Starting your own business is an exciting prospect, especially when it’s a type of business that is always in need. Every company needs bookkeeping, regardless of the economic climate. To start a bookkeeping business, you must determine how much to charge for bookkeeping and related accounting services. Settling on the right amount to charge is a balancing act that needs to consider several factors, so keep reading, and we’ll walk you through the decision process.

Factors Influencing Freelance Bookkeeper Rates

The rates you can charge for bookkeeping services depend on several factors and may change over time as you become more established in your practice. The amount and type of experience you have, your educational background, and any relevant certifications help support a higher hourly rate. You might also gain specialized expertise with a particular business or industry, which allows you to charge more for your additional expertise.

Keep in mind that the type of clientele that you choose also matters. Small business owners with few employees will likely require much less work than more established companies with diverse product offerings and many employees. You can also charge clients differently for various services, which will affect how much you can make. You can set an introductory rate for basic bookkeeping, while other services such as tax preparation, financial analysis, and preparing budgets may warrant a higher rate or add-on charge.

What’s Your Background?

If you decide to become a bookkeeper, it is helpful to have some formal training or earn a certification. This education helps establish your credibility with potential and existing clients and helps you excel in your job because of the knowledge you acquire. You don’t necessarily need years of experience or a bachelor’s degree to get started, but some type of formal education is essential. Consider getting an accounting software qualification or certificates, such as Quickbooks Online or Quickbooks Proadvisor. If you want to work as a full-charge bookkeeper, you may need to have completed a bachelor’s degree in accounting or a similar subject.

You can also affiliate with established bookkeeping associations, like the National Association of Certified Public Bookkeepers (NACPB). This industry group offers the designation of Certified Public Bookkeeper (CPB). In-depth training that builds your knowledge of GAAP (generally accepted accounting principles) can land you publicly traded clients and longer or higher-paying jobs. Other organizations offer bookkeeping certifications, such as the Digital Bookkeeper Association or the American Institute of Professional Bookkeepers.

Most clients do not expect their bookkeeper to have an active Certified Public Accountant (CPA) license, but if you do, you should charge accordingly, especially if the services you provide require knowledge at the CPA level.

Choose Your Clients

The complexity of your bookkeeping work depends on the size and nature of your client company’s business. If you want to run your own business instead of working for bookkeeping firms, you will probably start with part-time work from clients like small businesses that do not require a full-time bookkeeper.

Larger companies may have subsidiaries, do business in multiple countries and require specialized reporting and other services. You would want to increase your rate accordingly for these types of clients. Conversely, smaller companies or those with a straightforward business model, such as a service-based business with one location and no inventory or other complexity, should be charged a lower rate.

Keep in mind that size alone doesn’t dictate the rate. Smaller companies can still be very complex and may require more services because they have a smaller in-house staff. However, companies with less than $500k annually might look for lower rates, while larger companies with over $1M in annual revenue can handle a higher fee structure. Consider the client’s location as another pricing factor. If the business operates in a large city, you may be able to command higher rates than you could in a suburban or rural business area.

How Bookkeepers Charge

Some clients need your services every month, while others might only need a one-time service or quarterly or annual work. The less often you see the client, the more work they might need you to do, so charge accordingly. Be mindful of this while considering how to structure your fees. Bookkeepers typically charge in the following ways, which can also differ depending on individual client needs:

• Hourly billing – Charging by the hour is the most common method
• Per bank account, number of financial transactions, or percentage of income – less common but could make sense in certain situations
• Fixed rate – often used for clients that have the same workload each month, but start with hourly until you have a good feel for the recurring workload

Regardless of how you decide to charge for the basic ongoing services, determine how you will price for add-on services not covered in the original agreement or last-minute requests that require you to work over a holiday or weekend, for example.

Benchmark Your Rates

Compare your service offerings and rates to the local bookkeeper’s salary competition. You might need to charge slightly less than competitors when you start building your clientele. As you gain more clients, add more services, and develop specific niche expertise, you can raise your rates over time.

Know the average bookkeeper salary [1] for your state to use as a starting point in deciding how to charge your clients.

Define the Scope of Your Services

Deciding how much to charge for your bookkeeping services is only part of the equation. You will also need to precisely define what you will provide in exchange for the price charged. Generally speaking, a bookkeeper records a company’s day-to-day financial transactions, while a full-charge bookkeeper acts in a managerial role, having oversight and responsibility for the company’s entire accounting cycle and financial records.

Depending on the size of the business client and your background and expertise, you could strictly process daily transactions and do bank reconciling. For smaller clients, you might be involved in some accounting activities, such as running payroll, invoicing, producing monthly financial statements, providing data for an audit, and problem-solving for any accounting issues that crop up. Some bookkeepers may also prepare their client’s tax returns and send them to a CPA for a final review.

Define a package or packages that clearly define what services you will provide for your clients. You could have a basic level of service that comes with a fixed fee, such as weekly journal entries and monthly bank reconciliations. Any add-on services, such as ad-hoc requests, could involve an extra charge or be charged hourly.

The dangers of not defining your work scope upfront can result in you giving your client additional work you do not get paid for. Clear communication avoids issues when you’re dealing with a fixed-fee client. It must be clear that extra work will be invoiced separately and isn’t included in the base contract.

Frequently asked Questions (FAQs)

What’s the difference between sale vs. sell?

Two words that are commonly confused when it comes to describing the process of exchanging goods or services for money are sale and sell. In general, the use of sale is as a noun of the verb (sell) which refers to a business transaction that involves the exchange of goods or services for money. Sell is the verb form, and it describes the action performed by the seller in exchange for money. One example would be when a store would “sell” a hat to a customer for $45. In this example, the store is performing the action of selling, and the transaction would be referred to as the “sale” of the hat.

