Starting a new business venture is an exciting journey filled with promise and potential. However, amidst the chaos of product development and customer acquisition, it's crucial not to overlook the critical aspects of tax and accounting. Early-stage founders often encounter common pitfalls with serious legal and financial consequences.
In this guide, we'll discuss common mistakes that startup founders often encounter and provide suggestions to help you avoid these pitfalls. These tips will empower you to steer your business toward financial success.
Avoiding Tax and Startup Accounting Mistakes for Founders
Pay Yourself the Right Way
Common mistake: Don't take money from your business without making sure taxes are paid properly. This can lead to serious problems and common mistakes startup founders make.
Thank us Later: Always use the proper way to pay yourself, called "payroll." If you need to take cash in a different way, treat it like a short-term loan. Your payroll system, like Gusto or Rippling, can help you with taxes and make sure you report your income to the IRS correctly
Don't Skip Tax Filings
Common tax mistake: Neglecting to file taxes or filing late, even when your company is not making a profit.
Thank us later: Do your due diligence. Hire a tax accountant early on, well before tax season kicks in. Research and choose an accountant, get referrals, and sign an engagement agreement during non-peak periods. Tax advisors can be hard to reach during busy seasons.
Keep Up with Bank Reconciliations
Don't forget to reconcile your bank statements regularly.
Verify Your Financials
Common mistake: Assuming that tax professionals ensure the accuracy of your financial records.
Thank us later: You are responsible for ensuring your financial statements are accurate. Your tax accountant will file a tax return based on the information you provide. Review your financial statements and make sure they are consistent with reality before providing them to a tax preparer or anyone else.
Account for Out-of-Pocket Expenses
Make sure to track and account for expenses you pay for personally on behalf of the business.
Separate Personal and Business Expenses
Common mistake: Using your business account for things that are just for you, not for your business, and waiting to open a business bank account.
Thank us later: Only use your business account for things that are necessary for running your business. Some personal expenses can be counted as business expenses, like travel for work. But things like everyday meals and personal subscriptions should be paid for with your own money, not the business's.
Open a separate bank account for your business immediately and use it only for business expenses, this will make record keeping much easier.
Navigating the financial landscape as a business owner can be complex, but being aware of common tax compliance and accounting missteps is crucial to success.
By paying yourself through payroll, hiring a tax accountant, maintaining accurate records, and separating personal and business expenses, you're setting a strong foundation for your venture capital-backed startup.
Regular bookkeeping, bank reconciliations, and vigilant financial reviews further fortify this foundation. Remember, the key to a thriving business is not just in revenue and growth, but in carefully managing your financial affairs.
With these strategies in place, you're well-prepared to navigate the challenges and triumphs of launching your startup. Choosing the right accounting services and startup accounting software like Puzzle will help you make informed business decisions and track the right metrics for the financial health of your business.
If you need free conversion support or have questions about your accounting system, our Puzzle CPA is here to help or get started here.