T-shirts and Calculators: Setup Your Startup For Success
by Joshua Lance, CPA, CGMA
Creating your startup from the ground up takes a lot of work. Beyond just having a great idea there are a number of other considerations that need to be made with great care upfront in order to position your startup for success. Failure to properly make these considerations could cause your startup to fail before it even gets off the ground.
Choosing the Right Legal Organization
One of the first things any startup does is to form a legal organization. This decision on what type of legal organization to form is one of the most critical decisions you can make. Each type of legal organization has both legal and tax considerations.
Limited liability companies (LLC) have a very flexible legal organization, but is a pass through entity for tax purposes, meaning the members of the LLC pay the taxes and not the entity. Similar to the LLC, S Corporations are pass through entities for tax purposes, but they have a very strict legal structure that limits the the number of shareholders and requires all shareholders to be US citizens. C Corporations have more flexibility with how equity is structured and the C Corporation pays the taxes for the entity, however any distributions to the shareholders are taxable to the shareholders.
It is important to understand the goals of the startup and to pick the right legal organization that fits those goals. Choosing the wrong type of legal organization can have very costly tax effects and legal ramifications in the long run and therefore it is very important to choose the right entity from the start.
Importance of Accounting
When it comes to accounting, most startups do not think about the need for accounting until they run into a tax return deadline. However, it is critically important that startups establish proper accounting processes and implement accounting systems from the start in order to truly have an understanding of how their business is operating. Accounting is more than just compliance with taxes, it is a system that allows you to understand your cash flows and profitability. Startups that fail to get their accounting setup often are required to pay more to fix their errors than if they just established an accounting process from the beginning.
Building the Right Team
Another way to setup your startup for success is to surround yourself with the right people that will help you build your startup. From co-founders to key employees to outsourced professionals like attorneys, accountants, and brand strategists, it is important to bring in the right people at the right time to assist your startup. For example, most startups do not have the resources or the need to have a full time accountant on staff, however, they can outsource that function to an accounting firm to provide right support for the limited work that they need. Startups that have been successful have utilized and built the right team to help guide those startups to success.
A startup can be set up for success by selecting the right type of legal organization, establishing accounting processes and systems, and building the right team of professionals. Utilizing these key factors will help your startup build the proper foundation for your company.