Avoiding Tax and Accounting Mistakes for Early-Stage Founders

Introduction

Often, startups' ideas and services do not cause their downfall. The improper handling of their accounts or money is the real issue. Even a well-known company will eventually succeed with a stable financial foundation.

Startups may face numerous challenges later on if they need to correctly manage their tax affairs from the start, such as paying fines to tax authorities or finding it difficult to pass an audit while fundraising.

This post has compiled some standard accounting and tax mistakes that startups or entrepreneurs should avoid. So, let's take a closer look.

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Preventing Tax and Startup Accounting Errors for Entrepreneurs

Account Payroll Accurately

Only take money from your company after ensuring that taxes are paid correctly. This might result in significant issues and frequent errors made by startup founders.

Always pay yourself using the appropriate method, called "payroll." Treat it as a short-term loan if you need to take cash differently.

Remember to File Your Taxes

You are paying taxes incorrectly or beyond the deadline, even if your business is not making a profit. Late fines may be incurred for company taxes not filed and paid. Do your due diligence. Get a tax accountant as soon as possible—well before tax season. During off-peak hours, do your homework, select an accountant, acquire recommendations, and sign an engagement contract, as it might be challenging to contact tax consultants during peak seasons.

Follow Up On Bank Reconciliation

Remember to reconcile your bank statements routinely. Your company must regularly reconcile its accounts. Verbalising that an account balance as it appears on your books is accurate and correct and corresponds with the actual balance in your bank account is known as reconciliation. Small expenditures and expenses may occasionally go unreported.

Small firms should reconcile their books periodically to keep their records accurate and their books from drifting apart from the actual state of their accounts.

Keep Personal and Business Expenses Apart

Don't use your business account for personal expenses, and stop putting off opening a business bank account.

Use your business account exclusively for expenses directly related to operating your company. It will be much easier to keep records if you open a separate bank account immediately and use it just for business spending.

Granting The Founding Team An Excessive Number Of Authorised Common Shares

It is significant to remember that authorised shares do not currently represent the company's ownership; instead, issued and outstanding stock does. A company's AOA must be amended to permit the issuance of extra common shares if it gives all authorised shares. A special filing fee and shareholder vote are required for the amending process. This tedious task can be avoided if one is proactive and issues the correct number of shares from the start.

Seeking Funding Before The Business Is Prepared

It is rare (nearly statistically impossible) for a company to secure venture and angel capital funding based only on an 'Idea'. Investors want a company to have achieved certain fundamental product milestones and KPIs before considering investing. In addition, the company needs to have some standard papers ready, like a pitch deck and a business plan.

A business that approaches investors too soon is not presenting itself in the best possible light since it is unaware of the kinds of businesses that particular investors are usually interested in funding. 

Bad expensing practices

Many companies offer Tax deductions for business expenses. Expenses such as office rent, travel, and software subscriptions can be written off as tax deductions for startups, resulting in substantial savings when these are reported on tax returns. You risk paying a hefty fine and missing out on tax relief if you attempt to file a claim without keeping receipts and the tax authorities demand to see them.

Non-Compliance Of Tax Regulations

A startup is subject to more tax obligations than just filing taxes regularly. Neglecting other tax obligations can result in fees, penalties, and time that you and your accountants must invest in the future. You will be sent a notice/warning if you don't follow any of your regulatory obligations, and you'll be requested to either rectify the default or file any unfiled reports.

Simplify your compliance management and consider technologies or routines that might assist in removing data inconsistencies between systems. To ensure you are ahead of any deadlines, set up a system that can assist with email reminders or debt alert features.

Not Hiring A Tax Professional

As taxes are complicated, even seemingly insignificant tax errors could have serious repercussions. It is beneficial to consult with a startup tax counsel to steer clear of these blunders and create a tax plan for your business as soon as possible. Growing firms can profit greatly from tax perks, such as the R&D tax credit. 

A tax professional can assist you in complying with tax laws, avoiding penalties, and maximising your tax advantages.

Not Investing in Accounting Software

Numerous excellent accounting software packages are available that greatly benefit you. You may make invoices, compile financial reports, and keep tabs on your earnings and outlays with the aid of these programmes. Why does this matter? With accounting software, you can grow. It provides access to real-time data, provides an audit trail, is automated and makes reporting more accessible and scalable. 

Unrealistic Company Valuation

When you ask an entrepreneur what their firm is worth, you will usually get an answer five or ten times greater than what is suggested by reasonable market and intrinsic valuation methodologies. Entrepreneurs need to comprehend the worth of their business, particularly when pursuing funding rounds and engaging in discussions regarding a possible firm sale. Unrealistic valuations by entrepreneurs might sabotage otherwise fruitful conversations with potential buyers. Entrepreneurs need to be aware of the relevant valuation techniques. To produce a reasonable estimate, it is advised to use a variety of valuations, including asset value, earnings-based, and market-based valuations.

Set A Budget

Establishing a budget is fundamental for any entrepreneur embarking on a new venture. Nonetheless, many entrepreneurs need to evaluate the state of their company periodically. This makes it more challenging to adjust their budget as their company expands or detect potential problems looming in the background. With this important financial data at your disposal, you can create budgets and long- and short-term goals that will best serve the long-term interests of your company. Irresponsible budgeting is a common cause of unexpected financial hardship for companies.

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Conclusion

If you want to start a business, you should steer clear of these accounting errors. You're laying a solid basis for your startup by employing a tax accountant, keeping correct records, and keeping separate tabs on personal and business costs. Diligent financial assessments, frequent bookkeeping, and bank reconciliations further strengthen this basis. Recall that smart financial management is as important to a successful firm as revenue and growth.

With these tactics in place, you're ready to face the obstacles and achieve success early on with sound financial management. You may track the appropriate parameters for your company's financial health and make well-informed business decisions by selecting the best accounting services and startup accounting software, such as Inkle Books.

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