When you’re setting up a new business, one of the first choices you’ll make is how to keep your books. That choice often has several steps, one of the most important of which is which accounting software you’ll use (along with who will actually be doing your bookkeeping and taxes).
Often, the structure of your business gives you some clues about the appropriate answers to those questions — let’s look at a few examples.
Sole Proprietor
As a sole proprietor, you don’t have a separate taxable entity set up. These businesses are often the most simple, and while you do need to track income for tax purposes, it’s very likely that you don’t have many valuable and depreciating assets.
In that case, it’s probably okay to get set up with a “single-entry” accounting solution. In essence, single-entry accounting ignores credits and debits, so it doesn’t track the value of your assets (including your bank accounts) — it just tracks income and expenses. But again, that’s probably okay because asset value matters much less than income for most sole proprietors.
Popular single-entry apps include Freshbooks and Less Accounting, and you might even get away with a simple invoicing solution like Harvest.
That being said, if your business does become any more complex, you’ll need to port the data to a double-entry accounting app (one that does track credits and debits, and therefore the value of your assets). That can be a pain, so it might be worth considering double-entry from the beginning, especially if you can find one that’s simple enough to abstract away some of the accounting complexity — more on these types of apps in a moment.
Limited Liability Company (LLC)
From a tax perspective, limited liability companies are very similar to sole proprietorships — while they are a separate entity from a liability perspective (meaning your personal assets aren’t at risk), all of the income from an LLC flows through to your personal income, and is taxed as such.
Limited liability companies generally have a slightly higher level of sophistication and require a bit more setup. They’re often formed when two or more partners join forces — another indicator that this business might be a little more complex.
And with more complexity in the business, you’ll want more capability in your accounting software. Double-entry may become a need if you have valuable assets or liabilities (like business loans, business credit cards, and the like).
The most popular double-entry accounting app is Quickbooks. They’ve been in the market for over 25 years and will be able to handle the bookkeeping needs of just about any LLC.
That being said, if you’re keeping your own books, or wanting to streamline the work of a bookkeeper, there may be better options. This is where my company, a Quickbooks alternative called ZipBooks, comes in. Modern software (like ours, and some other market entrants like Xero or Wave), have had some success making double-entry accounting feel like single-entry — meaning you don’t have to necessarily think in terms of credits and debits, but you’ll still have a Balance Sheet that tells you exactly where the value of all of your assets and liabilities is at.
An LLC with an S Corp Election will likely be handled similarly from a software perspective — while permitting a new tax structure, S Corps will likely have similar complexity to LLCs and would almost certainly benefit from using a double-entry accounting solution.
C Corp
If you’ve registered as a C Corp, that’s a strong tell that your company is meant to be able to handle some complexity. A C Corp is the same entity as Apple, Google, and Amazon. It allows for unlimited shareholders and is taxed as a completely separate entity from its owners.
Many small businesses don’t utilize the C Corp structure so they can avoid double taxation and unnecessary complexity (the exception is startups, which are small but have expectations to become big). If you’re a C Corp, you are probably either already well-established or have investors who have formalized the process enough that you’ve turned your business into a C Corp. This is a very strong indicator that you need double-entry accounting software. In fact, you may have formal documents that require you to keep accurate books that can be examined by investors or other parties.
In this case, you’ll want to go with one of the aforementioned double-entry solutions, or, depending on your size, even look upmarket to an ERP system, like NetSuite or SAP (which will become appropriate to at least look at once you have 100+ employees).
Once you’ve chosen your accounting software, it can be tough to switch — there’s a lot of data, and each app handles it slightly differently. And choosing the right one can make your life and your business operations much smoother. So make sure you choose correctly from the start — and recognize that consulting your entity selection can help point you in the right direction.
Tim Chaves is the CEO at ZipBooks, a modern accounting software for small businesses. Tim previously founded and sold two small businesses, and holds an MBA from Harvard Business School.