In addition, the use of sale and sell have slightly different connotations. For example, the word sale typically means that the transaction is part of something business-related, such as when a company “has a sale” on its products or when a retailer advertises a “special sale” around the holidays. The word sell, on the other hand, suggests an isolated exchange between two parties, like when a person sells a used item to another individual.

What Are Some Examples of Sale vs. Sell?

Sale and sell are two words that describe different aspects of a business transaction involving the promotion of goods or services exchanged for money. Here are some examples using the correct phrase.

Sale Examples

• The store had a sale on all shoes this week.
• We’re having a special Valentine’s day sale on chocolates this weekend.
• I got that sweater for half-price during the winter sale.
• Check out this huge clearance sale tomorrow!
• We are hosting a yard sale this weekend.
• The annual sale starts tomorrow.
• A person who works in sales to sell goods or services is called a salesperson
• A small business is having a sale to move old inventory.

Sell Examples

• I’m selling my old phone online.
• He sells cars for a living.
• I’m selling my old bike for $100.
• A real estate agent wants to sell a house.

Is It “On Sale” or “On Sell”?

The correct wording to use when asking if an item is being sold at a discount price would be “Is this on sale?” When using the word “sale,” it would be used as the noun form of the verb “sell,” In this example, you would use it when referring to when selling something. For instance, if you are looking for clearance items at the store, you would ask, “Is this item on sell” as it would not be the correct usage.

The same holds true when we are talking about goods or services that are being sold, as in this scenario, they are “for sale” instead of “for sell.” Remember, the words sale and sell have different definitions, so it’s important to use the correct form of each word in order to avoid any confusion.

Which Is Correct: “For Sale” or “For Sell”?

The correct phrase to use is “for sale.” As mentioned earlier, the word sale is the noun form of the verb sell, so it makes sense to use it when referring to a transaction that involves selling something. For instance, if you are looking to buy a used car from a neighbor, you might ask if a certain item is “for sale.”

What Is the Difference Between The Sales Price and Selling Price?

A sale price is a price that is offered for a product or service that has been discounted from its original selling price. The selling price, on the other hand, is the full, undiscounted amount that a customer would need to pay for an item.

For example, if a store normally charges $40 for a hat but offers it at a sale price of $20, then the selling price is $40 and the sale price is $20.

In this day and age, there are more options than ever when it comes to starting a business. And one of the most popular choices is working from home. If that’s something that appeals to you, and you have a knack for numbers and organization. starting your own bookkeeping business may be the perfect option. 

Starting a bookkeeping business is popular because you can work from home, and it is very flexible. You can choose to work full-time or part-time. The startup costs are also low, as you can get started with just a laptop, an internet connection, and some accounting software.

In this guide, we’ll walk you through everything you need to know about starting and running a successful bookkeeping business from home, and I’ll cover topics like setting up your business structure, choosing the right software, marketing your services, and more! 

Let’s get started!

1. Decide on a Market

I know it’s tempting to jump right in and get started, but the first thing you should do when starting a bookkeeping business from home is to take some time and decide who you want your customer to be. 

Once you have a good idea of who your target market is, you can start to narrow down the type of clients you want to work with and what services you will provide.

 – What type of businesses would you like to work with? Is your ideal client a local business or one that you will work with remotely? 

 – What size businesses do you want to work with?  Smaller companies typically need more guidance than a larger company and just getting the paperwork organized can be quite a challenge, though you are able to make a larger impact than when working for a larger company. 

 – What industry or niche do you want to specialize in? Starting out, you may want to market to all types of businesses to generate income, but if you have specific experience with a particular industry, it may be easier (and more profitable) to market your expertise. 

– What services can you provide?  Being a bookkeeper can mean offering a lot of other services in addition to entering sales and expenses. Bookkeepers can offer payroll processing, bank reconciliation, mailing invoices and processing accounts receivable, overseeing accounts payable, preparing financial statements such as income statements, cash flow statements, and balance sheets, preparing tax returns, and more. Recording financial transactions for small businesses tend to be the lowest paid service that a bookkeeper can do, so by offering some higher profit services, your income can be much higher. 

Not only will narrowing in on your target market will help focus your marketing efforts, but it will also prevent you from wasting time going after clients that you aren’t equipped to help or who aren’t a good fit for your business.

2. Write a Busines Plan

No matter what type of business you decide to start, it’s always a good idea to have a business plan in place. This document will serve as your roadmap as you get started and will help keep you on track as your business grows. A bookkeeping business plan doesn’t have to be complicated or over-the-top, but it should answer some of the following questions:

• What are your business goals? 
• Who is your target market? 
• How will you reach your target market? 
• Why will companies choose your service over the competition?
• What services will you offer, and how much will you charge?
• How will you keep your client’s financial information secure?
• What are some potential challenges you may face, and how will you overcome them? 
• How many customers do you need to create the cash flow you need?

If you’re not sure where to start, there are plenty of resources and templates available online to help you get started. 

3. Get Certifications

While a bookkeeping business isn’t required to be certified, customers often look for their bookkeepers to be certified. Not only does certification build credibility and proves competence in bookkeeping, but clients are trusting their bookkeeper to keep the business’s money safe, and they want some assurance you know what you are doing. 

Organizations such as the American Institute of Professional Bookkeepers and the National Association of Certified Public Bookkeepers offer certification programs in additional to professional development. Another popular certification is as a Quickbooks Certified ProAdvisor. 

Certification typically requires passing an exam that tests your knowledge of bookkeeping principles and practices. The exam covers topics like accounting, tax preparation, and financial statements. Don’t worry if this is all new to you. There are plenty of training opportunities to help get you up to speed quickly. 

4. Set Up A Business Structure 

The next step is to set up your business structure. This is an important step, as it will help determine how you file your taxes and protect your personal assets if your business is sued. 

There are four main types of business structures: sole proprietorship, partnership, limited liability company (LLC), and corporation. 

