No matter the business you are starting there are some general things you need to know, and that will help you get everything set up correctly. Always read up on local rules and legislation in your country.
You can easily cheat yourself if you are not aware when setting up your own company. So, in this post, I will go through
> Registering A Business
> Accounting
> VAT
> Tax And Salary
> Expenses
Registering Your Business
For many entrepreneurs, the start-up, the idea period where everything is taking shape inside your head, is the most inspiring time. You get energized and want to get moving sooner than later.
But very soon you will want to start a company. It sounds like a big thing, but a company is in fact just a legal body, and it is important to get that in place – for all the reasons that will follow in subsequent paragraphs, but also to convince yourself that you are in motion. Very soon, you will probably need to buy stuff to support your ideas – it could be a desk, a chair, a computer, a mobile phone- or even products that you want to sell. It is a good idea to have the company buy that and not you as a private person.
Depending on the type of company you want to start, you might need some capital bound in the company, when registering the company. If you spent a lot of money on equipment before starting the business, you might not have the money to show for. In many countries, you do need a statement from the bank, that the initial investment is on the account. Say, if you need 10000 Euro / Dollar / Pound or whatever currency you have in your country, in the account, you can start the company, then spend that money on whatever it is you need to buy to get started. It is a bit more complicated to state that your desk and chair are the initial assets of your company.
Accounting
Every movement in your company should figure in the books. Maybe you don’t need to learn accounting (but it is a good idea), however, you will need to make sure that it is done correctly. Accounting is the lifeblood of any business. This is where you measure how your business is doing. You can be very busy spending and earning, but it is the accounting that gives you an overview of your business and whether you are actually creating an income.
I mean, you could just save all the receipts and do everything manually, maybe using a spreadsheet, but really nowadays there are many online accounting systems that can help you. The better ones are very easy to go to, you just enter what you’ve bought or sold, and it makes sure to ‘keep the books’ the way it is meant to be done. For me, this has been great, and since I started earning an income in my business I’ve had an accountant finishing up the year, and doing my taxes, both my business and private for about $1000, which is a great value because he saves me at least three times that every year!
Accounting Software
I personally use and recommend the online accounting app Billy’s Billing which has made accounting easy for me. It is available in English and Danish, and there is a free option as well. But I would also recommend that you select a vendor and system that fit the tax regulations of your country.
VAT
When you buy something for your company, you can deduct the VAT, but you will need a company registration number, or VAT no.
Many times have I heard people worry about all the VAT technical stuff. But don’t worry – you do not need a degree in economics to figure it out.
When you purchase an item, either for company use or for reselling, you can deduct the VAT.
When you sell an item, you must add the VAT to the invoice.
VAT is, as the name suggests, tax on sales.
Buy And Sell Product – VAT example
You buy product X from your supplier. Your supplier’s asking price is $20. You live in a country where the VAT is 25%. So, the invoice from your supplier states
| Product X | $20 |
| VAT 25% | $5 |
| Total | $25 |
In your accounting, you will have an account for product X, or Products in general.
You will also have an account for VAT on purchases, and an account for VAT on sales.
On the Products account, you will post the $20 for the purchase.
On the account for VAT purchases, you will post the $5, the VAT the vendor added.
Your accounting always needs to be balanced, so you will post $25 on the account of your vendor – or directly on the account mirroring your bank account.
| Sales Expenses | |
|---|---|
| Debit | Credit |
| $20 |
| VAT - Purchases | |
|---|---|
| Debit | Credit |
| $5 |
| Vendor XYZ | |
|---|---|
| Debit | Credit |
| $25 |
Now, you are doing the math for this product. You are figuring that you need $80 to pay for your marketing, website fees, credit card fees, rent, and profit. So, you set the price at $100.
When you are selling items on the market, you are the government’s tax collector (like it or not!). So you will have to collect the tax – which in our example is 25%. Then, for the consumer, the price is $100 + (25% of $100 = $25) = $125.
When registering your sale, you’ll register $100 on the Products account, and $25 on the VAT Sales account. And $125 on the Bank account.
| Sales Income | |
|---|---|
| Debit | Credit |
| $100 |
| VAT - Sales | |
|---|---|
| Debit | Credit |
| $25 |
| Bank account | |
|---|---|
| Debit | Credit |
| $125 |
Now depending on where you are in the world, you will or will not include the VAT in the price tag – in the US tax is normally added at check-out, wherein most European countries the VAT is already included in the asking price.
Ok, it got a little confusing after all – but this is why you need an accounting system. Then this is all done for you – you just write the invoice and register the payment.
And when it is time to do the VAT calculation (monthly, quarterly, ..) the system has all the numbers to generate the report. The VAT report will show the total VAT paid when buying stuff, and the total VAT you have collected from your customers. You will need to pay the difference between the two. To begin with, you might have negative VAT, i.e. you bought more stuff than you sold. Then you will receive VAT back from the government.
Tax & Salary
If your business is a personally owned business, you do not actually get paid a salary. Salary is for employees, you are the owner, and your income is the profit the business makes.
This has some advantages. If you are employed, you get a salary, but the money that goes into your account has already been tax deducted. So, if you want to buy a computer or cellphone, you do that with money already taxed. When you own a business, you can buy business-related items like a computer or mobile phone for money not yet taxed. You are still paying taxes, but you pay them on the profit of the company. And if you bought a $2000 computer in the company, that is $2000 less to be taxed.
Expenses
Remember that you can probably not regard everything you buy as business-related – on this subject you really need to read up on local tax laws and regulations. Rule of thumb – you should be able to relate whatever you buy to the operation of your company. Items I would regard as being expenses in my business are:
- Computer
- iPad / Tablet
- iPhone / Cell phone
- Printer
- Coffee
- Coffee machine
- Any materials you use in your business, i.e. paper, headset, webcam/camera, tools
- Books, courses, software, subscriptions
- Office rental, electricity, heating (if not working from home)
- Internet and phone charges
When it comes to larger expenses like a car, you really need to learn the local rules as they differ from country to country.
I wish you all the best in your business endeavors. Don’t let rules and regulations discourage you from moving forward with your dreams and business.
I would love to hear from you, so reach out 🙂