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frequently asked questions

One of the first decisions you’ll make when starting up is your business structure. The structure you choose impacts taxes, liability, control, and how to pay yourself from your business.

You can structure your business as a: 

  • Sole Proprietor
  • Limited liability company (PTY)
  • Close Corporation (CC)

Some business structures are more complicated to manage than others. Depending on how you structure your company, you may have significant filing and reporting requirements.

Before selecting a business entity, lay out your business goals and consider the pros and cons of each.

Not all businesses are required to open a separate bank account. But that doesn’t mean you shouldn’t do it regardless.

Mixing personal and business funds can cause you to file taxes inaccurately, become disorganized, and overspend. You may accidentally use business funds to make personal purchases if you combine funds.

To open a business bank account, you must:

  • Choose a bank
  • Gather necessary documents
  • Open the account

Not every aspiring entrepreneur can afford to bootstrap their business. You may need to think about financing options if you want your small business dream to come to life.

If you’re interested in borrowing funds (which may require collateral), you can apply for a:

  • Business line of credit
  • Business loan
  • Small Business Funding

Instead of borrowing funds, you may want to find investors to invest in your business, like venture capitalists or angel investors. They won’t help for free, unfortunately. You likely need to offer them business equity or control in your company. 

You can also ask friends and family for loans or investments. Treat funds from family and friends seriously by creating a contract and payment plan (friends and family are worth their weight in gold, but only if you pay back borrowed funds!).

How much accounting lingo do you know? If you don’t have all the terms memorized, don’t worry about breaking out the flashcards. Instead, familiarize yourself with a few key terms to get started:

  • Cost of goods sold (COGS): An expense that represents how much it costs you to produce your offerings. COGS is a crucial factor when determining your business’s profit.
  • Debits and credits: Equal but opposite entries in your books (i.e., one increases an account and the other decreases the opposite account).
  • Inventory: Includes the raw materials in storage, items in the production process, and finished goods available for sale.
  • Assets: Your business’s physical (tangible) or non-physical (intangible) property that adds value to your business. 
  • Liabilities: The money that your business owes. You can have both short-term liabilities that are due within one year and long-term liabilities that are not due within one year.
  • Equity: The value of your business after subtracting liabilities from assets.
  • Revenue: The amount of money your business brings in from sales.

One of the first decisions you need to make when setting up your books is deciding how to record transactions. You can:

  1. Hire an accountant
  2. Use accounting software
  3. Record transactions by hand

Hiring an accountant is the most expensive but least time-consuming method. When you hire an accountant, you don’t need to manage your books. You may hire an in-house accountant or outsource to an accounting firm.

Accounting software to manage your books is a good middle ground between recording transactions by hand and having an accountant do it all. Using software streamlines the way you track incoming and outgoing money and helps continually organize your books. With software, you can automate your recordkeeping responsibilities, then hand over your books to an accountant for the more complicated accounting requirements (e.g., tax preparation).

Recording transactions by hand is the most inexpensive and time-consuming method. It also opens up your business to common accounting errors, such as miscalculating or failing to balance accounts, which can be costly.

You can use cash-basis, accrual, or modified cash-basis accounting to manage your books.

Cash-basis accounting is the simplest way to manage your books. With cash-basis accounting, you only record transactions when you physically make or receive a payment. This is a single-entry accounting system, meaning you record each transaction once.

With accrual accounting, you record money whenever a transaction takes place, even if you don’t physically give or receive money (like when you are billed or write an invoice). This is a double-entry accounting system, which means that you must record two entries for each transaction. 

Modified cash-basis accounting is a mixture of both cash-basis and accrual accounting. You can use modified cash basis if you want to use the same types of accounts as accrual but only record income and expenses when paid. 

Generally, you can choose the method you want to use, but the government requires some businesses to use accrual accounting (e.g., companies that make $5 million in annual gross sales). 

When transactions take place, you must make sure that your books properly reflect the transaction. Think of debits and credits as two sides of a scale that must balance equally—if a debit increases an account, a credit must decrease the opposite account. 

Debits increase asset and expense accounts. Debits decrease liability, equity, and revenue accounts. Credits do just the opposite.

Credits increase liability, equity, and revenue accounts. And, they decrease asset and expense accounts.

Debits and credits are the basis of double-entry bookkeeping, but they can be difficult to grasp, let alone memorize. Our handy chart should help clear up any remaining confusion around debits and credits.

If you go with accrual accounting, you’ll deal with accounts payable and receivable. So, what’s the difference? 

  • Accounts payable: Money you owe to vendors (aka a liability). Record accounts payable when you purchase something without paying right away.
  • Accounts receivable: Money owed to your business (aka an asset). Record accounts receivable in your books when customers purchase something on credit.