The most common structure for a home-based business is either the sole proprietorship or Limited Liability Company (LLC). 

The sole proprietorship is popular because it’s the simplest option, and there’s not much paperwork to file. However, it does have some disadvantages. 

For one, you are personally liable for all debts and obligations of the business. This means that if your business is sued, your personal assets (like your home or savings account) could be at risk. 

Another downside is that it can be harder to get funding from investors or lenders because they will see you as a higher risk. 

The LLC, on the other hand, is a separate legal entity, so your personal assets are protected if the business is sued. Another advantage of the LLC is the potential to save on taxes.  

The partnership is like a sole proprietorship, except with two or more owners. Just like the sole proprietorship, if the business is sued, the owner’s personal assets are at risk. 

The corporation is another option but is often used for businesses with a larger number of owners or investors. LLCs have the liability protection as the corporation, but they are much easier to set up and manage. 

If you’re not sure which structure is right for you, it’s a good idea to speak with an attorney or accountant who can help you determine what will work best for your business. 

5. Register your business 

After getting the business structure set up, the next step is to register your business. 

Each state has different requirements, but a business license is often required, even for a home-based business. In some states, a sales tax permit may be needed, in addition to an Employer Identification Number, if you plan to have employees. 

Working from home generally has fewer requirements than one that has a storefront, but licenses need to be obtained before offering services. 

6. Get a bank account

One of the first things you need to do when you start any business is to open a business bank account and business credit card. This will help you keep your personal and business finances separate, which, as you probably already know, is important for both legal and tax purposes. 

7. Choose bookkeeping software

Now that your business is up and running, it’s time to choose the bookkeeping software you’ll use to manage your client’s books. 

Accounting is the primary tool of a bookkeeper, and this isn’t an area to skimp on. There are many options available, with popular options such as Quickbooks, Xero, FreshBooks, and others. Since you will likely have clients who prefer different accounting software programs, you will probably want to get certified and become proficient with the more popular ones.   

8. Get business insurance

The only type of insurance that is usually required is worker’s compensation insurance if you have employees, there is insurance that is recommended as a bookkeeper. Professional Liability Insurance,  also called errors and omission insurance, protects a bookkeeper in the case of a bookkeeping error that financially harms a client, and as you may guess, the cost of a financial mistake could be quite costly.

9. Price your services

Now it’s time to price your services. This is often one of the most challenging aspects of starting a bookkeeping business, as you need to find the right balance between charging too much and too little. 

There are several factors that go into pricing a bookkeeping service, such as experience, industry specialization, and the range of services you provide. While it may be tempting to price your services low to get customers, you may consider pricing what your service is worth and providing a discount to start things off. Otherwise, if you are good at bookkeeping, you will be raising prices soon, and those initial clients can get anchored to your initial price and then be upset when you charge what you were worth, to begin with. 

10. Set up your office

If you haven’t already done so, it’s time to set up your office space. If you’re working from home, this can be as simple as setting up a desk and chair in a spare bedroom or corner of the living room. 

Optimally, having a dedicated space is best so you can have privacy and a quiet space to talk to clients.  Especially if working with local businesses, it is important to have a space where you can secure your client’s financial records, as it can be a real mess if poor document storage causes a client’s information to be seen by others. That’s a sure way to ruin your name in the community. 

If you have the budget for it, or your home isn’t a good setup, you may want to consider renting office space. In many areas, there is office space that you can rent for a few hours a month if you need to go to a place where you can concentrate. 

Begin marketing and find clients

The final step is to market your bookkeeping business and find potential clients. Going back to our first step, and figuring out the market you want to focus on, will shape your marketing efforts. Clients can be found locally, work from home opportunities, or in freelance marketplaces like Upwork. 

With a target market firmly in place, your marketing can be done in many ways, such as creating a website, getting the word out on social media platforms like LinkedIn, Twitter, and Facebook, direct mail, or radio, handing out business cards at networking events, working with local Certified Public Accountants(CPA), or even just telling friends and family that you’re starting a bookkeeping business. 

There are several ways to market a bookkeeping business, and it may take some trial and error to get that first client. Once you’ve found a few clients, be sure to provide excellent customer service so they will continue to use your services and recommend you to others. 

With these steps, you’ll be well on your way to starting a successful bookkeeping business from home.

Ultimately, it’s up to you to decide whether or not to create a contract. However, there are some benefits to having a contract in place. A contract can help to protect both you and your client by clearly defining the scope of work and outlining the expectations for each party. Additionally, a contract can provide recourse if there are any disagreements or issues down the line.

If you’re still not sure whether or not to create a contract, I have put together some basics of what should go into a contract and resources for free downloadable bookkeeping contract templates. Even with templates, it’s always best to consult with an attorney who specializes in business law. They can advise you on the best course of action for your specific situation.

What is a bookkeeping contract? 

A bookkeeping contract is a legally binding agreement between a bookkeeper and their client which outlines the terms of the professional bookkeeping services to be provided. The contract should spell out the specific duties of the bookkeeper, as well as the frequency and method of payment. A well-written bookkeeping contract can help prevent misunderstandings and disagreements down the road.

Do bookkeepers always need to write a Bookkeeping Services Contract? 

No, bookkeepers (or independent contractors) do not always need to write a bookkeeping contract nor is there a requirement to write one. However, there are some situations where it may be beneficial to have one in place. 

For example, if you’re working with a large company that has its own legal team, they may require you to sign a contract before starting work. Additionally, a contract can help to protect both you and your client by clearly defining the scope of work and outlining the expectations for each party. 

If an agreement is needed, be sure it is in writing and not orally. While oral contracts are enforceable, it can be difficult to prove what was actually said. 

What should be included in a bookkeeping contract? 

