Why Startups and Entrepreneurs Need Accountants, and How to Choose One

, , ,

Many first time and even repeat or serial entrepreneurs who launch their startup will initially try wearing the accountant’s hat by doing their own accounting and taxes, in addition to doing everything else in their business. The advent of simple desktop and online or cloud-based bookkeeping software packages like Quickbooks, Xero, Wave, etc., make it easy for even a layperson to keep track of their basic business finances, however, this is still not an efficient nor an effective approach.

In a growing enterprise, there comes a time when it makes sense to hand over the responsibilities for accounting, taxes, and the rest of the financial reporting and analysis to an accountant. For the successful entrepreneur, the right time to choose an accountant for your startup is before you even incorporate, closer to the time you are still developing the idea fully. A well-qualified and experienced outside accountant can make all the difference in how and if the business succeeds, providing valuable insight and first-hand experience. Great CFO‘s can work with dozens of companies over their careers, however great outside CPA’s work with hundreds annually.

Benefits of Startup Accountants:

Accurate and reliable books and records are the foundation of all successful businesses. This is not an easy task for new entrepreneurs, who have no extensive knowledge in accounting, taxation, compensation, and other financial and non-financial factors, but this is much more than just good bookkeeping.

Choosing an outside accounting firm who provides a wide range of services to entrepreneurs and new businesses will help growing companies stay on top of both regulations and opportunities.

  1. Selecting the most suitable business structure: Accountants help to decide the most suitable structure for the business after evaluating factors such as legal exposure, tax advantages, portability should you need to relocate, and ease of operation from among the many choices: Sole Proprietorship, Simple Partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), C-Corporation, S-Corporation, and Limited Liability Company (LLC).
  2. Financial planning and estimates: Banks, financial institutions and investors will require financial forecasts to find the potential profitability and risk profile of the business before they approve any business loan. Startup accounting firms make professional assessments of the business and thus enhance the chances of loan approval. Financial planning by startup accountants helps them to advise the new entrepreneur on how to raise money. They help with making sound decisions on whether fixed assets and other potential capital expenditures should be leased or purchased, whether funds should be raised by taking a loan, issuing more capital, or taking an overdraft.
  3. Budgeting: Maintaining company accounts out of the red will ensure that a business runs smoothly over its lifetime. They prepare business plans, cash flow projections, budgeting, as well as forecasts.
  4. Bookkeeping and payroll services: These services include preparation of financial statements, daily bank reconciliations, calculation of employee salaries and benefits, and the analysis and compliance for taxes such as preparing tax returns, preparing year-end accounts, advice on minimizing business tax, and handling any Federal, State or Local inquiries regarding tax.
  5. Auditing: Auditing services are often needed by banks and financial requirements as a condition of a loan. Whether performing the audit preparation work to ensure that the books and records are in compliance, to performing the outside audit itself, finding the right CPA for your startup is critical.

How to choose the best startup accountant:

Hiring an outside firm or outside accountant is a good first step for a startup business. This costs them less than a full-time, salaried employee and in addition, gives them a higher level of advice from a certified public accountant (CPA). The accountant will use the latest and greatest accounting and tax software to help them manage the books in a safe and secure way. After determining to choose an outside accountant, it is important to determine the qualifications and other criteria the accountant should possess. Things to look for when choosing the best startup accountant include:

Certifications: It is recommended for startups to look for someone who has professional accounting qualifications like:

CPA (Certified Public Accountant). CPA’s are real financial advisors who can provide more in-depth independent financial assessments about the business. They manage the daily bookkeeping of the business, provide tax advice and prepare tax returns. CPA’s also offers a wide range of other services such as debt management, cost-saving inventory measures, setting short-term and long-term goals, and managing cash flow in businesses.

Industry experience: Business owners often prefer to hire Certified Public Accountants that have experience handling similar businesses in the same industry. It is true that a professional with experience will be aware of the nuances in that particular industry.

Size of the firm: It is wise to look for an accounting firm that is comparable in size to the company. Generally small to medium firms specializes in small business work, provide personalized services and charge less compared to large firms.

