Loading...
Answers
MenuHow should I handle all of my initial startup costs?
Answers
The tax rules will vary depending on what country you want to incorporate and where you will operate your business. The type of entity you select will also impact this answer. If you are looking to form a corporation in the United States, then startup costs incurred prior to forming the corporation can be deducted to a certain extent, but are generally capitalized and amortized over 180 months. It's usually best to form the corporation early in the process to avoid having to amortize a lot of these expenditures. After incorporating the company, if you are not generating sufficient revenue to cover operating costs, you can certainly contribute additional funds to the corporation from your personal bank account. When shareholders contribute cash to the corporation, the contributions are classified as contributed capital. Alternatively, you could structure the contributions as a shareholder loan rather than an equity contribution. I would recommend consulting with a tax advisor to discuss your unique facts and circumstances in more detail.
Hi,
In addition to the elaborate answer that Jason gave before me, I strongly advise that you make sure that all the Intellectual Property (IP) that you and/or your team are creating is assigned to the future company and that all involved have signed an IP waiver. If not, there are 2 main (and major) risks:
1. when you eventually do setup the company and transfer the IP to it, this will be considered as a tax event, which you might have to pay taxes for later on when you eventually sell the company to an investor (example: every time you get your salary, you pay taxes, because you are getting something of value - the salary. When you transfer the IP to the company - which is a separate legal entity - you are giving it something of value, like the salary, which creates a tax event).
2. If one of your team members leave, they are leaving with the IP rights to whatever they created.
I am happy to explain to you how you can and should avoid these two outcomes. The solution isn't complicated nor too costly.
Good luck
If you are in the US, the simplest approach is to form a pass-through entity such an an LLC, or a C-Corp with a Sub-S election (a variation on the pass through), where all the losses (and profits) end up on your tax filings. The challenge is that, with the current tax environment in the US (where you have a "standard" deductions) unless these are significant, they will not make much tax difference. If you approach it this way, and pass through the losses, you will not have the benefit of them in the future.
Remember though, once you incorporate, if you have other shareholders, if you are the only person adding cash, it will benefit them all if you are not careful with the accounting. As you add capital to either entity, it increases your cost basis in the shares if you approach the Sub-S version or you can use shareholder "loans" for the LLC that would be repaid from future cash flow.
This is not difficult but you should get an accountant involved early. A corporate lawyer will be valuable in helping you choose the right entity. And keep great records.
You are lucky to get the relevant wisdom from the professionals as Jason Knott, Assaf Ben-David and Dane Madsen on the subject.
I personally feel that for any startup, profitability must be the prime focus. Though there are many points to focus on but I will share the two most relevant ones.
The first part is to develop and invest your professional expertise and the required time in 100% so that you don't need a major capital investment. And the second is to develop your product/service as unique and valuable so that the people who need you don't have to focus on the price.
To know more on the subject please visit www.ProfitMentoring.com
In regards to your first question make sure you have photocopies of all cleared checks and credit statements. That should be sufficient when reporting statements to the IRS. For question 2, yes you can. Make sure you keep track of your personal deposits in your business.
Related Questions
-
Should I hire a bookkeeper? (what does one do exactly?)
NIcole is right. When I first started my business I thought I was saving money by doing my own bookkeeping. It took me much longer than it would take a bookkeeper - all time that I was not spending on marketing or billable activities. And in the end I made errors which made the initial work of the bookkeeper longer. I now have a consistent routine. My bookkeeper picks up all my material monthly and does my books in less than 2 hours. Very worthwhile.RL
-
Are promissory note installments considered capital gains? I'm selling my website and would love insight on the financial details.
Yo are talking apples and oranges. Capital gains are related to your basis not the form of payment. If you are a cash basis taxpayer, you pay taxes when you receive cash beyond your basis. We can help you with structure.JH
-
Can I use Bench.co + Xero for my business?
