For any new startup company, there are many factors to consider, especially for software and technology firms. Between marketing and advertising, organizing the manpower, understanding the infrastructure and other facets of a startup, taxes are often placed on the backburner.
Many entrepreneurs feel overwhelmed by the thought of taxes. One of the keys to success is to learn the basics. By learning the fundamentals of taxes, startups can position themselves to avoid tax problems early on in their lifecycle and take advantage of meaningful tax benefits as the company grows. Below are some tax issues to consider:
Q: What is the best business structure for a startup?
This is a difficult question. Sometimes outside investors or lenders will dictate the type of entity they will invest or lend into. More often than not, institutional lenders will prefer a corporate entity structure. Private investment normally is comfortable with the use of pass-through entities such as LLCs or LPs. The type of product or service you are offering may also dictate entity structure. Bottom line, this question almost always involves consultation with the accountants and attorneys.
Q: What are some initial tax responsibilities that startups may have?
Startups need to be cognizant of all federal, state and local income taxes that may be imposed upon them. Depending on the type of entity selected, the income tax could be assessed at the corporate level or passed through to shareholders/members/partners. Once your company has employees, you will also have payroll tax responsibilities.
Depending on your state and/or local taxing authority, you could be subject to other state and local taxes such as personal property tax, sales tax, business privilege tax, etc. It is important to identify all the potential taxes your entity will be subject to at the onset, and as you continue to grow.
Q: When is the right time to get an accountant involved?
When launching a startup, one of the most important things to do is to get your general ledger set-up appropriately at inception. Regardless of the level of activity, it makes sense to get an experienced bookkeeper involved to make sure the accounting records are maintained properly. Having accurate accounting records is extremely important if you need to look for outside financial support. Many startups will have an outside accountant in place until such time that their level of activity requires them to hire full-time internal accounting personnel.
Q: How can startups take advantage of tax credits and incentives?
There are a myriad of potential credits and incentives available to startups. A popular credit often claimed by startups is the research and development credit. This credit is valuable because it can often be used to satisfy federal payroll taxes. It can also be converted to cash in several states. Some common employment credits include the job creation tax credit and the work opportunity tax credit. Many states and local governments also offer incentives to startups ranging from property tax abatements, tax-free financing, etc.
Baker Tilly works with nearly 700 software and technology companies in each phase of their business lifecycle. We help clients develop strategic and profitable solutions to their challenges in order to capitalize on market opportunities and bolster growth in a fast-moving industry.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.