Accounting for Startups: From Bookkeeping to Taxes for Early Stage Businesses
Accurate record keeping for a startup is a fundamental practice. It is never too soon to develop best practices for your early-stage venture’s financial records. Quality data leads to actionable information which is the backbone of business intelligence.
High-quality information is a necessity for accurate decision making in the operations of any business. Rather than being only a consumer of time, in fact, accounting helps your small business generate profit.
The types of records which should be kept include (but are not limited to):
- Bank Deposits and Withdrawals
- Bank Statements and Credit Card Statements
- Federal, State, and Local Tax Filings
- Legal Contracts of all Types including Equity Agreements, Stock Option Grants, Options Exercises
- Payroll Records and Payroll Tax Filings
- Receipts for Purchases
We often get asked about what type of software we recommend to keep these various books and records. For start-up accounting solutions, we recommend the following:
- Intuit QuickBooks (Hint: If you buy the desktop version, splurge for Accountant Edition with its extra features)
- Intuit QuickBooks Online
- Wave Accounting
- Xero
These products are relatively simple to use and do not require an accounting background. One should familiarize themselves with the Basic Terms of Accounting and the Different Types of Financial Statements to gain a working knowledge.
There are many payroll providers available, and also options that include blended HR services. A great option for startup payroll preparation is to work with your outside accountant. Oftentimes, this can be a less costly option than the traditional providers.
At some point, as you are on the way to becoming the CFO of your startup, you will encounter some important decisions including:
- Entity selection (Usually an LLC or C-Corporation, often in Delaware)
- Year-End (December is most common)
These are items which are best planned in conjunction with your startup’s accounting and law firms.
Many startups’ next mistake is about filing taxes. If you are a Delaware LLC or C-Corporation, you will usually still need to file taxes in the state where you are conducting business. In fact, if your startup encounters a concept called nexus, you may have tax obligations in multiple states or jurisdictions.
For a quick overview of some tax considerations for your startup:
Corporate Tax:
- Based on Net Income: No income, no tax (*except for certain states like California)
- Federal Form 1120: 4 Months and 15 days after the year-end (E.g. Due 4/15 for Calendar year-end companies)
- California Form 100: Minimum tax of $800. Exemption for the first year. (Same due date as above)
- Other states if you have “nexus.”
- If you are required to pay taxes, your startup may need to make quarterly estimated tax payments
Employment Tax:
- Federal and State Income tax withholding
- Social Security, Medicare, FICA, Unemployment (quarterly, monthly, or semi-weekly deposit schedules)
- State Unemployment, State Disability Insurance
- Additional local taxes (Varies by jurisdiction)
Sales and Use Tax
Fees:
- Secretary of State Fee
- Delaware Franchise Tax: 2 ways of calculating (assumed per value or authorized share) due March 1
Most startups do not have the time or expertise to understand these complex areas of accounting. In fact, many accounting firms can struggle when they begin to encounter startup-specific issues like 83(b) elections and the like. That is why it is important to find a CPA who specializes in startups. In most cases, your startup is not deriving value from the capabilities of its extensive finance and accounting staff as it may from its developers, marketers, or the like. The answer for many startups is to use outsourced accounting or as we call it, Corporate Business Management.
Though you do not need to become an expert in accounting and tax, it is important to develop a working knowledge so that your trusted advisors can provide value in a manner in which you can understand and make actionable decisions.
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