This write-up was originally sent to subscribers as a part of our Mission Control weekly insights, a series where we share wisdom and quick breakdowns on topics from our entrepreneur support network.
In the turbulent journey of entrepreneurship, dealing with taxes seems the furthest of priorities, however, understanding just enough of the intricacies of taxes and accounting can save you a lot of hassle and money. In Q1 we do a lot of extra programming around tax and compliance to help founders find the balance between preparedness and growing the business. Here’s a quick guide, and an accompanying video from the session explaining more.
What’s the Big Deal? ->
For early-stage startups, especially those eyeing Delaware incorporation for its investor appeal, grappling with franchise taxes, corporate income tax filing, and sales tax obligations are inevitable. Establish a decent understanding of what you can wait on, and what you should tackle proactively. Adopting strategic financial tracking and banking practices can significantly ease these burdens.
- Franchise Taxes:
- As a Delaware Corporation, expect to pay franchise taxes the year following incorporation, regardless of the incorporation date or how active the company was in that year. The due date typically aligns with your annual report, often March 1st.
- Initial franchise tax assessments can seem ridiculous if you have authorized shares in the millions which most startups do. Don’t panic if you get a big initial bill from your Delaware registered agent suggesting you owe between $60,000 to $80,000. Recalculating using the “assumed par value capital method” can reduce this to the minimum—$450—in early years before you have a lot of assets.
- Corporate Income Tax Filing:
- Regardless of revenue or business activity, filing corporate income taxes is mandatory. While you may not owe taxes without profit, the act of filing remains crucial and fees can add up if you push it off year over year.
- This process can be intricate, get professional assistance to navigate the complexities effectively. Early returns can be just a few hundred dollars to file with a professional and its well worth it to avoid future headaches.
- Sales Tax Considerations:
- The obligation to pay sales tax kicks in with your first sale if you have a physical presence in the state where the sale is made.
- Reaching a sales threshold (commonly $100,000) or a certain number of transactions in other states may require you to pay sales tax to those states due to “economic nexus” laws.
- You will owe sales tax even if you don’t collect it; don’t let that dig into your margins and bottom line. Establish awareness of approaching those thresholds. Many modern payment processors offer this functionality, you should check if yours does.
- Economic nexus can trigger a foreign qualification filing which may result in having additional franchise tax obligations in those states if they have franchise tax requirements (not all do).
- Accounting Best Practices:
- You’ll eventually need a bookkeeping system tracking all corporate expenses to avoid financial disarray. Tools such as QuickBooks or Xero are recommended for efficient tracking.
- Streamlining expenses through a dedicated corporate bank account makes tracking this and eventually loading into a bookkeeping solution easier. Utilizing modern banking solutions like Brex, Mercury, or Ramp can facilitate this process, making expense management straightforward.
Actionable Advice
Keep as meticulous a record of your financial transactions and receipts as you can. Establish a routine—weekly or monthly—to update your records, ensuring every expense is accurately captured. This discipline is crucial not only for tax purposes but for the overall financial health of your startup.
Wrangling your startup finances may seem a bit much when so much is uncertain, but taking proactive steps early on can prevent the snowball effect of unmanaged accounting. “Losing control of your accounting, it’s worse than losing control of your codebase” as Gust’s team explains in more detail in this loom video.
How Gust Can Help
We wrestle with tax questions regularly in Mission Control Office Hours, our regular open Q&A sessions. Founders are not only able to get the above high level insight but also ask clarifying follow up questions and check their own understanding.
If access to that level of expertise on an ongoing basis seems like it would help you on your founder journey, join Mission Control for $99/month. If it doesn’t save you time, mistakes and billable hours you can cancel any time.
The next few months we have dedicated workshops to help founders get the lay of the land and learn just enough to keep compliant while still focused on the business-end of their startup.
Even if you’re not in Mission Control yet we hope this information was valuable; feel free to let us know if you liked it on Linkedin!
Gust’s Mission Control can guide early founders through all sorts of complex startup hurdles, like issuing equity.
This article is intended for informational purposes only, and doesn’t constitute tax, accounting, or legal advice. Everyone’s situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.
