Accounting for Startups

13 minute read

The journey a new business owner takes is a wild and exciting one. If you're considering a new venture, there are many ways you can work to make it a fuss-free, stress-free endeavor. Here are just a few tax, accounting and non-financial concerns you should be thinking about, as well as how software for accountants can help.

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 decisions with accounting for startups. 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 to understand the legal ramifications of your selection. Legal entity options differ by jurisdiction, but the most common options are:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Companies (LLCs)
  • Corporations (S corporation or C corporation)

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. Different business entities have different tax ramifications. Familiarize 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 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. You can use whatever account numbers you like as long as there is a clear numbering scheme and room for growth. Accounting for startups often have account numbers setup such as:

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 to prepare financial reports, budgets, projections and tax returns, so you want them to be set up in a way that is helpful to you. 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 the software for accountants that you use, 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 you expect. 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

You will likely already know to register their business name, get business insurance, claim your domain name, and open a bank account. But there are a few other administrative tasks you 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 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. Be sure to properly obtain the permits and licenses needed 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.

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Comply with Zoning Ordinances

Before you open for business, check with state and local zoning ordinances to ensure you can operate your 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 you have employees, you must use Form I-9, Employment Eligibility Verification to verify that your employees are eligible to work in the U.S.

Register Securities

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

Help With Compliance

You will know to come to you for help filing income tax returns, but there are many other areas of compliance to keep in mind. In addition to filing Federal, state, and local income taxes, you can:

  • 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 you took out a Paycheck Protection Program loan or an Economic Injury Disaster Loan (EIDL), you should walk 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 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 software for accountants on the market, it can be difficult to select the right one. Help your startup find the system that works for your industry. If you own a restaurant, you will want an accounting software that syncs with its point of sale (POS) system. If you have a lot of inventory items, you will want a system that can track those items and report up-to-date values. If you hold 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 a software for accountants that you can access through the cloud. If you can have on-demand access to your 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 to save as much money as possible. Through tax planning, you can create a tax-efficient business that reduces your tax liabilities and maximizes your ability to contribute to things such as retirement plans that are crucial for 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 you. 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.

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