At a minimum, a bookkeeping contract should spell out the specific duties of the bookkeeper, as well as the frequency and method of payment. Additionally, the contract should outline the expectations of both the bookkeeper and the client. For example, the contract may state that the bookkeeper will provide monthly financial reports to the client. Alternatively, the contract may stipulate that the bookkeeper will have access to the client’s bank account in order to reconcile transactions. 

What are some of the benefits of having a bookkeeping agreement? 

There are several benefits to having a bookkeeping contract in place. First, a contract can help to prevent misunderstandings and disagreements between the bookkeeper and the client. Additionally, a contract can provide recourse if there are any issues or problems with the bookkeeping services. Finally, a contract can help to protect both the bookkeeper and the client by clearly defining the scope of work and outlining the expectations for each party.  

What to include in a bookkeeping contract template

There are a few key components that should be included in any bookkeeping service agreement. 

• Services provided. This may include any general bookkeeping tasks such as bank reconciliation, check registers, detailed general ledgers, bill payment, budget preparation, payroll processing, accounts receivable, and providing advice on financial matters. It is important to be specific about the availability of services that will be provided so that there is no confusion about the scope of work.
• Payment. This may include specifying how often the accountant will be paid, as well as how the fees will be charged (e.g. hourly rate, retainer, etc.). It is important to be clear about the payment terms (such as paid in full within 30 days of receipt) so that there are no surprises down the road. Also, any additional fees that are incurred, such as mileage, postage, tax fees, attorney’s fees, etc., will be paid by the client. 
• Contract term.   The contract should spell out when it will begin and end. This is important so that both parties know when the bookkeeping services will start and finish. Additionally, having a defined contract term can help to prevent any misunderstandings about the length of the bookkeeping relationship. 
• Confidentiality. This ensures that the accountant will not share any confidential information without the consent of the client. This is an important protection for both the client and the accountant. As a bookkeeper, you will come across proprietary information, such as the client’s financial affairs, trade secrets, etc., and keeping this information private is super important. 
• Material and data access.  What data will the bookkeeper have access to? The contract should spell out what data the bookkeeper will have access to. This may include the client’s financial records such as bank statements, financial records, tax returns, etc.. It is important to be clear about what material the bookkeeper will have access to so that there are no surprises down the road. You may want to consider including a statement that the client will assume full responsibility for any existing financial information as your work could be wrong based on what they provide. 
• Limitation of liability.  The contract should spell out what will happen if the bookkeeper or affiliates (contractors or service providers hired by the bookkeeper) of the bookkeeper makes a mistake, whether due to gross negligence or the client’s omission of important information. This may include specifying that the bookkeeper will be liable for any damages to items such as business interruption, loss of or unauthorized access to information, damages for loss of profits, incurred by the other party arising out of the services provided under this Agreement. It is important to be clear about the limitation of liability so that both parties know what to expect in the event of a mistake. 
• Relationship. In most cases, the bookkeeper won’t be an employee of the client, but rather an independent contractor. It’s important to put this in writing so the client knows you aren’t there for them 24×7. It may also be worth including that as a bookkeeper you would follow all requirements in accordance with all state and Internal Revenue Service codes. 
• Cancellation. The contract should spell out what will happen if either party wants to cancel the contract. This may include specifying that the bookkeeper will be paid for any work that has already been done.
• Dispute resolution. If there is a disagreement between the bookkeeper and the client, the contract should outline a dispute resolution process. This may include mediation or arbitration. Having a dispute resolution process in place can help to prevent any disagreements from escalating into full-blown legal disputes.  In addition, the agreement should include a clause for being in accordance with the laws of the state where you are located. 

When should a bookkeeping contract be signed? 

Ideally, a bookkeeping contract should be signed before work begins. This way, both the bookkeeper and the client can review the contract and make sure that they agree to the terms. Additionally, signing the contract before work begins can help to prevent any misunderstandings or disagreements about the scope of work or the expectations for each party. 

What if I need help writing a bookkeeping contract? 

If you’re not sure where to start, there are a few resources that can help. First, you can consult with an attorney who specializes in business law. They can advise you on the best way to structure your contract and can help to ensure that all of the necessary information is included. Additionally, there are a number of bookkeeping contract templates available online. These templates can provide a helpful starting point for drafting your own contract. Finally, you can also reach out to other bookkeepers in your network for advice and guidance.

What is a semimonthly pay schedule?

A semimonthly pay schedule means that employees are paid twice a month, on the 1st and 15th (or the 16th, if the 15th falls on a weekend or holiday). This is the most common pay schedule for salaried employees.

Semimonthly Pay Example

What is a biweekly pay schedule?

A biweekly pay schedule means that employees are paid every other week, for a total of 26 pay periods per year. This is the most common pay schedule for hourly employees.

So, what’s the difference between biweekly and semimonthly payroll? The biggest difference is in the frequency of paychecks. With biweekly payroll, employees receive two paychecks each month, while with semimonthly payroll, they receive one paycheck every two weeks.

Another difference is in the timing of paychecks. With biweekly payroll, employees are typically paid on Fridays, while with semimonthly payroll, they are paid on the 1st and 15th (or 16th) of each month.

2022 Biweekly Pay Schedule

What is the difference between semi-monthly pay and bi-weekly pay?

The main difference between semimonthly pay and biweekly pay is the frequency of paychecks. Semimonthly payroll means that employees are paid twice a month, while biweekly payroll means that employees are paid every other week. Another difference is in the timing of paychecks. With semimonthly payroll, employees are typically paid on the 1st and 15th of each month, while with biweekly payroll, they are paid on Fridays.

So, which is better for your business? That depends on a number of factors, including your business size, type of employees, and your own preferences. If you’re not sure which is best for your business, talk to your accountant or payroll provider. They can help you make the best decision for your company.

