While small, online businesses may not have the accounting volume or depth you would normally see in a large corporation, there are still several important steps and things to consider when setting up and operating your financial practices. Read on to find out the basics every business owner should know about this crucial topic.

Business Registration

One of the very first steps to take when starting up any online business directly impacts how involved your accounting duties would be: your business registration. There are several different types of business entities, some of which may carry more accounting and bookkeeping duties than others.

The most common business structures for those operating a smaller business online include:

  • Sole Proprietor: This is a popular choice for online businesses, given how easy it is to set up and administer. When it comes to finances and accounting, a sole proprietorship has no distinction between your personal and the business side. While this does consolidate much of your accounting and bookkeeping duties, your personal assets are at risk if you have business debt or declare bankruptcy. The basic component of business accounting and bookkeeping, the EIN (Employer Identification Number) is optional with a sole proprietorship, but still recommended.
  • LLC: An LLC, which stands for Limited Liability Company, gives more protection and flexibility that a sole proprietorship. The biggest difference is that your personal and business finances are separate, which means your own assets are not at risk in case something goes wrong. An LLC does involve more accounting and bookkeeping chores, since you must have a separate set for all your business transactions and records.
  • Corporation: A corporation is considered a completely separate entity in all ways from your personal identity and finances. There is usually much more paperwork and financial responsibilities for a corporation, with things like shares, government laws and regulations, and continual fees making things a bit more complicated.

Acquiring a Business Bank Account

Unless you are operating an extremely small online business, usually one that is primarily used to supplement a regular job, it is advisable to get yourself a business bank account. In fact, with any of the aforementioned structures except sole proprietorship, it is legally required that you do so. Even if you are just a sole proprietor, keeping your finances separated with one or more business bank accounts will help avoid confusion, and costly errors.

It is best to start off by opening up a business checking account. This is the primary resource you will use to handle incoming payments and outgoing expenses. Following that, open a business savings account to use to save a percentage of your profits for things like taxes and unforeseen expenses. You can also open a business line of credit, if you qualify for one.

There are some important things to consider when opening a business bank account. These include:

  • Fees: Shop around at different banks for those with the lowest fees for the types of transactions you will do the most. Fees can rack up quickly over time, and take a big bite out of your hard-earned profits.
  • Limits: Make sure any limits, such as withdrawal or spending, coincide with the volume you expect to do now and in the future.
  • Reputation: Check out the feedback for a bank you are interested and see how well past and present clients would rate them.

Expense Tracking

Tracking your expenses carefully and thoroughly is one of the main keys to overall business success. Expenses impact many different areas, such as tax preparation and business growth. For example, if you want to save valuable tax dollars with deductions, you must be able to support your claims come tax time. Knowing where and how much you spend in all areas can point out where you can save money and help your business grow.

There are two primary ways to track your business expenses, and which method you decide to use depends heavily on personal preference, and how complex your expenses are.

  • Paper: This can range from keeping a simple log based on all of your receipts on up to hand-written spreadsheets. This is usually only a viable option if you are very organized and your expenses are simple or minimal.
  • Digital: The internet is chock full of different services and software suites available for tracking expenses of all types and complexities. These range from free, basic services, to expensive and sophisticated software programs that handle just about anything. Check out the last section for some of the best services and software currently available.

Tax Records

Making sure all of your tax records are present and complete is an excellent way to avoid getting into trouble with the IRS. You need to have proof of everything you claim on your taxes, in case the IRS requests it or you get audited. There are several types of tax records you should focus on, including:

  • Purchases: Any source documents that can prove you purchased a piece of equipment or products to sell should be first on your list of records to keep fastidiously. Source documents include things like bank statements, receipts and canceled checks.
  • Travel: If you go out on a business trip, you can deduct expenses like food, lodging, or even some types of entertainment from your business taxes. Keep a hold of all receipts, and jot down on the back how it related to your business.
  • Vehicle: Whenever you use a vehicle for a business reason, you can claim such things as gas or a portion of repairs or maintenance. All invoices and receipts should be retained and organized efficiently.
  • Gifts: Employee perks, or gifts to customers or clients fall under the category of business expenses and should be kept close track of. These can be scrutinized more heavily by the IRS, so be sure to keep all your receipts
  • Home Office: If you operate your online business out of your home, using either a dedicated home office or a portion of your living space, utilities, rent and other related expenses can be deducted come tax time.


If you have employees, making sure to keep proper payroll accounting can help you avoid trouble with important things like litigation and substandard worker performance. Paying an employee on time, and for the correct amount, shows that you care about them, and that they can trust you to make good on everything they are owed.

There are a few important things to know and understand when it comes to payroll accounting:

  • Gross Pay: This is the overall amount the employee has earned, and is divided into three sections: net pay, taxes, and deductions.
  • Net Pay: The amount of money the employee actually receives, after all deductions are taken out.
  • Taxes: All state and federal taxes are taken out of the gross pay. Records should distinguish between the taxes that the employee is responsible for, and those shouldered by your business.
  • Deductions: If benefits are offered, your employee may also be responsible for extras like healthcare premiums, contributions to retirement accounts, and any union dues, if applicable.

Outsourcing to an Accountant

If the demands of your business get to the point where you simply do not have the time or energy to handle increasingly-complex accounting and bookkeeping duties, it may be time to consider enlisting the aid of an accountant or accounting firm. While there is an inevitable price tag associated with it, it is likely to be money well spent to avoid the repercussions that can come from shoddy or incomplete accounting records and performance.

There are a few things to look for and consider when selecting the accountant you want to work with. Not all services are equal, and some may be better for certain industries, sizes, operating styles, and structures than others.

  • Certified or Not: While it is possible to have a friend or colleague take care of your accounting needs, it is usually not the best hands in which to place this important activity. While someone who is not certified and experienced in accounting may be a lower expense, you are more likely to suffer mistakes at a higher rate. Certified professionals are also adept at recommending effective strategies that can end up saving you even more money as your business progresses,
  • Related Experience: Just having a certification is not necessarily enough to make an accountant or firm perfect for your business in specific. Try and find someone who has worked in your industry before, and has handled your structure, size, and style of business specifically. Chances are they will better understand the unique requirements you have, and can perform and recommend most effectively.
  • Networking and Recommendations: Check the reputation and background of any accountant you have shortlisted. You can use government resources such as local chambers of commerce, or you can ask a fellow business owner who they would recommend. Social media sites designed specifically for networking, such as LinkedIn, can give you insight on who they have worked with in the past, and how well clients have reviewed them.

Best Accounting and Bookkeeping Software and Services

Finding the best accounting software and services can be a challenge, mainly because there are so many different choices to consider. Doing a Google search will return tons of different software suites and online services that all claim to be the best in both operation and value. We have sifted through the pile and come up with some of the best offerings in each category.

Overall Accounting

There are a few noteworthy selections when it comes to a single program to address all your accounting and bookkeeping needs, including

Expense Tracking

While the next two categories can usually be handled in some capacity by the overall recommendations made above, there are some that specialize in these areas in specific. Those for expense tracking include:


Dedicated payroll software can handle virtually every aspect of the process, ranging from simple record keeping on up to making the payments automatically. Worthy of note in this department are:

Creating and developing a solid accounting and bookkeeping strategy is a time-consuming process, but one well worth any effort and expense put into it. Doing so thoroughly and correctly will help you streamline your business, avoid legal ramifications, and capitalize on many opportunities and advantages.