How to Start a Business in Minnesota: Accounting and Tax Checklist

Get detailed “How-to” information on accounting, tax registration and compliance for new Minnesota businesses

Entrepreneurship in Minnesota is an exciting endeavor, you are well on your way as a reader of this article but getting the accounting and tax structure right from day one will save you time, money and hassle. This checklist takes new owners step by agonizing step through critical accounting establishment, tax registrations and maintenance of ongoing compliance so you can keep your foot on the growth throttle with confidence.

Select the Type of Business Organization and Tax Issues

Determine whether you are going to be a sole proprietorship, partnership, limited liability company (LLC), S corporation or C corporation. Each one has implications for taxation, personal liability and reporting. From the perspective of accounting, this decision will define what tax forms you need to file, whether you have to withhold employee taxes and how profits (or losses) flow up to owners. Note your election and effective date in your project file so that the rest of your accounting setup can coordinate with however you’ve chosen to form the business.

Registering With State and Federal Tax Authorities

Get state business registrations for your company. If you will have employees and are required to collect sales tax, register with your state tax department for employer withholding and sales tax accounts. A federal employer identification number (EIN) for tax reporting and banking is required by most businesses as well. Even if you are a one-owner business with no employees, having an EIN makes it easier to differentiate business and personal activities, and banks may require an EIN to open a business bank account.

Open a business bank account This will be more than likely if you could get right from the institution that provides your service provider credit card processing tools.

It's crucial to keep personal and business funds independent of one another. Open a business account CHECKING account in the legal business name and run all income/expenses through it. This disconnect is the root of easy bookkeeping, retained liability shields for structured entities and effortless tax preparation. Enter the details in your accounting system and reconcile bank statements as each month ends.

Set Up a Chart of Accounts and Policies for Accounting

Set up an easy-to-understand chart of accounts that reflects your type of business — income streams, cost of goods sold (if you’re selling a product), operating expenses (rent, phone and internet), payroll, taxes and owner distributions. Choose accounting methods: cash versus accrual, capitalization limit for fixed assets, rules for expense categorization. Standard policies help reporting accuracy and comparability between periods.

Set Up a Bookkeeping Routine

Establish a rhythm of bookkeeping — recording sales and receipts daily, expense entries weekly, bank statements and credit card reconciliations monthly. Book keeping being done in time helps avoiding backlog and provides with current financial information for decision making. If you hire out bookkeeping, nail down frequency and deliverables so monthly financials get generated faithfully.

Payroll and Withholding Obligations

If you have employees, you will need to sign up for employer withholding and withhold Federal and state income taxes in addition to paying payroll taxes on a regular basis. Set up a system for paying employees, which involves recording work hours, calculating gross and net pay, retaining necessary taxes and making employer contributions such as unemployment insurance. Maintain complete payroll records for all pay periods and submit necessary payroll tax returns as scheduled.

Sales Tax Collection and Filing

Find out if your products or services are taxable in Minnesota. If yes then please do register for sales tax, charge the tax on taxable sales and file return of sales tax. Keep in your accounting records the record of taxable versus exempt sales, and the reason why any sale is not taxed (including resale). Put the collected revenue in a different account so you don’t unknowing spend what belongs to the state.

Estimated Taxes and Owner Draws

Owners of pass-through entities typically are required to pay quarterly estimated tax payments for federal and state income taxes, as well as self-employment tax. Compute estimated liability on projected income and set up a tax reserve account. On owner draws (distributions), do those different from the bus exp so that you can have correct equity accts.

Recordkeeping and Supporting Documentation

Maintain neat and accurate records of all business dealings such as invoices, receipts, contracts, payroll information and tax filings. Hold on to the records in both electronic and physical form, where it’s appropriate, and keep them safe. That documentation supports your positions and serves you during audits or inquiries. Put together a retention and filing mechanism based on tax-reporting periods.

Depreciation, Fixed Assets, and Inventory

If you buy equipment, vehicles or other capital assets, create fixed asset accounts and track cost, date placed in service and useful life. Use consistent methods of depreciation and maintain records of disposals. For stores with inventory, track your stock accordingly using the same accounting method you use: either periodic or perpetual, and reconcile your inventory records frequently.

Internal Controls and Fraud Prevention

Put in place simple internal controls: demand receipts for all re-imbursements, restrict cash transactions and split roles when possible – get double approval on big spending. Even with small businesses, oversight activities such as reviewing monthly statements and occasional audits of expense reimbursement can make a big difference.

The Business - As Usual Financial and Tax Schedule

Create financial reports in a timely manner-- make adjustments as necessary—profit and loss, balance sheet, cash flows) on a monthly basis to track results versus plan. Keep a tax calendar with estimates for quarterly and yearly deadlines—payroll deposits, sales tax returns, estimated payments, income taxes due. Trigger reminders and assign tasks to prevent filing failures or penalties.

Deductions, credits and popular tax-saving strategies

Keep track of all nonreimbursed, and therefore deductible, ordinary and necessary business expenses: rent, utilities, supplies, advertising travel and professional fees. Maintain good records to substantiate deductions. Look to see if there are tax credits that apply to your business and keep documentation of eligibility. Time purchases and charges with tax in mind to maximize the yearly tax liability.

Consult a Professional and Review Annually

An initial discussion with a tax or accounting professional knowledgeable about local obligations can be helpful in verifying registrations, payroll setups and anticipated tax liabilities. Grow the business and schedule a five-year review to verify accounting policies and tax elections are still applicable. Even slight shifts in revenue, hiring or how products are offered could impact tax registrations and filings.

Received Wisdom: Get used to disciplined bookkeeping, save for taxes and make it a point to review numbers monthly. Forming a venture in Minnesota with a solid accounting and tax system minimizes your risk and allows you to grow strategically. Here’s a step-by-step list you can use as a quick reference guide as you go from idea to business operation.