If your business has a physical presence in a state that enforces sales tax, you must collect it from customers at the point of sale. Sales tax is a percentage of the customer’s purchase. Your state, county, or city determines the sales tax rate you must collect.

After collecting sales tax from customers, remit it to your state or local government and record it in your books.

One of the first decisions you’ll make when starting up is your business structure. The structure you choose impacts taxes, liability, control, and how to pay yourself from your business.

You can structure your business as a:

• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• Corporation (C Corp or S Corp)

Some business structures are more complicated to manage than others. Depending on how you structure your company, you may have significant filing and reporting requirements.

Before selecting a business entity, lay out your business goals and consider the pros and cons of each.

You can use cash-basis, accrual, or modified cash-basis accounting to manage your books.

Cash-basis accounting is the simplest way to manage your books. With cash-basis accounting, you only record transactions when you physically make or receive a payment. This is a single-entry accounting system, meaning you record each transaction once.

With accrual accounting, you record money whenever a transaction takes place, even if you don’t physically give or receive money (like when you are billed or write an invoice). This is a double-entry accounting system, which means that you must record two entries for each transaction. 

Modified cash-basis accounting is a mixture of both cash-basis and accrual accounting. You can use modified cash basis if you want to use the same types of accounts as accrual but only record income and expenses when paid. 

Generally, you can choose the method you want to use, but the government requires some businesses to use accrual accounting (e.g., companies that make $5 million in annual gross sales). 

An audit is an examination of your business’s financial records. During an IRS audit, the IRS reviews your records and checks for inconsistencies in your books.

Receiving an audit doesn’t necessarily mean that you’ve done anything illegal. The IRS occasionally chooses a business at random to audit. And sometimes, the IRS audits a business if its small business tax returns look suspicious.

Some actions can trigger an IRS audit, such as:

• Running a cash-only business
• Making errors on IRS forms
• Missing tax deadlines
• Claiming too many business expenses 

To determine your business’s financial health, you need to know how to calculate profit. Use the following net profit formula:

Net Profit = Revenue – Cost of Goods Sold – Expenses

The income statement is divided into three main sections:

• Revenue
• Expenses
• Net profit or loss

An income statement is one of three main financial statements you can create to observe your business’s financial health, obtain outside financing, and make financial decisions. The other two financial statements include the small business balance sheet and cash flow statement.