Costs and charges: Fee charges are another important factor while selecting a startup accountant. Depending on the extent of work and size of the firm, costs and charges may vary. While it is important to get the right value for the money spent, experts advise that cost should not be the first factor in choosing an accounting firm or a CPA.

Additional services: Additional services may be offered by accounting firms such as specialized business advice apart from their basic accounting services. These specialized services can help startups plan better and grow successfully.

Choosing the best startup accountant is a milestone for many businesses. Choosing outside accountants signals that the company wants to improve its financial position, and position it for growth and success. Hiring an outside accountant should be done early. Many companies wait too long before making this decision which often results in inaccurate and sloppy reporting at a crucial time in the company’s growth.

/by

Accounting for Startups: From Bookkeeping to Taxes for Early Stage Businesses

, , ,

Accurate record keeping for a startup is a fundamental practice. It is never too soon to develop best practices for your early-stage venture’s financial records.  Quality data leads to actionable information which is the backbone of business intelligence.

High-quality information is a necessity for accurate decision making in the operations of any business.  Rather than being only a consumer of time, in fact, accounting helps your small business generate profit.

The types of records which should be kept include (but are not limited to):

  • Bank Deposits and Withdrawals
  • Bank Statements and Credit Card Statements
  • Federal, State, and Local Tax Filings
  • Legal Contracts of all Types including Equity Agreements, Stock Option Grants, Options Exercises
  • Payroll Records and Payroll Tax Filings
  • Receipts for Purchases

We often get asked about what type of software we recommend to keep these various books and records. For start-up accounting solutions, we recommend the following:

  • Intuit QuickBooks (Hint: If you buy the desktop version, splurge for Accountant Edition with its extra features)
  • Intuit QuickBooks Online
  • Wave Accounting
  • Xero
These products are relatively simple to use and do not require an accounting background.  One should familiarize themselves with the Basic Terms of Accounting and the Different Types of Financial Statements to gain a working knowledge.
There are many payroll providers available, and also options that include blended HR services.  A great option for startup payroll preparation is to work with your outside accountant.  Oftentimes, this can be a less costly option than the traditional providers.
At some point, as you are on the way to becoming the CFO of your startup, you will encounter some important decisions including:
  1. Entity selection (Usually an LLC or C-Corporation, often in Delaware)
  2. Year-End (December is most common)
 These are items which are best planned in conjunction with your startup’s accounting and law firms.
Many startups’ next mistake is about filing taxes.  If you are a Delaware LLC or C-Corporation, you will usually still need to file taxes in the state where you are conducting business.  In fact, if your startup encounters a concept called nexus, you may have tax obligations in multiple states or jurisdictions.
For a quick overview of some tax considerations for your startup:
Corporate Tax:
  • Based on Net Income: No income, no tax (*except for certain states like California)
  • Federal Form 1120: 4 Months and 15 days after the year-end (E.g. Due 4/15 for Calendar year-end companies)
  • California Form 100: Minimum tax of $800.  Exemption for the first year. (Same due date as above)
  • Other states if you have “nexus.”
  • If you are required to pay taxes, your startup may need to make quarterly estimated tax payments

Employment Tax:

  • Federal and State Income tax withholding
  • Social Security, Medicare, FICA, Unemployment (quarterly, monthly, or semi-weekly deposit schedules)
  • State Unemployment, State Disability Insurance
  • Additional local taxes (Varies by jurisdiction)
Sales and Use Tax
Fees:
Most startups do not have the time or expertise to understand these complex areas of accounting.  In fact, many accounting firms can struggle when they begin to encounter startup-specific issues like 83(b) elections and the like.  That is why it is important to find a CPA who specializes in startups.  In most cases, your startup is not deriving value from the capabilities of its extensive finance and accounting staff as it may from its developers, marketers, or the like.  The answer for many startups is to use outsourced accounting or as we call it, Corporate Business Management.
Though you do not need to become an expert in accounting and tax, it is important to develop a working knowledge so that your trusted advisors can provide value in a manner in which you can understand and make actionable decisions.
/by