The Internal Revenue Service has issued guidance in regulations, revenue rulings, and on its website. However, as is common with any topic that receives significant attention before complete guidance is issued, there is a lot of misinformation being circulated. In this connection, it may be helpful to review a few questions that Withum’s Real Estate Group has been receiving from our clients and contacts.
1. Which type of entity should I choose?
There are many factors to consider when choosing the entity type for your start-up and each has its own advantages and disadvantages. It is best to speak with both a lawyer and a CPA when making this decision. Changes in tax laws from year to year can influence the best entity to choose for tax purposes.
2. Should I incorporate in Delaware?
Delaware has some of the most business friendly laws in the United States and many companies choose to incorporate there and this is standard in many industries. A good registered agent will help you with all the necessary filings.
3. I am selling widgets/SaaS all over the United States, do I have to pay/file sales tax?
As is the case with most tax questions the answer here is it depends. The sales tax laws have been changing dramatically over the past few years and enforcement is still catching up. The Wayfair decision, with its “economic presence” terminology has greatly expanded the sales tax nexus reach for most states.
4. What software should I use to keep my books?
There are hundreds of accounting software solutions on the market, most start-ups we have worked with use QuickBooks, either online or desktop, Xero, or NetSuite. All these products will allow an accurate set of books to be kept for internal reporting, budgeting and forecasting and to serve as the basis of a tax return or financials statements. The best software again depends on the individual use case, with factors such as 3rd party software integrations, number of users, and complexity of the record-keeping desired/required by your business, a conversation with an accountant can help you make an informed decision.
5. What should I be looking for in an outsourced/part-time CFO?
Training, Experience, and References. A great CFO generally is a CPA and often times has a master’s degree in tax, accountancy, or business administration. While additional credentials are possible and maybe desirable given the exact nature of your business, continuing professional education is a requirement to maintain the CPA designation. A great start-up CFO’s resume will show a progression through an accounting department staff to manager to controller, plus or minus a few steps. This shows that the candidate fully understands the entirety of the accounting process and can jump in at any step that needs attention, which is essential for startups with small, often understaffed accounting departments or who outsource their accounting function entirely. Lastly the track record of the CFO and their team (if applicable) within your specific industry and related to your specific growth goals.
6. I have no idea how to pay employees or manage benefits and human resources, help!
Depending on the level of support you’d like with each of these areas there are providers that can take care of as much or as little of payroll and the associated filings, benefits administration and human resources functions. Depending on the level of help you’d like and your budget for these services we like to recommend a few different providers.
7. Why should I hire an accountant beyond preparing a tax return?
Accountants do much more than audit financial statements and prepare tax returns. The role of a CPA has been shifting to that of a business advisor who can help with many aspects of running a business from the regulatory compliance like income, excise, and sales taxes to providing referrals from everything from legal, insurance, payroll, benefits, human resources, banking, real estate and even where to get a decent meal. Working with an accountant as a consultant rather than the traditional tax return or financial statement engagement allows them to know and understand your business on a deeper day-to-day level and to offer solutions or improvements to your processes or current service providers in an effort to achieve your business goals as well as provide accurate, timely, and actionable financial data that helps management make informed business decisions.
8. Does your startup have enough runway?
Essentially, the more dollars on hand, the longer the runway which in turn gives your business the time to ramp up and take off. A good rule of thumb is you want enough runway to manage your business through a planned milestone that drives valuation and enhances the odds of further successful fundraising. It is generally considered that startup runways should be 12 – 18 months, which allows time for essential projects to reach the finish line plus additional room to line up additional funding. Most startups spend 80% of their money on 3 things: payroll, rent and contractors. If you can control these spends, you can control your runway. The advice of a CPA can help to guide a startup through the analysis process of determining your burn rate, as well as the appropriate essentials for your runway success.