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7 Common Tax Mistakes Made by Startup Businesses

7 Common Tax Mistakes Made by Startup Businesses

A common misconception among many entrepreneurs is that their startup will not face any tax filing requirements while in the early stages of the business.

However, this is not the case.

If you incorporate your business or form an LLC you have tax and other government filings that are due, even if you had little to no financial activity.

As a result, it is important to understand the tax laws associated with your startup’s legal entity as they may differ depending on whether you are a sole proprietor, a partnership, or some form of corporation.

There is no “right” type of entity that can be applied to all startups. Rather, there is the type of entity that is right for you and your startup.

Below are a few common startup tax related mistakes that can save you time and money in the long run:

1.Proper Record Keeping

It is important for a business, no matter how big or small, to have its own set of books. If the startup team lacks a solid bookkeeper or someone with financial expertise it can be very inexpensive to hire a bookkeeper on a part-time basis. You can also hire a consultant or accountant to help you setup a system that you can maintain going forward.

2.Quarterly Taxes

While you are exempt from paying quarterly taxes in your first year it is still a good habit to get into. First and foremost, you don’t want to get sticker shock when it comes time to pay taxes and you haven’t been setting aside cash every quarter. Secondly, you are going to have to start getting in the habit of paying quarterly taxes sooner or later so you might as well start now.

Additionally, set up separate accounts for anticipated taxes like self-employment and employee withholding. The biggest problem for many business owners when it comes to tax season is having enough cash on hand to pay for taxes.

3.Record Your Startup Costs

Almost every cost you incur when starting your business is eligible for a tax deduction – think market research, travel, customer surveys, prototypes, advertising, branding, etc. All startup costs up to $5,000 are deductible in full in the first year. Furthermore, if your costs go over $5,000, you
can potentially roll out the deduction for up to 15 years.

4.Track Expenses Correctly

While many of your startup costs are deductible be sure that you are recording these expenses correctly to ensure protection if audited. For travel and entertainment expenses over $75 you need to maintain receipts and a recorded reason for the expense. When using your personal credit card be sure to write an expense report to the business shortly after incurring the expense. Track your miles if you plan to deduct car travel to and from your office.

5.Know How To Classify Employees

Many startups think they can avoid paying payroll taxes by classifying their employees as independent contractors. However, the IRS is cracking down on this misclassification and this is one penny that is not worth pinching.

There are a lot of nuances surrounding the differences between an employee and an independent contractor. The biggest factor has to do with how you control this person’s time. If you are telling them when and how to work they are most likely an employee.

6.Blending Business and Personal Finance

Many entrepreneurs make the mistake of neglecting to claim certain expenses as business expenses, such as a home office. On the other hand, many entrepreneurs fail to separate their personal finances from their business finances and often get sued or are forced to pay additional taxes. Be sure to maintain a clear line between your business and personal finances.

7.The Difference Between Equipment and Supplies

Typically, equipment expenses are amortized over the lifetime of that piece of equipment and therefore face unique deduction eligibility requirements. Supplies on the other hand, such as pens, notepads, and printer ink, have a lifetime value that expires far more quickly. In order to get the most out of your deductions be sure to track your expenses accordingly.

If you have a question about your Startup or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Although the verdict is still out whether or not entrepreneurship can be taught there are a few legal problems that all entrepreneurs can avoid with some proper foresight.

8 Startup Situations Every Entrepreneur Wants to Consider

1) Founder’s Agreement: Most co-founders will have some simple planning conversations at the beginning of the venture. However, it is important to take these conversations one step further by developing a Founder’s Agreement. The agreement should outline what each partner brings to the business, his/her roles, and how the business and its assets is distributed when the agreement is terminated. It should also demonstrate how and when the business will be terminated as well as methods for resolving disagreements among the founders. A Founder’s Agreement formalizes the initial planning conversations to ensure that there isn’t any confusion down the road when one party remembers the conversations differently than the other.

2) Non-Compete: It is important that you check your contract with your current employer for any non-compete clauses prior to transitioning full time in your startup, especially if your startup is in the same industry. Similarly, be sure to place a non-compete clause in your employees contracts to ensure that they cannot steal your trade secrets and become your competition.

3) Incorporation: Be sure to incorporate prior to raising capital as it will reduce the amount of tax that you pay when issuing yourself shares. If you delay incorporation until after you’ve raised a seed round your business will very likely have a much higher valuation and thereby holding you accountable for the increased value of those shares.

4) Social Media: Social media can be a business’ best friend or worst enemy. Remember that all posts on social media are public and permanent, so be careful what you post. Create a company social media policy to help ensure the proper use of social media among your personnel. Always handle online criticism with positivity, transparency, and professionalism.


5) Crowdfunding: Crowdfunding is becoming a rapidly growing method for raising capital. As a result, there are a lot of schemes that the government is trying to crack down on. Don’t put yourself at risk by overpromising and under delivering. Be sure to deliver on exactly what you promise. Also, be sure to read the terms and conditions for each site that you start a campaign on as they might be different from site to site.

6) Website: If you sell products on your website there are a few very simple compliance issues that you need to be aware of. For example, you are required to list your terms of service, terms of use, terms and conditions, and privacy policy on the bottom of the page. Don’t catch yourself in a legal quandary because you didn’t take the time or money to consult with a lawyer upfront.


7) Provisional Patent: Don’t wait until you start selling your product to protect your intellectual property. File for a provisional patent (or better yet, a utility patent) and protect yourself from day 1. Be cautions when speaking about your product to anyone outside of the company and do not share any trade secrets. Use non-disclosure agreements when appropriate, but realize that many parties, such as investors, will not sign them. Lastly, it is important to realize that, in most cases, you can discuss your startup/product/service without giving away anything that is truly proprietary.

