#OwnYourFinancialWellbeing: How to set up your business for long-term success
Patreon’s #OwnYourGrowth workshop series explored actionable ways for creators to scale their creative businesses. We did deep dives on topics like taxes, health insurance, and outsourcing to freelancers, with expert advice from our brand partners and Patreon creators. We’ve created recaps of these crash courses to develop your thriving creator business and explore ways to boost your physical, financial, and mental wellbeing whenever you want.
As you grow your creative business, you might see your income fluctuate. That’s totally normal. But it’s important that you know your numbers and have a clear picture of the future to get through those rockier periods. We invited Karat Financial‘s Noa Rodriguez Hoffman and Manuel Godoy, President of Black Sands Entertainment, to share their tips on setting up your business for long-term success, creating a financial safety net, and balancing the books to help you scale and avoid burnout. Here’s a recap of their advice on owning your financial wellbeing.
Want to dig even deeper? Check out the full #OwnYourFinancialGrowth event recording.
The importance of keeping business and personal finances separate
When you’re first starting out and proving your business, it’s okay to use your personal account for payments. But as soon as you start making a profit, set up a separate checking account. Using a personal account to make business transactions has its downsides. It’ll complicate your tax processes and call for the extra work of going back through all your accounts, which can get expensive, too. “It can also lead to tax filing errors and even trigger tax audits,” explains Karat’s Noa Rodriguez-Hoffman. “And nobody wants to deal with a tax audit!”
It’s super easy to set up a dedicated checking account for your business — you’ll need your address, business name, industry type, and an EIN (a nine-digit number issued by the IRS to keep track of a business’s tax reporting). If you’re a sole proprietor, you can use your social security number. Although it may not feel hugely significant, your future self will be eternally grateful for creating a clear line between business and personal finances.
Streamline your accounting to reduce workload
Now that you have a separate checking account for your business, you’ll want to connect it to accounting software to save time and stay on top of your finances. There are a ton of different options; QuickBooks is a common one, although there are less expensive options such as Freshbooks or Xero. They share many of the same features, but the main difference is that FreshBooks doesn’t include any accounts payable features, but it does let you send invoices, accept payments, and manage your expenses.
Make sure you’re categorizing all your transactions correctly from the beginning, because the system will start learning and auto-categorizing for you. “This lightens the admin load, so you’re not forced to categorize every single input manually,” says Rodriguez-Hoffman. “Eventually it starts to learn your patterns and categorize them for you.” Accounting software can also send out invoices and pay contractors automatically, which means you’ll get paid on time, without needing to chase anyone.
Categorize your transactions with a tax professional if possible, because they will know the right tax deductions for you. An accountant only knows the information you tell them, so make sure you inform them of any transactions completed outside of your business account, too. Give them as much clear information as possible so they can run accurate reports.
How to find an accounting professional for you
- Use your creator network and peers to source referrals.
- Join Patreon’s Discord community to connect with other creators.
- Once you’ve gathered details for a few referrals, connect to discuss their services.
- Before you meet, create a list of questions to ask: what’s their experience with creators, or your particular industry? Do they have any specialties? What is their fees breakdown and how do they communicate with clients? Make sure they understand your business, so they can provide advice on the most up-to-date tax strategies and maximize your deductions.
You can now work virtually with professionals all over the United States — so the world of accountants is your oyster!
Evaluate current financial health
To get a grasp on your current financial health, you’ll want to work with the following three reports:
- A profit and loss statement (P&L statement) details your revenues and expenses for a period of time: a month, a quarter, or a year.
- A cash flow statement, which is more of an immediate picture, tracks how much money came into the business and was paid out during a period of time.
- A balance sheet, or statement of financial position details your assets, liabilities and equity (net worth). Typically banks will ask for this when they’re deciding whether to give you a loan or credit. Some will require two years worth of statements, plus tax returns.
Understanding the relationship between your P&L and cash flow statement can inform important strategic business decisions, including the best way to pursue growth. Any accounting system or accounting professional should be able to get you these statements. If you have “toxic debts” (aka debts between $25,000 and $100,000, with a 6-18 month term and an interest rate of 8-12%), work on paying them off first and then set aside some money to start funding your business.
Starting a business with toxic debt isn’t going to set you up for success, because it will just snowball. Find a good medium where you’re paying off those debts and get a plan together to put some money away for your business. Remember sweat equity — all the things you can do for the business yourself without spending a dime.
Pros and cons of business entities
Now it’s time for the big final question: to incorporate or not to incorporate? “Typically people jump to setting up an LLC first,” says Rodriguez-Hoffman. “But there’s no point setting up an LLC if you haven’t turned a profit yet.” Keeping on top of your numbers will help you determine the type of business structure you need. There are pros to setting up an LLC, versus a sole proprietorship, including legal protection. If your business gets tangled in legal troubles or is sued, the plaintiff or creditor can only go after the business’s assets, not your personal assets (as long as you set-up the business correctly, have kept good records, and haven’t commingled funds). You can also make some serious tax savings by choosing the right business entity.
Once you reach a certain level of income, you can elect to be taxed as what is called an S corp. This is your way of telling the IRS that you want your business to be taxed as a corporation, versus a pass-through which is a sole proprietorship. Once you reach $75,000 in annual revenue, you could save up to $6,000 in taxes just by electing to be taxed as an S corp.
Patreon Creator Manuel Godoy’s Advice
Our workshop co-host, Patreon creator Manuel Godoy of Black Sands Entertainment, offered his own framework for growing your creative business sustainably. And at its center is a clear roadmap and a commitment to “never stray from the mission.”
Manuel prioritized “dominating” Instagram, becoming a subject matter expert in his niche and sharing his expertise widely, spending money on quality content production to stand out from the competition, being approachable to his fans, and following what his tried-and-tested Golden Rule, The 1,000 Rule. Once you’ve completed each milestone below, move onto hitting the next one.
Each step of Manuel’s 1,000 Rule takes time and effort, but they’ll all help you come out on the other end as a financially sustainable creator.
“This is not a fast process. By the time I hit number five, I was probably four years in. But by the time you hit goal number four, you will be 100% financially independent as a creator.”
Manuel Godoy, President of Black Sands Entertainment and author of Black Sands, the Seven Kingdoms
Where are you on your financial journey? Why not connect with like-minded creators and members of the Patreon team on our Official Patreon Discord? Head to the #Own-Your-Growth channel to keep the convo from this workshop going.
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*This post is intended to summarize and highlight material presented as part of Patreon’s #OwnYourGrowth workshop series, and is not intended as financial, business, or legal advice from Patreon.