Advantages of semimonthly pay

There are a few advantages of semi monthly pay schedule for businesses. First, it can simplify your payroll process and is the most cost-effective since there is a fewer number of paychecks to send out than bi- weekly payroll schedule. If you have employees who are paid hourly, you’ll only have to track their hours and calculate their pay once every two weeks. This can save you time and reduce the risk of mistakes. Also, it is somewhat easier to calculate salaries and wages, since there is less need for month-end adjusting entries.  

Second, semimonthly pay can help you stay compliant with labor laws. If you have employees who work overtime, you’ll need to track their hours and make sure they’re paid the correct overtime rate. With semimonthly pay, you can do this once every two weeks, rather than once a week. This can help you avoid mistakes and potential penalties.

Advantages of biweekly pay

There are also a few advantages of biweekly pay for businesses. First, it can align your employees’ paychecks with their work schedule. If your employees work Monday through Friday, they’ll likely prefer payday to be on Fridays. This way, they’ll have the weekend to spend their hard-earned money.

Second, biweekly pay can help you save on payroll costs. If you have hourly employees, you’ll only have to process their hours and calculate their pay once every two weeks. This can save you time and money on payroll processing fees.

Last, employees are paid more often when they are on a biweekly pay schedule as they will receive two extra paychecks each year when compared to a semi-monthly schedule. Employees also know the specific dates they will be getting paid, so they can plan for their living expenses better. 

Preferred industry pay schedules

Now that you know the difference between biweekly and semimonthly payroll, you may be wondering which is preferred in your industry. Here’s a look at the most common pay schedules by industry:

As you can see, the most common pay schedule varies by industry. In general, biweekly pay is more common for hourly employees, while semimonthly pay is more common for salaried employees.

When it comes to your business, there’s no right or wrong answer when it comes to choosing between biweekly and semimonthly payroll. The best solution is the one that works best for your company and your employees. Talk to your accountant or payroll provider to see which option is best for you.

eBay itself does not require that merchants on its platform hold a particular business license. However, depending on the type of business you plan to operate on eBay, the government may require you to register for specific permits or licenses.

Do eBay Sellers Need a Business License?

No, an eBay seller does not need to acquire a business license. However, for certain types of businesses, the government may require certain types of registration for taxation purposes or for restricted goods.

If you intend to operate your eBay business as a reseller or retail operation, then you must acquire a sales tax permit (also known as a resale certificate) to collect sales tax. This seller’s permit will allow you to avoid paying sales tax on wholesale purchases, thereby avoiding a needless tax expense upfront. 

Additionally, in rare instances, the state government may require that you acquire an auctioneer’s license based on whether your business sells items on behalf of others on eBay. Consult an attorney for more information about this rare situation, as well as the legalities around operating auctions on an online marketplace.

How to Register Your eBay Business

To register a business, you should consider the following steps:

• Determine the type of entity under which you plan to operate your eBay store. Options include sole proprietorships/partnerships, LLCs, S corps, and C corps among several other common types.
• If you plan to operate a sole proprietor or partnership, you may want to register a business name or trade name known as a DBA (doing business as). A DBA will allow you to operate with your chosen name in the eyes of the government. 
• Tax IDs: If you plan to hire employees, you should acquire an Employer Identification Number (EIN) from the IRS. This identifier allows the IRS to identify your business as a separate taxation entity. 

For certain types of goods, state and federal governments may require that you apply for separate permits. Your local government may also have additional restrictions that involve permits or other types of registration. 

In addition to the above documentation, you may also want to acquire a Home Occupation Permit. This permit, for a fee, allows you to establish operations from your own home. Many professionals will want to acquire one of these permits, including entrepreneurs, dentists, lawyers, architects, writers, and more. Some municipalities may have additional restrictions on the types of businesses that entrepreneurs may operate from their own homes.

Also see: Licensing requirements for home-based businesses

Common eBay Business Entity Types 

Many eBay business owners operate informally as sole proprietorships. One common business model involves finding goods at steep discounts at various markets or thrift stores and then reselling those goods at a markup on eBay. 

In essence, this process involves taking goods from a local market level to a national or even global market in a type of arbitrage. Other business models exist on eBay in addition to this common type. 

As your business grows, you may want to consider formalizing your business through the formation of a new entity separate from your personal assets and liabilities. The most common types of entities include:

• Sole Proprietorships and Partnerships: These businesses lack the formality and liability separation which organized entities have. However, for entrepreneurs just starting out on eBay, they offer a cheap and easy way to test the waters. 
• Limited Liability Company (LLCs): LLCs provide an easy and affordable way by which to separate yourself from your company for liability protection. Additionally, LLCs offer pass-through taxation, meaning that your year-end tax bill will flow directly from the earnings or losses of your business. 
• S Corporations: An S corporation offers some of the benefits of an LLC with the additional benefit of offering easier ownership transfer. S corporations may carry additional regulatory and legal burdens for owners, however. 
• C Corporations: For most small business entrepreneurs on eBay, a C corporation poses too much complexity to act as an ideal entity. C corporations do, however, offer entrepreneurs easy ownership transfer through common stock, a reputable way to raise equity and debt funds from outside investors, and may also establish credibility for the business as it grows. 

Advice for New eBay Business Owners

As a new business owner on eBay, you should prioritize identifying product-market fit before you go down the rabbit hole of entity formation and other back-office concerns. eBay also recommends that new sellers on the platform consider the following pieces of advice:

• Optimize your listings for Best Match. This allows you to achieve a higher placement when a buyer uses a Best Match screen on the platform. 
• Ensure you adequately identify the condition of your item to avoid misrepresenting its quality post-sale. 
• eBay has recently released a new unified listing tool to help sellers more efficiently deploy new listings. 
• Be sure to block buyers who have previously caused issues with your listings. eBay offers the ability for sellers to block bidders and buyers from all of your business’s listings. 