This is a great question. The world of accounting/bookkeeping can be a confusing array of options for non accountants. Let's address the software question first. Let me start by saying that my firm is relatively agnostic to software, we work with dozens. I'm familiar with Xero and my firm has worked with it, and if someone comes to us already on it, we stay with it. It's a solid piece of software, certainly works. And it's a very fashionable choice right now due to inroads their marketing has made with the startup community. The big dog in the market is QuickBooks On-Line (QBO), and when I say big dog, various version of QuickBooks have easily 10x the number of current customers that Xero has. Why does this matter? The usability of the software from a user experience is about the same, but Xero is still trying to play catch up to QuickBooks On-Line in terms of features. For instance, they have payroll rolled out for "a few states and are adding more each month". Anything innovative that Xero comes out with QuickBooks is going to quickly copy and add to their product, because they are huge and have the resources to quickly adapt. This is not a situation of the iPhone putting Blackberry out of business, QuickBooks isn't going anywhere. Likely end game is that at some point QuickBooks acquires Xero and moves everyone over to QBO. Lastly, every bookkeeper knows QuickBooks, some know Xero, and there are hundreds of developers developing software that integrates with QuickBooks. So, while Xero is a perfectly adequate piece of software, we’re talking the platform for your accounting, go with QuickBooks On-line. The subject of a bookkeeper is tricker. Do you go with a person or a process solution? Full disclosure here, my firm does outsourced bookkeeping for a living, so you have to take that into account when viewing my answer. I haven’t worked with Bench.co, but it looks very intriguing, and pricing is quite aggressive. They also look very easy to engage with. The down side is that is appears to be a person based solution. You get assigned a bookkeeper, and then good luck. The skill of individual bookkeepers varies widely from damn good to truly awful. They often hook up with several services like this, so their loyalties are divided. Additionally, they are often working with up to a dozen clients, and what typically happens is one of their clients starts growing quickly. All other clients get pushed aside while they focus on their largest client because they can’t afford to lose them. A couple of other disadvantages are that, because they are on their own, you are limited to just their skill set, they have no one else to check with in sticky situations, and when they go on vacation, your accounting goes on vacation, too. These are all things that may be fine for you if you’ve got a relatively small business that doesn’t need daily attention to its accounting. The other alternative is a firm that specialized in outsourced accounting. There are several firms out there, you can find them (and us of course) with a simple search of the internet. The advantage to the better firms in this space is that they typically will assign you a team of bookkeepers/accountants so that you have backup in case one member of the team is on vacation or leaves to take a full time job somewhere. These solutions also will typically come wrapped with software they would suggest for your business. Finally, you aren’t limited to knowledge base of the one person working on your account. You have a team, and really the knowledge base of the entire firm at your fingertips. Of course you pay a little more for this, but the hourly rates are often not that much more than individual bookkeepers. And in the long run you may end up spending a lot less by not having to come behind a bookkeeper that maybe wasn’t so good and clean up the mess. So if you plan on scaling your business beyond a few $200k a year, it may be best to start out with a firm based solution rather than an individual solution. Side note on Bench.co: I can’t tell what software platform they are on. If they are using a proprietary platform, you will find it very hard to move your accounting to another solution if you’re not satisfied with their solution. Something to ask if you go with them. So, I think that about covers it. I’ve probably told you way more than you wanted to know, but I’m always available to schedule a call if you want to dive in a little deeper. Just let me know.CM
-
Will a startup only focused cloud accounting software work that also provides metrics for the startup?
What financial metrics would startups use?
Recently launched Subleger http://subledger.com/ is trying to do some or all of what you describe. It doesn't mean that there isn't room for others but consider that many early-stage companies don't have complex revenue in-flow so the core of what you're describing (converting or merging income into other operational metrics) might not have a wide appeal especially for startups. Hopefully you get some good answers here but really whatever anyone (myself included) says here is far less valuable than asking startup CEOs what their financial painpoints are with respect to reconciling their app's internal metrics with revenue and expenses. Finally, the question "is the market big enough" is too open-ended to answer for you. Big enough for what? To attract significant outside funding? Maybe not big enough. But to build a great income for you and a few others? Perhaps! Happy to discuss this with you further to help you in your evaluation of the opportunity but as I say, best thing to do is canvass the potential market first.TW
-
How should we divide up expense account amounts between partners?
I'm going to answer you with my own experience. The way you mentioned to divide the expenses makes total sense and it's consider the "rational" thing to do. I have seen it work many times and it's what many would consider "fair". The problem (and this is counterintuitive) is that we are humans with emotions and we can't separate us from them. Once someone starts buying nicer things the "ego" hits in, also the "jealousy" and the competitive nature. This brings bad culture and a worst environment. I know you think "we are different", "it won't happen to us" but it actually does and it's not your fault, it's just our nature. My solution is the following. Treat the company as a separate entity from the three of you. So the company (not you) have revenue and costs. THE company can have expenses and they should be as little as possible to run efficient and lean. THE company has to create the most profits as long as it's in the same direction of creating value for their clients. Now, because the company has shareholders (you guys/gals) the profits it generates will go into your pockets 50/30/20. This is after your salaries, that depends on your place in the company and that is money totally entitled to each of you. The profits can be expended as whatever you want because it's like part of your salaries. You will think this makes no sense due that is just a "technical" step. But it's important to separate you from your company. Keep personal and professional in each side of the table. Hope this helped :) If you want to reach out I would be happy to talk. I have helped many family companies to also deal with this kind of issues. Have a great dayJC
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.