While the bad financial behavior of large corporations such as Enron are often told as anecdotal warnings to small businesses, small business owners often practice creative accounting in order to reduce tax bills and attract investors. Privately owned small businesses have a distinct advantage over large, publicly traded corporations - there is no necessity for financial transparency, except to major private shareholders. However, small business owners should remember that even the smallest form of creative accounting - such as not printing receipts to understate earnings - can have a massive negative impact on your company if the IRS decides to audit your company, and can cause even worse problems if your company is found guilty of tax evasion and fraud. Here are some suggestions to keep your company on track and out of trouble.While understating profits for the purpose of lower taxes may seem like a solid idea and a victimless crime, this can negatively impact your company's credit in the future. Your legally reported profits are all kept on record, and banks, venture capitalists and angel investors will unlikely back you with capital if your record of sales growth is poor. In addition, abusing capital losses on your tax returns to reduce taxes owed can have a negative impact on future financing, as banks may require larger amounts of collateral in exchange for a loan. This can also damage your ability to qualify for Social Security benefits years later. As the owner of this small business, your own personal standing is directly linked to your business' tax returns, and all these drawbacks will be applied to your personal taxes and loans as well. To top of all this nastiness, an IRS audit will quickly identify misreported earnings, and the penalties are steep.
Therefore, it's important that small businesses, even ones without professional accountants, keep careful tabs on their revenue and expenditures. First keep all receipts - cash, check or credit card - and make sure every penny received in and paid out of the company's coffers is recorded in a ledger, preferably digital. Gains and losses on investments and loans should be dated and recorded properly and attributed to the correct parties. As a small business owner, the easiest way to stick to this system is to keep all personal and business transactions separate. Keep a business bank account and credit card for use only with business related transactions. If you use your personal account to cover business costs, issue yourself a receipt and reimburse yourself out of the company account. This seemingly redundant action will keep both accounts neatly compartmentalized. If your company wants to keep the majority of its profits safe from corporate sales taxes, then consider investing in tax-free retirement funds or trusts. There are numerous conservative investment vehicles that allow small business owners to preserve their capital for retirement and future generations. This allows your company to report honest profits - thus gaining credit for loans and financing - while preserving the maximum amount of your earnings.