Additional Requirements for Starting an eBay Business

To register as a seller on eBay, you will need to fulfill the following requirements:

• Individuals: Full name, address, date of birth, and social security number (SSN). 
• Registered Businesses: Identification for all owners or account managers, legal business name, DBA or fictitious business name if relevant, EIN, business address, and phone number. 

You will also need proof of identification. This proof can come in the form of a driver’s license, a government-issued ID card at either the state or federal level, or a valid, non-expired passport. 

On the banking side, eBay wants to ensure that your name matches the name on your checking account. If registering as a business, you should ensure that the business name and the business bank account match in this regard.

eBay will also require you to provide the routing number and account number for your bank account. 

The Accounting Definition of “Tangible Good”

Tangible goods or tangible assets occupy most of the attention of accountants. Humans can interact with tangible assets in a physical sense. These physical assets often have a shorter useful life compared to intangible ones. Examples of tangible assets include some of the following examples:

• Computer equipment such as those used to operate a business headquarters or office. 
• Fixed, long-term machinery such as those used in the production process at an automobile manufacturing plant.
• Software and other digital products sold or used by businesses. 
• Natural resources such as gas, oil, and minerals. 
• Manufacturing overhead supplies like glues, nails, and other miscellaneous items. 
• Physical products sold by retailers to the public, including food, medicine, and disposable products.
• Inventories used by both retailers and manufacturers to generate profits. 
• Retail storefronts such as a spa treatment facility. 

Of course, there exist an incredible number of different types of tangible goods. Accountants typically make use of conservative principles to value tangible assets at either the lower of their original cost or the current market price.

Examples of intangible goods, on the other hand, include:

• Patents: Governments grant patents to individuals and businesses to protect their intellectual property rights for a defined period of time. 
• Goodwill: When a business purchases another business, goodwill often comes into existence as a result of the transaction. It accounts for the excess cost built into the transaction. 
• Licenses: Governments and other firms also grant licenses and permits to businesses to operate in a certain, regulated manner. 
• Trademarks: Companies protect their intellectual property and brands with trademarks granted by the government. 
• The Company’s Brand: A brand itself, including wordmarks, logos, and “voice” function as intangible assets. 
• Intangible Products: These products could include consulting services or creative works such as movies or music. 

Characteristics of Tangible Assets

Tangible assets tend to require additional measures such as security and insurance since they exist in the physical world. Businesses that transact primarily in tangible assets will also need to make different financial decisions compared to those which principally deal with intangible goods and services. 

Current vs Noncurrent (Fixed) Assets

Within the category of tangible assets exist two subcategories: current and non-current or fixed assets. 

Current assets include those assets which exist for a short time on a firm’s balance sheet, including cash and cash equivalents, short-term investments (those which a firm intends to convert to cash within one year), working capital such as inventories and accounts receivable, and prepaid expenses like insurance or prepaid rental contracts. 

Noncurrent assets include those assets which lack liquidity and for which the firm cannot convert to cash in a reasonable amount of time. These include property, plant, and equipment, land, long-term investments, and vehicles such as commercial trucks.

Comparing Tangible and Intangible Assets

Key differences between tangible and intangible assets include:

• They receive different accounting treatments:
  • Companies often route tangible goods through the balance sheet prior to the income statement.
  • Intangible assets often appear first on the income statement as an expense line item.
• Tangible assets have a greater susceptibility to damage and theft. 
• Intangible assets pose valuation difficulties for investors and lenders, whereas tangible assets have settled accounting techniques.  

Examples of Companies with Substantial Tangible Assets

To compile this list, we examined the largest industries in the United States ranked by the total amount of property, plant, and equipment (PP&E) held on their books:

1. Power Utilities: Utilities and power companies must make massive investments in infrastructure and other fixed assets. The capitalized value of these assets sits on the balance sheet for long periods of time. 
2. Retail: Businesses which sell merchandise have large sums in their working capital accounts under the current assets section of the balance sheet. 
3. Auto and Truck: Automotive manufacturers and dealers must contend with large amounts of tangible assets. 
4. Semiconductors: Firms like TSMC must make large capital investments in fabrication facilities and manufacturing plants. 
5. Telecommunications: Telecom firms must invest in significant amounts of fixed infrastructure like towers, wires, and machinery to support the operations of the firm. 

Examples of Companies with Substantial Intangible Assets

The following companies have a large amount of intangible assets as measured by various studies:

1. Apple: No surprises here. Apple has developed tremendous intangible market power over the last two decades thanks to its late charismatic founder and innovative, category-defining products.
2. Amazon: In addition to a vast sum of tangible assets, Amazon always carries tremendous branding power. 
3. Microsoft: While Microsoft has a large amount of assets carried on its books thanks to its array of data centers and marketable software products, the company also invests significant sums in research and development.
4. Alphabet: The holding company of Google also invests in a variety of so-called “moonshot” projects designed to
5. Tesla: Elon Musk’s company may have substantial property, plant, and equipment, but the company pays for no advertising since it has built large amounts of intangible brand equity thanks to its founder. 

Valuation Differences Between Tangible and Intangible Assets

For businesses with a high degree of tangible assets, the task of valuation becomes considerably easier. On the other hand, a business with a large amount of intangible assets may pose valuation difficulties for lenders and investors attempting to value the company. 

Aswath Damodaran, a professor of finance at New York University’s Stern School of Business, prepared a whitepaper on how to value companies with intangible assets. This paper communicates the following valuation principles for analysts seeking to better understand how intangible assets create value for shareholders:

• Damodaran points out that firms with high-value intangible assets often have high amounts of spending in research and development, advertising, and employee recruitment. These income statement line items receive the “expensed as incurred” treatment by the accounting profession which then understates the value of the intangible assets created by those efforts. 
• Manufacturing firms, on the other hand, create capitalized assets on the balance sheet when making large investments in fixed assets such as property, plant, and equipment. Thus, book value appears more closely related to the actual value of the firm.
• Firms with significant intangible assets have a wider discrepancy between their book values and true enterprise value. 

