When you’re driving a car, the rearview and sideview mirrors are indispensable assets. Why? Because a driver should be focusing on the road in front of him, not whipping his neck every which way to check a blind spot.
Startup founders are equipped and capable of amazing things when called into action. But they can’t be everywhere, and, like drivers, they have holes in their vision. For some of them, taxes are an issue.
Besides being a weakness for some, taxes — specifically the IRS — are particularly scary. I’ve heard countless horror stories of simple tax mistakes turning into huge, expensive headaches for startup founders.
When there are a million things to do, taking on the most confusing, frightening task on your to-do list doesn’t sound viable. However, the “tax man” is an annual presence that apprehensive startup founders should prepare for ahead of time.
Put the Right Person Behind the Wheel
Moving through traffic is even more daunting when a driver is timid and lacks a sense of direction.
In tax matters, hiring a competent accountant will undoubtedly streamline the process. While staying in-house cuts costs and keeps you on budget, outsourcing allows the founder to focus his attention elsewhere.
When choosing an accountant, select a person or entity that specializes in startup services. For example, your “friend who’s an accountant” probably isn’t knowledgeable enough to organize your early-stage finances.
On the other hand, a seasoned, experienced professional can do wonders for your organization’s tax preparation. Add in the fact that the hire can instantaneously funnel in contacts and expertise that normally take years to accrue, and it’s easy to see the value in outsourced accounting.
Plan for These Potential Detours
You may file taxes in April, but it’s better to think of it as a 12-month excursion. Finding someone to crunch the numbers is half the battle. There are a lot of tax bases your company must cover, so make sure your hired hand is keeping all these variables in mind:
1. Don’t hesitate to incorporate
Will you start your business as an LLC or some other option? Smaller companies can avoid incorporation, but if you ever want to raise money, registering as a C corporation is mandatory.
Research and pick the designation that makes the most sense for your company and its employees. Informed decisions about incorporation can save you thousands of dollars in taxes and fees.
2. Factor in sales and payroll taxes
Startup founders can become enamored with income and expenses. It’s an accountant’s job to put all that taxable material into context.
If you sell a product or have employees, account for sales and payroll taxes. Tax legislation varies from state to state, so consider those regulations in the event that your business travels across borders.
3. Pay attention to personal portfolios
Startups invest capital and faith that a particular hire will help transition the company to greener pastures. But employees, too, invest in a company and hope its health will help fatten their wallets somewhere down the line.
Startup stock options represent an additional compensatory stream for employees. The IRS has several guidelines regarding this potential profit, and founders need to understand them from the outset.
Pay particular attention to IRC Section 83(b). It not only mitigates a number of tax issues, but it also provides guidance for founders and employees looking to cash in on a company’s future worth.
4. Get everyone on track
Don’t get caught in a confusing battle with co-founders or employees. Be very clear with all founders about how taxes work and where responsibility and equity lie.
The same goes for employees. There’s nothing worse than misclassifying an employee and facing IRS fines.
All of these decisions can and should be made after engaging a professional. Taxes are complex — especially for startups.
Negate any fears by actively engaging and planning for tax-related scenarios year-round. Do that, and you won’t go into another lane without seeing what’s coming.