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The Reason That 80% Of Businesses Don't Make It Past Their First Year

For many, opening a small business is a dream come true. The Small Business Administration reports that there were 856,352 small businesses operating in Michigan in 2016, and 18 percent of those have 20 employees or fewer.

Not to say that opening a small business is without its risks. Approximately 20% of small companies survive past their first year in business, largely due to under-capitalization at the launch of operations.

The best way to make sure the dream of owning a small business doesn't turn into a nightmare is to start with a good business plan and then make sound financial decisions as the business grows. While some small business owners opt to make all the financial decisions — paying employees and vendors, balancing the books, and paying taxes — others choose to turn that part of the business over to an accountant or CPA.

For owners who choose to run the financial side of the company, remember that there is help available should unforeseen issues arise, and a good time to reach out for professional assistance is in the early stages of business planning and when applying for a loan. (List a few of the different types of loans).

There is a difference between an accountant and CPA.

Accountants may or may not have a college degree in accounting. Some accountants may have a college degree in a discipline other that accounting and have received on the job training that enables them to perform accounting work. CPAs must have a four-year college degree majoring in accounting and pass the CPA exam. Additionally, to become a licensed CPA they are required to meet state experience stipulations and complete 150 credit hours of college education. Further, they must satisfy state requirements for continuing professional education on an annual basis.  CPAs are held to a much higher standard than accountants. For example, they must adhere to a code of ethics, act with due care and serve the public trust. Accountants not meeting these requirements cannot legally use the CPA designation.

For business owners trying to manage the financial side on their own, it's important to note that:

Software products such as QuickBooks may help you manage your business's financials even if you don't have a background in accounting, but as your business grows, it may be beneficial to engage the services of an accountant, especially when it comes to legal and technical issues.

Paying employees and vendors seems to be going OK, and you're even making a profit, but it's time to pay taxes. Here are some issues you'll run into.

The IRS assesses fines and penalties on business owners who don't pay their taxes.  If you are unable to pay your taxes, the IRS will allow you to file and extension of up to 120 day, but the late-payment penalty plus interest will still be applied.  Other options include paying in installments or by credit card when you e-file through TurboTax or another tax submission software.  Tax credits reduce the income taxes that you owe.  Tax credits are typically designed to motivate certain actions deemed beneficial by the government.  Examples include environmental, research and development, and energy related endeavors.

What should you do if you're facing an IRS audit?

You may be audited for a variety of reasons, it's important to find out specifically what you are being audited for so that you can gather the relevant information.  This will help you to be prepared and organized with all of the pertinent records.  You should be courteous and answer the questions asked to the best of your ability.  If you feel that the tax issues under review are beyond your abilities to adequately resolve with the IRS on your own, it may be beneficial to engage a tax accountant to help you.

Walsh College offers a series of complimentary non-credit Strunk accounting courses designed for business owners, students, or employees who wish to sharpen their accounting skills. The courses assume no prior accounting experience and are an introduction for those wanting to learn how to record, organize, analyze, and communicate business information from an accounting perspective.

The course is named for Arthur Strunk, who graduated from the Walsh Institute in 1957. It is made possible through an endowment from the Strunk Foundation. The courses will be offered during the winter semester (DATES TO COME). For more information on the Strunk courses, contact Diane Barrantes at dbarrant@walshcollege.edu.

By John Black
Professor and Chair, Accounting Department
Walsh College

 

Learn more about Walsh College, Detroit's all-business school.

For more tips and inspiration for small business owners,
visit CBS Small Business Pulse Detroit.

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