How Businesses with Tangible Assets Operate Differently

A business with significant amounts of tangible assets tends to operate in the following ways:

• Common income statement expenses include depreciation and amortization, cost of goods sold (COGS), and interest expense since these firms tend to use debt to fund large fixed asset purchases. 
• They tend to have large amounts of current assets such as inventories and accounts receivable. 
• Businesses with significant tangible assets may invest greater sums in security and storage of their physical goods. 
• These businesses may require more staff to run operations at an efficient level. 
• These firms may have lower valuation multiples due to the degree of investment capital required to grow operations. 

Why This Matters for Your Business

As a business owner, you should think carefully about how to run your operations based on the types of assets held on your books. For business owners with mostly tangible assets, everyday operational considerations include maintaining sufficient cash flows to sustain those physical assets, securing assets from theft and damage, and carrying sufficient insurance policies to cover possible damaging scenarios. 

For business owners operating in the intangible space, other considerations arise, including the need to communicate the value of those intangible assets through financial metrics which investors and lending institutions alike can understand such as free cash flows to the firm, gross margin, and measures such as EBITDA and NOPAT. 

The key principles of entrepreneurship remain: creating value and communicating that value to outside parties, whether the business focuses on tangible or intangible goods.

Equity Injection Definition

In its simplest form, an equity injection occurs when an investor makes a cash payment to a company in exchange for shares in that company. Other sources might refer to this act as a capital injection. Typically, the word “injection” in this context communicates that the company receiving the funds has experienced a degree of financial distress and needs additional funding to continue operating.

On the other hand, an equity injection can also refer to a rule within the SBA loan framework which requires some applicants to “put some skin in the game” and make a down payment to receive a 7(a) or 504 loan. 

Depending on the context, you might hear this phrase used for SBA loans or more generally to describe the act of an outside investor making an emergency cash investment in exchange for an equity stake in the target company. 

Finally, the phrase may appear during a business acquisition or other types of transactions, although its meaning in those contexts acts outside the scope of this article. 

SBA Loan Equity Injection

Two SBA loan programs will usually require some form of additional equity invested by the borrower: the 7(a) loan program and the 504 program. 

The 7(a) program helps businesses pay for working capital, refinance debt obligations, and purchase assets like office furniture, new fixtures, and other supplies and overheads. 

The 504 program focuses on helping businesses pay for new property, plant, and equipment as well as other expensive fixed assets. Such assets might include new land, buildings, facilities, and long-term PP&E. All 504 loans require an equity injection by the borrower.

Requirements

As of 2018, the SBA put into practice new standard operating procedures which require that all borrowers of 7(a) loans with principles of $350,000 or more must make a 10% equity injection in the form of cash or in assets that constitute 10% of the loaned value. 

The SBA does not allow borrowers to fulfill equity injection requirements with borrowed cash, proceeds from a personal loan, most assets other than cash, or standby debt unless said debt is on full standby with no payments of principal or interest. 

For borrowers who make an equity injection with gifted cash, the SBA requires a letter proving the validity of the gift and a deposit statement. The lender may also have additional requirements with respect to the gift letter. 

For 504 loans, the 10% equity injection requirement also exists. The key fact to note here revolves around the necessity of providing some degree of upfront cash before taking on an SBA loan. Businesses should treat SBA loans like certain other forms of consumer debt like mortgages; ultimately, the government wants business owners to have a stake in the outcome of the funded project. 

Eligible Programs

The following SBA loan programs and associated SBA lenders require some or all applicants to put forward a minimum equity injection prior to receipt of loan proceeds:

• 7(a) loans with principals larger than $350,000.
• All 504 loans regardless of loan size. 

The following SBA loan programs do not require applicants to make a preliminary equity injection:

• Some types of 7(a) loans.
• SBA Express loans.
• SBA Export Express loans.
• CAPLines.
• SBA Veterans Advantage loans.
• SBA microloans. 

Other requirements associated with these programs may exist for your specific circumstances. A lending institution can provide more information about the exact requirements for a given business as well as the exact amount of upfront cash required, a number usually based on the total project cost. Also note that SBA requirements change with some regularity.

Types of Equity Injection Financing

Businesses may use the following sources of cash as a valid equity injection payment when applying for an SBA loan:

• Cash directly from your business’s bank account.
• For non-cash property, the SBA requires a professional appraisal. Your business must have owned the property for a minimum of two years. 
• Cash withdrawn from a personal retirement plan such as a 401(k), IRA, or Roth IRA. 
• Personal loan cash proceeds if the borrower intends to repay the personal loan with non-business-related income or from a salary from an external operation unrelated to the business itself. 

The lending institution will have more information about applicable funding sources for the equity injection requirement for an SBA loan. 

Unique Equity Injection Funding Sources

Outside of SBA loan requirements, businesses may develop a pressing need for additional cash to continue business as usual. Businesses which have reached a point of financial distress due to a downturn in the economy, operational disruptions, or inability to react to changing market conditions may find themselves in a difficult financial position.

The following unique equity injection funding sources may help a business to navigate difficult financial times:

• Friends and Family: Business owners and startups may turn to friends and family to provide much-needed cash during difficult times. In some cases, family and friends may ask for an equity stake in the business in exchange for the cash they provide. 
• Angel Investors: Some types of investors known as angels can provide early-stage financing for small businesses in exchange for a large equity stake. 
• Venture Capital Firms: VC firms can provide financing for businesses which have established a degree of product-market fit and have received a prior angel investing round. 
• Private Equity Funds: PE firms can step in to acquire businesses or purchase large stakes in existing businesses meeting certain EBITDA requirements.
• Government Programs: In some jurisdictions, government financing may help businesses to continue operating during difficult times. For example, during the COVID-19 pandemic, the US government provided businesses with emergency cash injections to pay for employee expenses in a program known as the Paycheck Protection Program or PPP. 

