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Tax and Accounting Concerns for Startups

The journey a new business owner takes is a wild and exciting one. If your client is considering a new venture, there are many ways you can help make theirs a fuss-free, stress-free endeavor. Not only can you help them with the financial side of their business formation, you can serve as a sounding board in the non-accounting related areas of business ownership. Here are just a few tax, accounting and non-financial concerns you should be thinking about.

Setting Up The Business Structure

Selecting a business structure is usually one of the first decisions a business owner makes, and it is also one of the most important. Business structure influences:

  • Legal liability
  • Ownership options
  • Growth potential
  • Business continuity
  • Future capital investment
  • Salary requirements
  • Taxes

With so much riding on one decision, you should consider soliciting the help of a lawyer you trust. Business structure is a legal determination first and foremost, and you want your clients to understand the legal ramifications of their selection. Legal entity options differ by jurisdiction, but the most common options are:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Companies
  • Corporations

A business’s choice of legal entity does not always correlate with tax structure, but it can. For instance, LLCs are taxed as sole proprietorships or partnerships by default, but they can be taxed as S corporations or C corporations if the business makes certain elections. If you are not an attorney, you cannot advise them about legal issues, but you can explain the tax ramifications of the various business entities. Talk through the options with your client and refamiliarize yourself with what forms you need to file – if any – to ensure they are taxed appropriately.

And although it may seem premature to be thinking about exit strategies at the business’s formation, your client’s succession plans should influence their choice of business entity. A business owner who wants to transfer interest to a child or grandchild will have different exit goals than an owner who wants to sell their interest to a third party.

Setting Up the Trial Balance

Though establishing a perfect trial balance from Day 1 may be a bit unrealistic, it’s best if you can put a bit of extra effort into this task so the business starts off on the right foot. Trial balances are used internally most often, so talk to management and hear what they want to see on their reports.

A clean and organized trial balance begins with a clean and organized chart of accounts. Your client can use whatever account numbers they like as long as there is a clear numbering scheme and room for growth. Common account numbers are:

10000s – Assets
20000s – Liabilities and Equity
30000s – Revenues
40000s – Cost of Sales
50000s – Operating Costs – Labor
60000s – Operating Costs – Benefits
70000s – Operating Costs – Other
80000s – Administrative Costs
90000s – Non-Operating Costs

Trial balances serve as the raw data that you will need when helping your client prepare financial reports, budgets, projections and tax returns, so you want them to be set up in a way that is helpful to you, too. Establishing a trial balance that works for book reporting and tax reporting will ensure your quarter-end and year-end cleanup will go that much smoother. Depending on your accounting software, you may be able to establish separate groupings for book purposes than for tax purposes, and with a simple click of a button you can rearrange the reports to fit your needs.

This is an excellent opportunity to talk about the various income and expenses that the business owner expects. You may also be able to highlight some additional income opportunities or potential expenses that the business owner has not considered. Though the above listing is generic, most businesses have their own quirks within their books. Therefore bringing up this discussion will held aid in identifying if the accounts are set up correct and also provide a great opportunity to potentially upsell for CFO or Tax Planning opportunities, based on the numbers shown.

Regulatory and Administrative Requirements

Your client will likely already know to register their business name, get business insurance, claim their domain name, and open a bank account. But there are a few other administrative tasks they will need to do before opening for business:

Apply for a Federal Tax ID Number

A business will use their employer identification number (EIN) to file taxes and identify themselves to governmental (and many non-governmental) agencies. Applying for an EIN is simple, but the turnaround time can be up to four weeks, so help your client apply early.

Apply for a State Tax ID numbers

In general, a business will need a state-specific tax ID number any time they collect taxes. Payroll and sales taxes are the most common state taxes that require separate tax IDs, but occasionally businesses will need separate state ID numbers for property taxes, income/gross receipts taxes and excise taxes.

Apply for Business Licenses and Permits

Business licenses and permits vary by industry. For instance, many professions require licenses to practice, like nursing, education and cosmetology. Other businesses require safety permits like liquor licenses, food handler permits and driver’s permits. They may also need to apply for local licenses. Help your clients obtain the permits and licenses they need to operate within the law.

Establish a Trademark

Some businesses will want to protect their brand, their name or their ideas. Point your client to the United States Patent and Trademark Office for help establishing a trademark.

Comply with Zoning Ordinances

Before your clients open for business, check with state and local zoning ordinances to ensure they can operate their business in their chosen location. Many localities limit business operations to only certain locations, prevent homeowners from running businesses out of their residence, or require businesses to store hazardous chemicals in certain conditions.

File Annual Returns

Most states require businesses to file annual informational returns with the Secretary of State. These are simple forms, but failing to file them can put a stain on a business’s otherwise good standing in the community.

Create Employment Guidelines

If the business has employees, they will need to establish workplace guidelines that comply with the Fair Labor Standards Act (FLSA).

Confirm Employment Eligibility

If your client has employees, they must use Form I-9, Employment Eligibility Verification to verify that their employees are eligible to work in the U.S.

Register Securities

Federal securities laws can be tricky, and if your clients plan to sell or advertise their securities, they must be registered with the Securities and Exchange Commission.

Help With Compliance

Your client will know to come to you for help filing income tax returns, but there are many other areas of compliance they may need your help with. In addition to filing Federal, state, and local income taxes on their behalf, you can help them:

  • File property tax returns
  • File sales tax returns
  • File payroll tax returns
  • Pay estimated taxes
  • Maintain records of licenses and contracts
  • Record stock sales or transfers
  • Establish bylaws or operating agreements
  • Record meeting minutes from annual meetings of the Board of Directors
  • Comply with data security laws
  • Perform audits or reviews
  • Monitor new tax exposures by performing nexus studies

Compliance also plays an important role in business loans. If your client took out a Paycheck Protection Program loan or an Economic Injury Disaster Loan (EIDL), you should walk them through those program requirements. Even traditional business loans have certain compliance requirements. Loan covenants often require businesses to maintain certain debt to equity ratios. You should help your client monitor these ratios throughout the year so no surprises crop up when it’s time to renew those loans.

Setting Up Accounting Software

With so many accounting systems on the market, it can be difficult for your client to select the right one. Help your startup client find the system that works for their industry. If your client is a restaurant, they will want an accounting software that syncs with their point of sale (POS) system. If your client has a lot of inventory items, they will want a system that can track those items and report up-to-date values. If your client holds a high volume of high-value assets, you want an asset management system robust enough to fit their needs.

You should also think about suggesting software that you can access through the cloud. If you can have on-demand access to your client’s financials, your month-end, quarter-end or year-end processes will go that much smoother.

Setting Up a Tax Plan

As mentioned earlier, helping your client select the right business structure is key. Not only does that affect legal liabilities, growth potential, future capital investments, salary requirements and ownership options, it especially influences taxes. 

Every startup should be equipped with a clear tax plan in order to save as much money as possible. Through tax planning, you can help your client create a tax-efficient business that reduces their tax liabilities and maximizes their ability to contribute to things such as retirement plans that are crucial for their long-term success.

This is why our tax planning software is so important—it can help you quickly create the tax plan that is right for your client. It works by giving you proactive strategies that are automatically recommended based upon the data you input. You’ll be able to see how each tax planning strategy is calculated and be able to select which strategies you want to recommend in your final tax plan.

Create tax plans with ease.

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