I am interested in working as a social media consultant and would like your thoughts on best practices in accounting for expenses and income.
Lisa Chau, Asst. Director of Public Relations, Tuck School of Business, Dartmouth
In teaching entrepreneurship and new venture strategy, based on many years of running my own businesses and working with dozens of start-ups, the first thing I tell students and clients to do is hire an accountant. While I or any other seasoned business person can advise based on what we think might be the best financial structure for your work, an accountant can look at the balance between your personal and business worlds and make the best decision for you.
For your type of consulting, it is perfectly possible to keep your own books and file taxes as a sole proprietor using your Social Security number. However, even one-person consultants benefit in most cases from incorporation and generating a unique tax identification number for the business. A knowledgeable accountant will help you decide what kind of incorporation to pursue (likely an LLC -- limited liability corporation) and will direct you through the process.
Even if you choose to be a sole proprietor, based on sound accounting advice, return to the accountant for tax preparation. This helps assure that you have properly documented expenses and can take advantage or comply with any new tax law. Don't use a consumer tax preparer for your business. Go to someone who does commercial accounting. The first year of my consulting business, the accountant saved me more than 10 times his fees by properly representing my business to the IRS.
Further, meeting with an accountant before you start incurring expenses will allow you to be coached on how best to monitor those costs to later translate them into records for the government. Plus, your accountant will likely have preferences about software that you should use to manage expenses and income.
Finally, as a small-business owner, your work with an accountant will likely be supporting another small business -- one that may have clients who can use your services.