When I created my first business I only had three things in mind. I was able to solve a problem, make money solving this problem, and use that money to pay my bills. That’s it. It took me approximately a month or so to create a LLC and a year to open a business account at the bank. Let's be clear, I only did that because I’d heard that was a good thing to do. I didn’t understand the complexities or consequences associated with having an LLC nor did I care.
I’m a creative not an accountant. But here's what being in business for 3+ years has taught me...
It won’t make a difference how many followers and likes you have if the IRS will be at your door ready to clear your bank account because of bad business practices.
When I realized that the money I was taking through PayPal, CashApp, etc. was not mine, I was mortified. I thought I could take and spend as I pleased. Nah Sis..
The money your business brings in is not yours and you have to start treating it that way.
The money you got from CashApp today isn’t there as an available balance that you should think of as cash ready for you to spend. That money belongs to the business. Understand this, each business runs differently according your state's tax law so consult with a true business accountant (not your mama... unless she is an accountant) and take what I’m about to say as a trigger for you to get your finances in order.
If you own your business as a Sole Proprietor, you take an “owner’s draw” not a salary. A “draw” is an amount taken out of your business for personal use. It's called a draw because money is drawn out of the business. An owner’s draw is shown as a negative in your business’s available capital and it does not reflect as a salary although it does reflect as income. This is important. You can’t say to yourself, “Oooooh… I made 70k this year!” Nah Sis… your business may have brought in 70k this year. Let's be clear, if you made 70k, you would put yourself in a position to have to pay a personal tax on that money. But if your business made 70k and you took an “owner’s draw” of let's say 30k in income as a sole proprietor, a draw doesn't affect your business taxes in the same way at the end of the year.
Because a business is taxed on the business net income. The net income of the business subtracting expenses. Think of it this way, a draw isn't an expense of the business, the draw is a distribution of business income. As we roll into the new year and get our finances in order, take a clear look at 2019 and understand where your business finances stand.
Do you need to take inventory of where your money is going and coming from? Do you need to re-evaluate your incorporated docs for business purposes? Maybe so. Here’s a cool resource to get you started.