Common Bookkeeping Mistakes Solopreneurs Need to Avoid

Key Points

Solopreneurs wear many hats, and some of them even take on their bookkeeping.  However, these mistakes are common for entrepreneurs:

• Forgetting to Collect Sales Tax
• Not Closing Books on Time
• Lacking Financial Documents to take Advantage of Small Business programs
• Unprepared for Loan Applications
• Not Having a bookkeeper

Common Bookkeeping Mistakes Made by Solopreneurs

You know how it is as a solopreneur.  Everything rests on your shoulders.  You’re wearing multiple hats and driving your business forward.  Maybe you’re also the cook in your restaurant, the marketing team at your design firm, or maybe you’re the bookkeeper for your solopreneur business.

If that last description is familiar, you’re not alone.  Many solopreneurs try to do their bookkeeping themselves.  But there are a lot of “traps” you can fall into if you’re not careful.  Here are the five most common mistakes solopreneurs make when trying to do their own bookkeeping.

1. Don’t Forget to Collect Sales Tax

A common trap that solopreneurs need to be careful of is forgetting to collect sales tax.  This is especially a risk for solopreneurs who sell products online. 

Many solopreneurs haven’t done this yet, even if they’ve been in business for two years.  Not doing your sales tax in time will cause:

• You to have to refile for previous years.
• Take late fees hits and interest.
• The government to potentially freeze your bank accounts until you have paid these taxes.

2. I’ll Get to it Later Trap.  Not being proactive with their bookkeeping. 

Bookkeeping has some key milestones that need to be hit to keep your accounting straight.  If you procrastinate on your bookkeeping, you’ll find that unresolved issues may now be expanded if you lost a receipt or lost access to records.

Many solopreneurs have come to LINK MoneyMan Business Solutions LINK when times running out in December.  The solopreneur needs their taxes filed, their financial statements complete, and their accounting books filled with 11 months of data.  You’re now in a predicament where you need to get 11 months of data input in a week. When the tax accountant starts asking for the data and finds you don’t have it ready, they may then get an extension for you.

As you’ll learn from our next common mistake, not having these financial reports could leave you missing out on opportunities for the business.  In the middle of you tax extension, there may be a grant or a financial program you could have qualified for, but the organization needs your tax records, which are still unfinished. 

Suddenly, the bookkeeping priority catapulted from low, to “very hot”.

If you’ve procrastinated on your taxes for 3 or 4 years, its very difficult to cobble together financial documents if you need a loan or grant. 

When putting taxes together, you’ll have to find your banks statements.  Old bank accounts may have been closed, so accessing the bank statements may be impossible.  The bank may have already deleted your bank statements.  For most banks, you only get access to statements for a few months back. 

3. Lacking Financial Documents to take Advantage of Small Business Programs

Small businesses have numerous programs they can apply to for financial grants and loans.  These can be private programs, government programs, and even programs by non-profits.  Many solopreneurs qualify for these programs, but to apply, these programs will always ask for some combination of the following:

• Tax returns
• Profit/loss statements
• Bank statements
• Payroll reports
• Proof of business organization
• Employer Identification Number (EIN)

Many solopreneurs aren’t ready to take advantage of these programs, and when the due date nears, these solopreneurs are trying to get ready on the fly.  There are deadlines.  They missed the train, but they are ready for the next train.

A lot has happened in the last few years. Numerous programs were initiated during the Covid-19 pandemic to help struggling solopreneurs as customers isolated themselves. New economic impact development loans were created to support struggling solopreneurs (ppp loans).  Unfortunately, a lot of the solopreneurs that really needed these programs did not have their financial and business paperwork ready to take advantage of these programs.

Programs that look to fund your business need to see an accurate report on your business to see if you qualify for their program.  The New York state seed program is one example of a program new companies can take advantage of.

For example, the [New York State Seed Program](https://nyseedgrant.com/) gives small businesses $5,000 to $25,000 depending on their gross receipts.  To determine gross receipts, the program will be reviewing your taxes.  To qualify, you just have to be a business that started after 2018.

They will also verify that you are a small business, which means your gross receipts do not exceed $1 Million per annum.

4. Not ready when requesting a loan:

A bank will ask for two key financial documents when processing a loan: balance sheets and the last five years of taxes.  Even big institutions and corporations are required to provide these documents.  Loans are available to all companies regardless of size; however, bigger companies have an advantage as they have a team of people who prepare these documents for the bank.

Banks may also request profit/loss statements as well.

A lot of these grants are made with solopreneurs and small businesses in mind – the entrepreneurs who really need the support.  But without financial documents, they lose access to these opportunities.  Our last common mistake touches upon that “team” you need to access these opportunities.

5. Not Having a Bookkeeper

A bookkeeper is a very important ally.  Even if you’re running your business solo, it’s important you have a bookkeeper when you begin your business.  Bookkeepers ensure that these common mistakes are avoided so that you can focus on your business.

The right bookkeeper proactively prepares your financial records so that you can be ready if you start a loan or grant application. 

Prepare Your Financial Documents

There are many programs that can provide funding, seed money, and loans to new businesses starting up.  But these programs will require the same types of financial documents each time.  And if you’re not prepared, you may lose your opportunity to apply for these programs.

Tax Returns

You need to have, at a minimum, your tax returns from last year.  Ideally, you should have at least 5 years of tax returns.  A tax return will have an official statement of your business’ performance.  Since, you and your accountant could face perjury charges if your tax return were intentionally misrepresented, there is a good chance your tax returns accurately reflect the state of the business. 

Proof of Business Organization

Misplacing your business documents could lead to a lot of hassle and confusion.  At a minimum, be sure to keep these documents in a secure file location on an accessible computer or cloud system.

The first item you need is your articles of Organization.  This document is proof you organized a business and registered the business within your state.  This document was likely generated automatically when you first registered your business.  If you do not have this document, you may be able to go back to your states registration page and request a new copy.

The second document you need to have ready is proof of assignment of an employer identification number (EIN).  This number is what you used to file your taxes under.  However, there is a document you receive from the IRS when you request this number.  This document is proof that you were assigned that particular EIN.  Be sure you have a copy of this document ready when you’re applying for funding.

Financial Reports

If you do not have a profit and loss statement, you’re simply not going to get funding.  Unless your company is brand new, grant programs will need to see your profit and loss statement.  They may also ask for a balance sheet as well.  For business loans, a balance sheet is important to understand the liquidity risk of your business.

Conclusion

Solopreneurs wear a lot of hats, and sometimes one of those hats is bookkeeping.  But the best way to avoid these issues is to hire a bookkeeper.  They will make sure you have financial documents prepared for loan and grant applications.  They will also make sure taxes are collected to avoid hassles with the IRS.  And most importantly, they’ll keep your financial records up-to-date so that you don’t lose any critical records.