Startups face an uphill battle—from financing, to hiring, to distinguishing themselves from the vast crowds of competitors fighting for market share and publicity. For most people, starting a business is an exciting time during which they are invigorated by the possibility of success and the fun of tackling new challenges. It is also a time to make lots of mistakes!. As a start-up, you won’t want to get into a legal tangle especially with a very aggressive tax regime and a long incorporation process. To make sure your new business is handling its regulatory, tax obligations properly, run through these common mistakes that most start-ups make:
Not understanding your tax obligations:
Unfortunately, ignorance of tax law is not an acceptable defense. Once Startups/companies have earned revenue, they also have recurring tax obligations. You need to know what tax compliance looks like for your company on both the federal and state levels plus municipal licensing fees, payroll taxes and more.
Keeping multiple sets of books
You know what we mean: you have one system for your big enterprise customer, multiple spreadsheets for your other customers, a napkin for other customers, and a couple in your head. At the end of the month, you (hopefully!) email your bank statements over to your accountant, who can now bill you extra. This is bad for a many reasons. First, you’re paying more for your quarterlies by dumping a ton of accounting shit on your accountant. Second, you’re losing a ton of data that, when organized, can offer you a ton of in valuable information for operations and, perhaps, the ammo you need when you sit down and explain your numbers with a potential investor & lastly, multiple sets of books also calls an action from Income tax authority!!(yes you read it right)
Selecting the wrong legal structure
Your startup’s legal structure affects your legal reporting requirements and your tax filings and how much you pay as tax, so it’s important to choose the right entity.There are a number of entity structures that you could choose such as a Registered Company (Public/Private Limited), LLP, proprietorship, partnership etc.While the proprietorship mode of business could lower your tax pay out to an extent but a registered company is more formal and widely accepted way for doing business especially with foreign clients which generally want to do business with registered companies. Also venture backed startups generally require registered companies for funding. Also if you do not want personal liability for the losses/liabilities of your startup than you could opt for either a Limited liability partnership or Limited Company, but if you don’t mind your personal assets being used for settling the business losses/liabilities then you could opt for proprietorship or partnership.Remember that not choosing the right form of a legal entity can get you into a legal tangle and can also result in a higher tax outgo. A discussion with a tax advisor or CA can help you figure out which structure is right for your situation.
Not paying your taxes regularly
Businesses, including self-employed sole proprietors, are required to pay taxes on a advance basis i.e they have to determine their taxes for the year in advance and pay as prescribed instalments in Advance. Not paying the taxes deducted from payments of suppliers/ service providers can land you in big trouble. Take a stock of your profit/loss statement at each quarter and pay your advance taxes accordingly. A CA/Tax Consultant can help you estimate these payments if you need some help.
Recommended articles- Implications and advantages of filing tax returns
Not keeping track of all your expenses
From the moment you launch a business, you’re able to deduct all “ordinary and necessary” business expenses (e.g. office supplies, event fees, kilometers driven to meet with partners). The biggest mistake start-ups make is not keeping track of these expenses throughout the year and trying to gather every receipt when it’s time to file the tax returns. Always remember, you can’t deduct what you can’t document, and failing to record expenses as you go most likely means you’re leaving money on the table.
Find a method for documenting expenses that works for you. There are accounting softwares, such as QuickBooks, Tally, Busy, FreshBooks etc which let you record and manage expenses. You can hire services of MyeCA to record all your expenses. You can also get all your accounting outsourced to MyeCA.
Mixing capital expense with revenue expense
First-time business filers get tripped up as to which expenses are considered assets /capital expenditure and which are revenue expenses deductible in the P&L A/c. Capital Expenditure/ Assets/ Equipment are typically higher-value items that will last significantly longer than one year. For example, a new computer, server, office chairs. The expenses on their purchases are not deductible as revenue expenses in the P&L A/c but only the depreciation/amortization on them is deductible over a period of time.
Revenue expenditure includes things that you use/consume during the year (e.g. printing paper, pens, toner cartridges etc.). If you mistakenly deduct your equipment or capital items as revenue expense, the tax department can determine that you improperly characterized the expense and that you’re not entitled to the deduction.
Infringing another’s trademarks
Technically, a trademark is a distinctive mark that identifies the source of a product or service and distinguishes it from other sources. A trademark can be a word, name, logo, or design. A person receives rights over a trademark simply by using it in the market, and does not have to register his or her trademark in order to enjoy trademark protection. Some companies will commence business with a name or mark that is already is use. After putting much money and effort into building their brand around that mark, they come to find out that they do not have sufficient rights, usually in the wake of a cease and desist letter from a lawyer. Trademark due diligence is important, maybe not today, maybe not tomorrow, but soon, and for the rest of your life. The entrepreneur should conduct a search before settling on a trademark for the company to avoid using a trademark that is already owned by another. At a minimum, a basic web search is necessary, and a full trademark search is advisable.
Skipping quarterly tax payments.
Once you’ve made it through your first year in business, you’re on the hook for quarterly taxes. If you incorporated sometime during 2014, you would have filed a tax return in the beginning of 2015; then, in 2015, begun making quarterly payment, whether or not you’re structured as an LLC. A professional can help you estimate your annual taxes and keep you up to date with filings dates and details throughout the year. Even if you aren’t legally required to pay quarterly taxes, it’s a good idea to make the payments so that you spread out of the pain (and the financial hit) from taxes.
Not having a separate bank account
If you mix your business and personal finances, you’re just making life more difficult, not least because you will need to separate it all out when it comes time to tax return time. The first thing you should do once you have settled on a business name is sort out a bank account.New startup founders and small business owners often invest so much of their time and money in the company that their personal and business expenses become indistinguishable. This practice can lead to major confusion come tax filing time, and in some cases, can lead to deductions being disallowed on an ad-hoc basis by the revenue and higher tax outgo as a result. Avoid trouble by establishing a company financial account from the start and maintaining separate records for the business.
Not taking advantage of deductions
Okay, so you’ve only got 5 – 50 employees and you’re not racking up profits, so why worry about deductions? Again, a couple reasons at first glance. First, you can almost always bank those deductions and use them in the future when you are profitable, which will save you a bunch on taxes. Second, this is a great opportunity to understand the stuff you need to know when you are ready to hire in-house CFO and accountants, who won’t be able to bullshit you on what they don’t know. It’s never too early to at least understand the power of deductions on your business’s after-tax bottom line.
Not retaining purchase receipts
The result? Working out your business costs accurately over the year becomes more time-consuming. You risk failing to account for certain expenses, which means paying more tax than you need to. Even relatively modest expenses can mount up, so keep a close record of every penny your business spends.
Not asking for professional tax help
Once you get established and incorporate, find a tax ad-visor to make sure you are following all the regulations. Your job is to get your company up and running , to focus your energy on creating your product, forming strategic relationships, and other big-picture ideas. The last thing you want to think about is taxes. It’s essential to hire a tax advisor to accept liability, and make sure you follow all regulations.
Above all, any startup or small business owner must think of taxes as a year-long obligation, not just something to revisit once a year.
In case of any query, feel free to ask them.⇓