As most startups build their business from the ground up, they inevitably bring in outside professionals to assist in building their business. Whether it is a lawyer to draft up bylaws or a founders agreement or a designer to create a logo or website, crafting together a group of outside advisers is necessary and critical to running your startup. One of those key advisers you should bring in is an accountant. Unfortunately, most startups bring in an accountant too late into the process of creating your startup. So the question is, when should you make the call and outsource your accounting and tax work to an accountant?
I would argue that if you first call is to a lawyer to create the legal structure of your startup, your second call should be to an accountant. I believe this is critically necessary for the following reasons.
- Your accountant can help you understand the accounting and tax implications of the legal entity you chose. There are significant differences in the accounting and tax structures of a LLC, a S-Corp, or a C-Corp and it is important to understand those upfront so you can plan and make adjustments. Understanding the tax implications of your legal entity at tax time is the wrong time as there is very little you can do at that point.
- You need to get an accounting system in place from the beginning. Once you get your entity legal, you need to start tracking your income and expenses so that you have an understanding of your financial performance (even if you are not making money yet), understand and analyze your cash flows, and so you have records to create a tax return. Taking the time to get this setup properly at the beginning will save you a lot of time and money from trying to pull everything together down the road.
- You will need financial advice as you grow your business and seek investors. Future investors of your company will not blindly throw money at you. If your accounting is a mess, your future investors have no way to know what they are buying into. Furthermore, you will need assistance to understand your financial reports and handle complex accounting items, especially with regards to the capitalization of your startup.
It is mission critical for a startup to understand and get their accounting setup when your business starts. Waiting until a tax return is due or an investor wants some financial information about your startup is not the right time to hire an accountant. The right time to hire an accountant for your startup is now!