8) Unpaid Interns: State and federal guidelines dictate whether an intern should be paid. Should they determine that you hired an unpaid intern that should be paid you could be liable t pay back pay, back taxes, and penalties. Be sure to learn your local laws and abide by them.

If you have a question about your Startup Funding or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Four Non-Profit Structures

The Four Non-Profit Structures By The Startup Garage

The Four Non-Profit Structures

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A Non-Profit organization can be structured in several different ways.  Depending on your organization’s liability risk, the type of activities your organization wishes to engage in, and the complexity of your finances, one of the following structures may suit you best:

Corporations

  • A corporation is a separate legal entity that has the capacity to sue and be sued, to own property and to make contracts.
  • A corporation must be registered with the state and requires the most amount of steps to be established or dissolved.  The law that governs a corporation is extensive and clear compared to the law governing an unincorporated association.
  • Members, directors and officers of a non-profit corporation are protected from personal liability for the debts of the corporation.
  • For a detailed explanation of the types of non-profit corporations, please read our blog post entitled The Three Categories of Non-Profit Corporations.

Trusts

  • A trust exists when a person (the trustee) holds legal title to property but is under an obligation to use or hold the property for a charitable purpose.   A “charitable purpose” can be religious, charitable, scientific, literary, educational, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
  • A trust would be the best option if the organization is primarily intended to hold, manage, or distribute property.

Unincorporated Associations

  • An unincorporated association is the least formal structure, and exists when two or more members with a common purpose mutually agree to engage in a lawful activity.
  • An unincorporated association, like a corporation, can sue and be sued, enter into contracts, and acquire and hold interest in property.
  • Unincorporated associations do enjoy some limitation on the liability of the management and staff of the organization, but the extent of personal liability is uncertain and depends on the nature of the situation and whether or not the individual assumed personal liability under the law.

LLCs

  • The LLC structure provides personal liability protection for the directors and officers of a non-profit but is easier to file for and manage compared to a corporation.
  • A non-profit LLC can file for federal tax-exempt status.  However, an LLC will only be recognized as tax-exempt in certain situations, such as when the members are exempt organizations themselves.   For this reason, the main uses of a non-profit LLCs are by exempt organizations for managing subsidiary and joint-venture activities, as well as for holding title to property.
A corporation is the most commonly chosen form for a Non-Profit, and next I will explain the different types of corporations your Non-Profit can incorporate as.

 

Whether you have a question about Non-Profit Structure, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Overview of the Types of Non-Profits

Overview Of The Types Of Nonprofits By The Startup Garage

Overview of the Types of Non-Profits

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Now that you have decided to start a non-profit organization, you must consider which legal structure you wish to use.  The most common form of non-profit is the non-profit corporation, and later in this blog series I will explain how you can file for incorporation if you wish to do so.  If you don’t want to go through the incorporation process, you can consider structuring your non-profit as either an unincorporated association or a trust.

Before you decide which structure is the best for you, consider the differences in choosing between the legal structures.  The main reason that a non-profit chooses to incorporate is to protect the management from personal liability from lawsuits or debt.  Depending on the type of work your organization will be doing, and the type of assets the organization will be buying or owning, chances are that you will want the legal protection of a corporation.  A corporation is a separate legal entity that has the capacity to sue and be sued, to own property and to make contracts.  But if the corporation cannot meet its financial obligations, the personal bank accounts of the people in charge of the organization will be protected.  Another option for your non-profit is to form a limited liability company (LLC).  A LLC offers legal protection similar to that of a corporation but is easier to form and manage.

Once you have engaged in a risk-assessment analysis for your organization’s activities and you have an idea as to how much liability you will be exposed to, you can narrow your entity choice options.  If you find that there is some exposure to risk, but perhaps not enough to justify the effort and expense necessary to file for incorporation, you can also consider investing in liability insurance.  Other options for minimizing liability include using waivers or operating under an umbrella group that has its own insurance policy.  Or you can try to eliminate the risky activities.

 

Whether you have a question about the Types of Non-Profits, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The 4 Ways you can Tax your LLC

Ways to Tax LLC from The Startup Garage

The 4 Ways you can Tax your LLC

Limited Liability Companies (LLC) are a growing trend in startup structure due to their personal liability protection without the bureaucratic red tape. But one big decision to make after choosing the LLC structure for your small business is to decide how your LLC will be taxed. There is flexibility with the LLC which is why it so appealing – all you have to do is choose was federal tax classification suits your company’s needs the best. Mashable wrote a great article on the 4 ways you can tax your LLC and we borrowed some snippets for you to take a look at.

  1. Single-Member LLC as a ‘Disregarded Entity’ – “As the name implies, you need to be the sole owner of the LLC. This classification falls into the ‘pass-through’ taxation category’ — the business itself doesn’t file any tax forms. As the owner of the LLC, you report business income or loss on your personal tax forms.”
  2. Multiple-Member LLC as a Partnership – “For federal tax purposes, if an LLC has two or more members, it will be taxed as a partnership unless it makes an election to be taxed as an S Corp or C Corp.”
  3. LLC as a C Corporation – “If you prefer to keep profits in the company (as opposed to distributing any end-of-the-year profits to owners), a C Corporation would work. In this case, only the company is taxed on the profits; individual owners are not responsible for paying taxes on whatever money stays in the business.”
  4. LLC as an S Corporation – “Individual LLC owners are taxed on their respective shares of the company’s profits (and profits are not subject to self-employment tax).”

Read the full article at Mashable.

 

Whether you have a question about Taxing your LLC, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!