Now What? Important Items to Think About When Starting Your Technology Business
Being ready is always critical to success.
As an NBA player, you wouldn’t go out onto the court without making sure your shoes are tied.
As a lead guitarist, you wouldn’t go out onto the stage without checking your amp.
So as a business owner, if you don’t want to trip over your feet and you want your business to run like a fine-tuned machine, you’ve got to have a solid game plan. Having a great idea is just the start, so here are a few important items to keep in mind as your business takes off:
- Choosing your entity type: Why is this important? The decision to structure your business as a C-corporation, S-corporation, LLC, or partnership will have a significant impact on how the business and business owner is taxed. Deciding whether or not to bring on partners or how you want business profits to flow to you can help solve potential tax issues before they even come up.
Deadlines to be aware of: Why should I care? Failure to file taxes in a timely manner can result in penalties and interest owed to the federal and/or state government. Being aware of the deadlines that are relevant to both you and your business is essential in order to avoid any late filings.
Payroll tax and sales tax issues: Should I be worried? Not if you stay ahead of the game! Payroll tax and sales tax are topics that you never had to think about prior to starting your business but are now integral to conducting your operation. Staying ahead and in compliance can even lead to some creative tax planning strategies!
Accrual vs. cash: What even is this? Accrual and cash basis are two different methods of accounting. The main difference is the timing of when revenue and expenses are recognized. Although your books may be kept on an accrual basis for financial reporting purposes, it may make sense to file your tax return on a cash basis. Understanding which method is required or most beneficial to your business can result in significant tax savings.
R&D Tax Credits: Can these help me? Tax credits can often put more money back in your pocket but tend to be overlooked by most business owners. Understanding which tax credits are available to your business and how to take advantage of them can lead to significant reductions in your tax liability which can also help with cash flow.
Employee vs. independent contractor: What is the difference? When employees get paid, the company withholds income tax, social security, and Medicare from the employee’s paycheck. When independent contractors get paid, the employer does not withhold taxes and employment and labor laws do not apply.
Separating business expenses and personal expenses: Isn’t it easier to just have one account? While it may seem easier to only have one account, it is extremely important to separate your business income and expenses from your personal. This can help keep a clean set of books and records and can even help with personal liability protection that you wouldn’t have had if the expenses were combined.
State Nexus: But I’m only operating out of one state! Your main business operations might only take place in one state, but if you are generating revenue or paying employees in various states, you may have an obligation to file multiple state tax returns. Staying aware of where your employees and customers are, especially in a remote working environment, can save you from a headache in the future.
Cap table maintenance: Don’t we all know how much we own? Your ownership structure and capitalization table may be straightforward now, but as your business raises additional capital, that can change quickly! Making sure your cap table always reflects the current ownership breakdown will be critical to understand the impact to your share of the company as future equity transactions occur. When it’s time for distributions, no one wants any surprises!
83(b) Elections: This sounds complicated! In the most basic terms, filing an 83(b) Election gives you the option in certain cases to pay taxes at a lower rate on the stock that you sell in your company. This election needs to be filed within 30 days from the date the equity was granted, and document retention is critical!
Whether you’re an NBA player, a top performer, or a business owner, it’s critical to be at the top of your game. Consider the points above the first steps in advancing your business and look out in the upcoming weeks as we take a deeper dive into each of the key considerations mentioned in this article. If you have any questions, reach out to your Citrin Cooperman advisor.
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