Startup Business Accounting: Do You Need It?

2023

Written by Chetan Dogra, CPA

You most likely still vividly recall the day your company was founded. After years of employment with a bigger organization, you were weary of having your suggestions for more effective procedures ignored. Or perhaps you discovered that you had built up a clientele that was willing to pay you for your area of expertise.

Now this is where you are. You’ve got your first clients and are getting paid to perform what you excel at and like after months of worrying and planning. No more putting in your time and effort on tasks that don’t excite you. No more red tape or bureaucracy. Finally, your future is in your hands.

Typical Errors & Pitfalls

Well, there might be a few things you didn’t consider. You probably didn’t start your company with the intention of becoming an accountant, but you may not be aware of the fact that accounting is a key indicator of a successful company. How can you be sure that you’re actually making money if you don’t keep track of your debits and credits?

Yes, you have income, but if you haven’t paid your estimated taxes, you might discover in April that your first year was actually a loss. It’s simple to forget that Uncle Sam expects his two pieces on a quarterly basis when you have a W-2 employment because your company handles your tax payments.

1. Not keeping track of compliance deadlines

Compliance deadlines are like jumping into a flowing river. When you have newly opened your firm, federal, state, and local deadlines may be approaching in three months or three days. If you haven’t prepared for such payments, the due dates will pass without your knowledge. Then your tax obligation will grow alarmingly quickly.

Perhaps you haven’t worked in a W-2 environment before. Maybe you already run a successful business, but you’re now trying your hand in a different sector. There is a temptation to think of accounting as being “one size fits all.” But just like every child is unique, so are every industry and type of business. If experienced business “parents” want to set up this specific business for long-term success, they will certainly need to go over some preconceived preconceptions.

2. Not selecting the right business entity

Business owners need to make a careful choice of their entity type. Every company needs to do an unbiased evaluation of the trade-off between legal protection and tax minimization.

For instance, in the oil and gas industry, you can only receive the more immediate tax benefits if you put yourself in a position where you could be held liable, such as through a general partnership. On the other hand, a limited liability corporation (LLC) can be a better choice for a real estate endeavor.

How you wish to recompense yourself as an owner and how taxes are levied are important factors to take into account when choosing an entity from a tax standpoint. For instance, using a C corporation tax structure will result in “double taxation” (net profits taxed at the entity level; personal income taxed at the individual level). This is in contrast to S corporations, single member LLCs, or partnerships where net profits are “passed-through” to the owners’ personal returns and tax is applied at the individual level. As an owner, it’s crucial to understand how the IRS taxes different income distributions from profits in comparison to W-2 salaries.

If there are any legal repercussions from leaving a prior company, some entity types offer more protection. This is crucial if a non-compete clause is in effect. For business owners who plan to sell their company soon, other entity types are preferable. The improper entity type can have substantial long-term repercussions, which is just one of the reasons consulting with tax and legal professionals is crucial throughout the startup phase.

3. Not having the right business accounting support

The two largest mistakes that new business owners make are omitting to put up accounting systems and failing to hire the appropriate degree of accounting support. The owner might believe he can handle everything himself. After all, accounting should be fairly straightforward. On one side are debits and on the other are credits. Done and finished.

Wait a minute. Consider first asking a few questions to yourself. Do you know how to build up your chart of accounts to both satisfy Uncle Sam and capture the level of transaction detail you require for your personal decision-making? Do you know all the month-end responsibilities your company must fulfil in order to generate the data you need to make strategic decisions?

Perhaps you spent the time and money necessary to set up those accounting procedures, but you don’t follow them consistently. Who has time for bookkeeping when you’re so busy recruiting clients, starting projects, and delivering invoices?

But think about the issues involved. You’ve invested all you’ve got into this company, including startup capital and personal guarantees for loans. Failure is not an option, but real performance must be understood clearly in order to succeed. Does “success” mean gaining 50 new clients or $50,000 in revenue? These are infinitely trickier to pin down. Sound business decisions are based on accurate, timely, and comprehensive financial data, therefore failing to establish the processes that generate such data could be stifling your company’s potential growth.

However, there are subtle ways in which accounting services can help in the startup stage. We will find out about that in the next blog Easy Business Accounting Tips to Help Your Startup: It’s Here!