes sense.

Yeah.

Go ahead.

Well, I was going to say, make sure you stop and think about everything that you do for your business and really just take a minute and start writing it down and then come back to that list. Because you'll think of things like while you're driving or showering or whatever, because there's going to be all kinds of things that you do, many of which are tax deductible in certain ways. Like if you're running around, if you need to go and make copies or whatever, not only is the expense of the copies tax deductible, but the expense of driving to and from the copy shop is tax deductible. If you meet someone for coffee, you know, at least half of that is deductible. If it's truly related to your business, that makes a big difference. And frankly, this is where the profits are in most small businesses. You know, you take great care to maximize all of these expenses or deductions, and then you pay taxes on less of your revenue because you only pay taxes on the portion of revenue that's considered profits, whatever's left over after all the money you spent. But the IRS isn't going to sit there and hold your hand and say, did you forget to deduct this? Did you forget? Like, that's on you. And so you've got to find it and be aggressive about it, otherwise you're not going to make any money.

Right. It's just easy to let it. It's like a sieve, you know, you think you're making that thousand bucks up on the top line, but as you. As you work your way down, I guarantee you, you're forgetting things that are the expenses that you're incurring to grow that business and manage it. And so you really need to take a time, you, like Dave's saying, and keep track of what you're doing and what happens for you to make every dollar. And it's a great time to do it when you're small, because the bigger you get, that's when you have to really start delegating and bringing in some other people to do it. But you'll benefit tremendously by doing it yourself the first time so you know what's going on.

Yeah, you got to set that culture, even if it's just you, because it's easier when it's just you. But setting that mindset of, okay, sure, we have to spend to make money, no problem. Make sure that you're remembering all the money that you spent and accounting for it, that's really the trick. Speaking of which, I want to tell everybody about our sponsor here.

Shannon sounds great.

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Yeah, for sure.

All right, man. What's next? What's the next.

Yeah, so the other thing we're talking about is insurance. You know, you're kind of putting yourself out there. You're growing your business. What. What kind of. I mean, and I hate insurance, but you just have to have it.

You know, you hate insurance right up until the day that you need it. In fact, we were having a conversation earlier, which I won't go into here, but you asked me, you're like, you do have that insurance, right? Right. Well, yeah. And you said, okay, good.

That's true.

But I had that moment, like, as you were asking the question, like, oh, yeah, yeah, yeah. It's all good. It's all good. Yeah.

It is really important, and it does protect you. And finding a good insurance person is kind of one of those we've talked about on the show here, of your quasi board of directors, you know, your advisory board, if you will. You're, you know, banker, attorney, accountant, and an insurance person, I think is really a good thing to have because they can save you a lot of money or cost you a lot of money. And a good one will kind of point out, here's the minimum things you might need. What are you doing? They need to learn about your business and what your liability is and whether it's just, oh, it's me, and I'm going here and I'm doing this consulting or this or that, or if you have people working for you and they're going on site and they may need to be bonded with other kinds of insurance and you need some advice. The last time you want to ask for advice is when something bad has already happened. You want to get some Advice up front just to get you covered enough to where you're not going to be so much at risk. I think you can overdo it with the insurance as well. But if you find the right person, they can kind of grow with you with your business. And I think it's real important I agree to protect yourself.

And in building that board of advisors, we talk about the accountant, the attorney that you need, and now we've added the insurance agent, which I think is a great person to add. I would argue that the insurance agent might be the first one that you talk to. And the nice. The reason I say this is especially for a small business, there are going to be those things, like, especially if you're doing jobs on site for someone else, you're going to see it way earlier than you think you would expect to. You're going to see in some contract like you're going to have negotiated everything in person with someone. All right, that's great. They're going to say, great, just, just sign this consulting agreement. It's just boilerplate for our company, and then you're good to go. Come on in. We can have you do whatever we need you to do. And in there somewhere, you're going to be agreeing that you have bonded yourself and therefore your company, even if it's a company of one and all of that, and you're going to sign it and give it back to them, they may ask you for proof of that bonding. And having an insurance agent that you know that you can call and ask about this, like Shannon said, is going to make a huge difference. And the reason I suggest them first, or as one of the first, is because they're free.

That's right.

Buying the insurance policy isn't free, but you don't have to pay to talk to them. They make money on the back end. Right. They get a commission of every bit of insurance that you buy for the life of the policy. So, like, you know, it's a good. I was going to say it's a good racket, but I don't want to turn you off on insurance agents. It's a good business. It makes sense, but they really don't, like. It's not going to cost you anything to call them up and find out what they have. And a good one, like Shannon said, will market. You know, we'll kind of shop you around to different providers, different insurance companies to find the best deal and the right thing for your business.

So, yeah, and I think like you're talking about a broker is the way to go. Yeah, because they can, you know, look at the whole, survey the whole market and see what's best for you and what's the best value versus a individual agent from a particular company. Company and everything from. You know, we did an episode back on November 15 about, you know, what happens when you get sued. You know, if you have the right insurance, you know, your insurance company is not only obligated to protect you, but they're obligated to defend you, which could be the most expensive part of getting sued is paying those attorneys fees to, you know, go through and do all the stuff that may take a year or more. So Dave is right. You want to be talking to these folks as early as you can. Once you kind of get your wheels under you and things are headed in the right direction with your business.