What to Do If Your Business Requires an Equity Injection

When determining the next best step in financing a distressed business, small business owners should consider the following funding sources prior to distributing equity to outside parties:

• If your business needs cash to pay for working capital like inventory, consider an SBA loan first. 
• Consider turning to private-sector lenders for additional debt financing if needed. 
• Avoid the pitfalls of giving outside investors equity by making use of innovative financial products like royalty financing. 
• Consider making use of the services of an invoice factoring firm to turn future customer payments into immediate cash in exchange for a fee. 
• As a last resort, consider a merchant cash advance (MCA) to keep the lights on until your business can achieve a higher level of financial stability. Ensure that your business’s cash flow can handle this type of financing.

Determining Next Steps

Owners and managers should first closely examine the financial statements to determine the exact degree of financing needed. Then, business owners should carefully consider the exact amount and mix of financing needed to bring the business back to a level of financial stability. 

Ultimately, equity acts a precious commodity of any business, and owners should only consider granting this equity to investors if the situation warrants it. Alternative financing options may offer a more appropriate solution for short-run capital challenges.

What Are Overhead Costs?

Overhead costs are fixed indirect costs incurred by businesses. They aren’t directly linked to the creation or manufacture of a product or service. These are the costs a company occurs to stay in business and generally support all revenue-generating activities.

Overhead costs generally include fixed costs, including mortgage or rent, insurance fee, employee payroll, utilities, legal costs, and administration costs. These can be further broken down into two categories: fixed and variable costs.

What Are Fixed Overhead Costs?

Fixed overhead costs do not fluctuate based on a business’ varying levels of activity. They tend to remain constant on a month-to-month basis. For instance, rent is a common example of a fixed overhead cost. Another common examples include mortgage payments, property taxes, business licenses, and more. 

What Are Variable Overhead Costs?

Conversely, variable overhead costs are business expenses that are linked to a business’ activity levels, and tend to fluctuate accordingly. As business activity levels increase, so do variable overheads, and vice versa. Common examples of variable overheads, include shipping costs or maintenance expenses.

Also see: What is the predetermined overhead rate

How Do You Calculate the Overhead Rate?

The overhead rate refers to the percentage of overhead costs that a business incurs in providing services or manufacturing products. To allocate overhead costs to a product or service, businesses apply the overhead rate to the direct costs incurred during production.

To calculate the overhead rate, you first need to determine an allocation measure or an activity driver. Businesses generally allocate overhead costs based on the number of direct labor hours or machine hours worked.

The formula to calculate the overhead rate is as follows:

Overhead rate = Indirect costs / Overhead Rate Measure

For instance, if total overhead indirect costs were $500,000 in 2021, and total machine hours (the overhead rate measure in this manufacturing example) worked were 40,000 to produce goods.

By dividing $500,000 by 40,000, the overhead rate will come out to $12.5. This implies that a company spends $12.5 in overhead expenditure for each machine hour worked during production. This can help with accurately pricing the product.

Examples of Overhead Costs

There are several examples of overhead costs, some of which are discussed below:

Administrative Expenditure

Administrative expenses generally constitute the bulk of overhead costs and mainly include costs associated with handling the day-to-day operations of the business. Administrative expenditure costs are related to purchasing office supplies, paying office associates, including any auditing or legal costs.

Rental Expense and Utilities

Both the rental expense incurred by the company as well as the amount paid for utilities such as gas, electricity, telephone service, or internet costs each month are attributed to overhead costs. In some cases, subscription costs for software might also be included in overhead.

Insurance Costs

The insurance premium paid by the company to protect itself from fiscal loss is also an overhead cost. This includes business liability insurance, health insurance, property insurance, and other types of insurance coverage that the business uses.

Repairs and Maintenance of Plant and Machinery

Plant and machinery often need to undergo routine maintenance, Apart from this, costs associated with the repairs and maintenance of vehicles and other equipment owned by the business are also attributed to overhead costs.

Why Is It Important to Calculate Overhead Costs?

Calculating overhead costs is very important for businesses as it directly impacts a company’s financial statements. Overheads are incurred regardless of a company’s activity levels, so they’re a constant presence on your income statement and balance sheet.

While it’s easy to calculate the cost of inventory, raw materials, or the labor that goes into the final product, it would be a mistake to just look at those costs and add markup as every business as many other costs that need to be accounted for.  

This can help finance leaders make better decisions that can affect a company’s performance. For instance, if a product is priced based solely on direct costs, it can reduce profits. By factoring in normal overhead costs, companies can sell goods without hurting their bottom line.

There are also strict accounting requirements where businesses must allocate costs to the goods or services they produce, which is why calculating and accounting for overhead costs is so important.

What Are the Differences Between Overhead Costs and Operating Expenses?

There are numerous differences between overhead costs and operating expenses. The latter refers to expenses incurred by the company during its normal course of business. They’re generally unavoidable expenses and appear on the income statement. Common examples include direct labor costs or materials required to manufacture a product.

Overhead costs, on the other hand, are costs that don’t directly relate to labor or materials. These are costs that relate to core business functions, including administration expenses, costs of maintenance, or rent. Unlike operating expenses, overhead costs are incurred even if a company does not partake in any revenue-generating activity.

How Often Should You Calculate Overhead Rate?

The overhead rate is used to allocate overhead costs, which is essential for determining the costs of manufacturing a product or offering a service.

Ideally, businesses should calculate their overhead rate after every financial year. They can get relevant figures from the financial statements and use those to determine overhead expenses for the previous year.

Smaller businesses can also calculate the overhead rate each quarter and allocate costs more efficiently. Calculating the overhead rate more frequently allows companies to quickly make key adjustments that prevent indirect expenditure from negatively affecting their product pricing and profit margins.