Five Mistakes Startups Make

Five Mistakes Startups Make Following the American Dream and starting your own company can put you on the fast track to success, but it can also lead to the deep end of failure if not done correctly. Here are five accounting mistakes many startups make that hinder their potential.

  1. Mixing business and personal finances – So many startups utilize their personal expenses for business use and vice versa.  Open a bank account for your business, transfer money, and keep the costs separate.  This will help minimize any negative tax consequences.
  2. Entity type – A partnership can take many forms, an LP, LLC, LLP, S-Corp, or C-Corp.  There are certain entities that are better for certain businesses.  In addition the number of owners can effect which type of entity you should use.   Not all businesses can distribute earnings in the same way.  Pick an entity that best suits your business by asking a qualified advisor.
  3. Not knowing obligations – That’s right, good old Uncle Sam and most states want theirs.  If you don’t have a reseller’s license, you will owe the state sales tax.  If you own an LLC and distribute guaranteed payments rather than W-2 wages, know that you will owe taxes on compensation received. Know your obligations.
  4. Have the right tools – Use an accounting system that fits your company needs.  Do you need software to track your client relationships, email blasts, etc…? Make sure you use technology that fits your company and helps it grow.
  5. Planning – Many startups think that they will be generating revenue from day one.  They find that it is harder to get off the ground than anticipated and they run out of money before they even start.  Make sure that you have enough money saved to live while you build your business.

And one for the road:

Consider and 83b election when forming your C-Corp.  It needs to be filed within 30 days of incorporation.   The election will minimize immediate tax consequences and lock-in your basis.

dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.