Accounting for Subscription Businesses: What You Need to Know

Whatever your reasons for starting a subscription business, a deep love of business accounting probably wasn’t high on the list. And yet, it’s a necessary part of running your business successfully. In order to create a profitable business, and stay on the right side of the law, you need to cover all the accounting basics.

7 steps to take for subscription business accounting

In the early stages of building your subscription business, there are seven important parts of getting your accounting set up.

Find a good accountant

The advice on this list is a good primer, but a lot of what you need to know will be specific to your business and location. Both to get guidance particular to your needs as a business and for help when it comes time to file your taxes, you need to hire a skilled professional. The best way to find a reputable accountant is to ask for referrals. The recommendation of a friend or colleague who has direct experience with an accountant is the surest way to know they’re trustworthy and knowledgeable. If you aren’t able to find someone based on asking around, research the accounting firms in your area. See what you can learn about their specialties and experience on their website, and look for reviews from customers to get a feel for their reputation.

In your research, it’s important to understand the two main categories accountants fall into:

  • Certified public accountants (CPA): CPAs will cost more than unlicensed bookkeepers because they face a higher level of accountability. CPA firms are liable to oversight from a state organization, which reduces your level of risk in hiring them. If they make an error in the work they do for you, you have recourse.
  • Unlicensed bookkeepers: You can save money going with a bookkeeper, but you don’t have the same level of protection with them. That doesn’t necessarily mean they won’t be good at their job, just that there’s not a neutral third-party to hold them accountable if they make an error, which could leave you stuck with bigger consequences.

Determine what type of entity your business will be

The IRS recognizes five different types of business structures. The one you choose will influence what government compliance looks like for your business. Determining which one makes the most sense for you depends on the particulars of your business, and is precisely the kind of question a good accountant will help you answer. Your options are:

  • Sole proprietorship: Under a sole proprietorship, the government treats you and your business as the same entity. You report your business profits and expenses on your personal tax return. Sole proprietorships are generally for one-person businesses, or occasionally businesses run by a married couple.
  • Partnership: This is similar to sole proprietorships in that you still report your business earnings and expenses on personal tax returns, but your share of both profits and liability in the company is split between two or more partners.
  • C corporation: Under this structure, your business becomes an independent entity from the owners for tax purposes. The business is taxed based on shareholder dividends and corporate profits. Personal assets and business debts are treated separately, and the business can have an unlimited number of shareholders.
  • S corporation: Owners of an s corp are treated as a separate entity from the business legally, but report their share of profits and expenses on personal tax returns. With s corps, there’s a limit on the number of shareholders you can have.
  • Limited liability Company (LLC): An LLC is treated as a separate legal entity from its owner (or owners). LLC owners can choose whether their business is taxed like a sole proprietorship or a corporation.

Set up a business bank account

Setting up a business bank account helps you keep your personal and business expenses separate, which in turn makes it easier to keep track of your business costs and earnings.  You can set up a business bank account at most banks and credit unions. Shop around to find out which banks in your area offer the best benefits and lowest fees for business accounts. Or if you want convenience, you can open a business account at the same institution where you do your personal banking.

Create a system for tracking income and expenses

This is one of the most important parts of business accounting. It’s how you’ll keep track of how profitable your business is, and get the numbers you need for reporting your business earnings and expenses to the IRS. Figure out what system works best for you here. How you do it is less important than making sure it’s something you stay on top of. You can use spreadsheets if you’re old school and find that preferable, or you can invest in a good accounting software if you want an easier option.  In choosing an accounting software to use, some important considerations to make are:

  • Your accountant’s recommendation: If they have a strong preference for working within one, sticking with their preferred product will ensure your files and system are compatible with the way they work, making both your lives easier.
  • Price: You can find free accounting software options that may work while your business is still small. For those with more complex needs, paid accounting products generally bill using a subscription model and have pricing that starts at around $9 a month.
  • Functionality: You’ll need your software to provide different features based on your business needs. If you have employees you’ll need payroll functionality. And consider if you’ll need the ability to send customers invoices, or if billing will be automatic.
  • Compatibility: If you can link your accounting software up to any ecommerce or payment processing products you use (for Rebilly customers, we have an API for that), you can automate some of the work of tracking income and expenses. Check to see if the software you choose will work with your other products.

Track all business expenses

Now that you have your system and software, make a point of logging all your expenses as you go. That will be much easier than having to go back over them and catch up at the end of the year.  Remember to include:

  • Employee salaries
  • Cost of paying any contractors and other professionals your hire
  • Business utilities (phone, internet, electricity, etc.)
  • Website expenses
  • Software expenses
  • Office supplies
  • Networking costs, including things like conferences and business lunches
  • Business travel costs, including mileage any time you drive for business
  • Educational costs, such as courses and training
  • Commercial real estate costs
  • Inventory costs
  • Shipping costs

If you’re ever unsure whether an expense counts, ask your accountant.

Set up nexus in all applicable states

Having an online subscription business means you can potentially reach customers in all 50 states, or even all around the world. That means more profits, but it also means you have to deal with the complications of sales tax.  States each have their own laws around sales tax, and you have to figure out how to be in compliance for each. Part of that is setting up nexus in every state that requires it. This is a confusing process, so most businesses will be best off hiring a company that specializes in setting up nexus for you. If you chose a large accounting firm back in step one, they may offer this as a service, but most smaller ones don’t.  If your products are subject to sales tax in any states, use your ecommerce software to set up sales tax collection through your website.

Choose between cash basis and accrual

Businesses have two options for the way you report your accounting to the IRS. On a cash basis, you only report money you’ve already received, and only deduct business payments you’ve actually paid out. In other words, if customers owe you money they haven’t paid yet, that won’t count when you file. If you owe a vendor on an invoice you haven’t paid yet, it doesn’t either.  With accrual basis, you report anything that’s owed on both sides. If a customer is overdue paying you, but you’ve already issued an invoice, it gets counted. If you owe a company money you haven’t paid yet, you can still deduct it.  Your accountant can provide advice on which option makes the most sense for your business. Most small and medium businesses are better off using cash, because it’s a simpler process.

Analyze your earnings data when making business decisions

Where most of this list is about compliance, accounting is also an opportunity to understand your business better and make more profitable decisions as a result. The expenses and income you track can become data that helps you analyze which products you sell are making you the most money, and which customers are the most valuable to your business. This step is a lot easier if you have software that helps you collect sales analytics and view it in a format that makes it easy to spot trends. Periodically commit time to reviewing the accounting data you have to determine ways to make your business more profitable.

Accounting is key to business success

Even if you do everything else in business right, if you bungle your accounting it can be your ruin. Find a good accountant and develop a system that helps you stay on top of it as you go. That will ensure you stay within the law, can keep a close eye on how your business is performing, and can make better decisions as you go.

While you’re setting up the systems you need to track your profits, make sure you’re doing everything you can to grow it, too. 

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Kristen Hicks is an Austin-based freelance content marketing writer and lifelong learner with an ongoing curiosity to learn new things. She uses that curiosity, combined with her experience as a freelance business owner, to write about subjects valuable to entrepreneurs for Rebilly.