Yep. And they can help you with all kinds of things. I mean, oftentimes it can be the same person that's doing your insurance for your cars and for your house if you own, or your renter's insurance if you rent. I mean, that person often has, you know, access to all of it and knowledge about all of it. So you might already even have this relationship, and that's frankly even better because now you've got somebody that you, you feel like you trust at least a little bit.

That's right. And they can, like, you know, you're not going to pay them. They're going to get paid from these other companies that they're, they're bringing your business to. And they can look at your, your company like one of the, you know, expenses and things that we, you know, we're talking about here. If you sell products, you know, shipping is a tremendous expense to your business. You know, everyone thinks shipping is free, of course, to everybody who buys things, but we all know it's not. And so somebody's paying those bills. And if you're spending a significant amount of money, now's the time of the year to start talking to your carriers, whether it's, you know, UPS, FedEx, DHL, whoever you're using and negotiating on, on the contract, because their rates are going to go up in January. They may have additional fees that go up and you can really save yourself a significant amount of cash. And maybe equally as important, you want to be sure you're paying those bills with your credit card. You know, from taking from someone that, I mean, our UPS bill used to be, you know, $250,000 a month. And that is a life changer. When you put that on your American Express when you start building those miles up. So look at that. Reach out to your carriers, start talk. Talking to them. And also just look at your bills. If you already have a contract in place, make sure you're getting those discounts that they've been promising you.

Yep, that's good stuff.

And on the insurance side of things, you know, related to your shipping, your insurance agent can. And I didn't know about this when I first started, but eventually, after paying a few years of shipping insurance to the carriers, I learned about a thing called inland marine insurance. And. And for about 1,000 bucks a year, we were able to add half a million dollars worth of shipping insurance to our policy. So we never had to pay a carrier again. And it's better insurance. It's extremely inexpensive, related to the number of your volume of shipments. And a good insurance person, they point that stuff out and they can help you with that. So it's really good.

Yeah, yeah, yeah, yeah. All right, well, we're getting close to the end here. Do you have one last thing to share? Is there anything we've. We've missed as we're going through this?

Man, I think you would benefit from stopping and maybe giving yourself some credit. If you're at the point where, you know, you. If you. There's all kinds of ways to start business, you're stepping away from another job you already have. And we've had all kinds of people on the show that talk about this. Well, like, stayed in a corporate world, and then I left, or I started when. And then we had guys that started right out of college and different things. But if you're one of the few that have made it and are generating enough revenue, I mean, let's just start with just enough revenue to live on at whatever lifestyle you want to live. Congratulations. And congratulate yourself and be proud of what you're doing. And don't ever forget that you know what you're doing is important and that you are. You're to be commended.

Yeah, for sure. And I would say along those same lines in terms of making sure you've got some confidence here. Don't be afraid. I know a lot of the stuff that we talked about here can be certainly foreign to you if you haven't ever run a business or don't have a hobby in accounting or something like that. But. But none of this stuff is overly difficult. Just remember, when you look at something, here's the best way to look at it. The tax code is what, 75,000 pages or something? Don't worry about that you're not going to need to read all of it. There's like, four lines that are going to matter to you. Just read those. And then next year it might be 10 lines that matter to you. Okay, great. No problem. Like, just you can wrap your head around this stuff. This is not rocket surgery here. It's just, you know, it's just keeping track of the money that you receive and the money that you spend. Start there. And it. And the rest is really easy. And frankly, even if you can't start there, like, for example, a lot of people this time of year and certainly as April approaches, start having really good memories about the mileage that they drove. Sometimes you forget to mark down your mileage, but you can look and look at the calendar and say, oh, yeah, that's right. On this day, I went and saw that person. Okay, well, that's, you know, 13 miles from my house. So, okay, 26 miles round trip. Write it down. The IRS is pretty, pretty lenient about that stuff. Again, always good to talk to an accountant, which we are not. But that's right. You know, like, that kind of stuff is okay. I don't want to give anybody advice to fudge things, but, like, coming up with those numbers after the fact, the IRS is going to be fine with it because they're going to look, okay, yeah, it's 13 miles from your house. You called it 26 miles. Now maybe it's 12.7 miles from your house and you called it 26. You know what? If that's the only type of error, and that's not even really an error, but if that.

No, it's reasonable.

It's reasonable. Yeah. And that's what you got to remember is it's all just reasonable. And. And the tax code is there for you to take advantage of, and if you choose not to, that's on you. So just go after it. If you have questions, ask an account. You can ask us, too. We'll answer whatever we can. But we can't join you at the IRS's office to defend whatever decision you make.

Go back and listen to the show that we've done on the irs, and you get some tips on how to deal with that stuff. But send your questions to feedbackusinessshow.co. or, Joe, jump over to the small business support group@businessshow.co. facebook. I think we have about 300 or so business owners up there that will answer questions for you, and maybe you can answer some questions for them.

Yeah, absolutely.

Awesome.

It's good stuff. Yeah. Yeah, it is.

It is. Enjoy the rest of the year, folks. And we're going to be with you next week.

We'll be with you next week. That's right. And thanks to our sponsor, storyblocks.com SBN and thanks to all of you. Keep living that charmed life. Hopefully this helps. Take it easy.