Essential Financial Checklist for Start-Ups

Growing Money

Growing MoneyMoney. It’s on the mind of every founder of a start-up business. The financial and accounting decisions that start-up businesses make during their first year of existence can have a lingering impact on growth and profitability.

But when it comes to small business finance, there are so many possibilities that it can be hard to figure out what will work best for your new venture. Should you seek investments from friends and family? Look to crowdsourcing? Work with a factor or inventory-based lender like Kabbage.com? Try to get a venture capital firm interested? Try for a small business loan? Or just bootstrap your business, and pay for everything with personal assets or credit cards?

No matter how carefully you manage your own resources, or how quickly your business grows, even multi-millionaires can seldom handle 100% of the capital needs for a growing business. In fact, according to the Small Business Administration, over 90% of all small businesses need to raise outside capital or borrow money during their first five years of existence.  The two primary reasons businesses need an influx of outside capital are:

  • To cover a temporary cash flow gap and or
  • To provide working capital for growth

What kind of capitol you raise depends on what kind of business you run. For example, service businesses can seldom access venture capital or angel investment, but might qualify for state start-up funds, or loans. Regardless of what route to raising capital you take for your small business, you’ll need to make sure that you have formed the proper legal entity – usually a C Corporation – and established a good relationship with a bank that offers a range of services to small business owners.

The tax and business advisors at 1-800Accountant can help small businesses with the practical planning and implementation of the financial “to-do list” that comes with starting a new business.  Here’s a checklist of some of the most important financial items that can make an entrepreneur’s start-up dreams a reality – without incurring long-term tax or regulatory issues.

Don’t Wait to Track Start Up Costs

Before you start a business, you’re going to start spending money. Think about these costs you’re likely to incur before you earn a single dollar in income from your new business:

  • Doing an analysis of your potential market(s)
  • Legal costs to secure your intellectual property, and set up the proper legal entity
  • Necessary city and state permits and license fees
  • A website, software, computer hardware, payment processing system, and bank account (with checks) to run your business and get ready to sell products or services
  • The supplies and physical materials you’ll need to operate your business

Start from the very beginning to track organizational costs. The longer you wait to get your records set up, the more time-consuming and costly it will be to get things in order later.

Start With a $10,000 Tax Deduction

Did you know that you may qualify to start your new business with a $10,000 tax deduction? It’s true. Start by tracking all of your business start-up costs before you open your new business. IRS rules allow for the deduction of up to $5,000 in business start up costs and another $5,000 in organizational expenses in the year that you start a business. Start-up costs include supplies and equipment, while organizational costs include the legal and compliance costs of organizing your business.

The deductions are reduced if you have more than $50,000 of either type of expense. Also, even after that first $5,000 in expenses is written off, you can still get a tax benefit from other expenses by amortizing other start-up costs over 15 years.  If that sounds like a long time to wait for the full deduction, it is. But it’s better than the way things were before 2004.  Until then, start-up costs could be deducted over five years, but none could simply be written off.  The current rules are much easier for the smallest start-ups, which usually have fewer than $5,000 in total business start-up costs, to work with.

Depreciate Initial Equipment & Furniture

The assets you buy for your startup can be depreciated over time, but not written off.  There are different rules for different assets.

Office equipment is typically written off over seven years, while computers can be deducted over a five-year period.  Even if you are using some furniture originally purchased for your home – a bookcase brought to the new office from the family room, a desk chair from the guest room, and a waiting-room sofa from a garage sale, for example – you can still depreciate the item if they’ve never been used in a business before. Start with their value when you started using them in your business.

Don’t Try to Do It All Yourself

Starting a new business isn’t easy. Don’t try to do it all yourself. There’s plenty of free or very low cost help available to start-up companies. For instance, the webinars and white papers available from 1-800Accountant offer practical tips on things like tax planning, selecting the right legal entity for your business, and avoiding actions that can trigger a tax audit from state authorities.

Help is also available from not-for-profit organizations like the Service Corps of Retired Executives (SCORE), a group that matches local mentors with start-ups. Nearly every industry has a trade association that can be a lifeline for a start-up, and most cities have Chambers of Commerce that offer special interest sections in various industries.

Don’t forget about business accelerators, and state programs for start-up businesses. For example, if your idea for a new business involves technology, many states have emerging technology funds that provide mentoring and capital to start-ups. In Texas, for example, companies in the technology, energy, or agriculture industries can get investments of up to $5 million directly from the state, after an annual competitive review process that pairs start-up businesses with mentors from state universities to prepare a business plan.

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