Startup Tax Fails
The biggest missteps entrepreneurs take—and how you can help them find their footing.
For CPAs working with startups and budding entrepreneurs, the calls often come to them in late March or early April. “Do I have to pay sales tax?” “We haven’t filed a return in six years. We lost money. Why do we need to file a return?” “Do I have to keep financial records?” “Really? That’s not what Google says.”
They’re all true tales from the startup frontlines, where many CPAs have discovered that some of today’s newest businessmen and women often breeze right past Finance 101 on their way to fame and fortune.
“They have a big passion for what they’re doing, but they don’t really care about accounting,” says Curt Mastio, CPA, of Founder’s CPA Group
in Chicago, founder of Startup Accounting Advisors
and an adjunct instructor at Northwestern University's Farley Center for Entrepreneurship and Innovation
. “They often struggle to adapt to the tax and legal requirements.”
And therein lies the opportunity for CPAs to help many of those fledgling entrepreneurs find their financial footing.
Where do startups trip up? How can CPAs provide the professional guidance needed to help them? Below we share insights and observations from CPAs who have spent time with startups of all stripes—and who have launched and managed their very own startup organizations.
The ground floor
The first pitfall? Failing to build a “financial foundation at the beginning” and “implement an accounting process at the start,” says Joshua Lance, CPA, CGMA, founder and managing director of Joshua Lance CPA, LLC
in Chicago and adjunct instructor at Northwestern University’s Farley Center for Entrepreneurship and Innovation. Too many startups, he says, ignore doing this.
For many eager startups, Lance explains, it’s a combination of factors that keep them from seeking that initial financial advice, including excitement over their product or service, a narrow focus on delivering that product, and an overall blissful ignorance of reporting and recordkeeping necessities.
“There are owners who think they know everything and won’t listen to our advice,” says Lance. “Those startups are often not successful.”
Too often, entrepreneurs are “making a decision from the gut, without having a financial background,” adds Kimberly Loftis, principal of Loftis Consulting and Financial Management
in Chicago. “By the time they get to me, things are already a mess.”
A longtime CPA who’s been working with small and midsized companies for the last six years, Loftis also has seen the pendulum swing in the other direction—startups that get lost in the unfamiliar weeds of finance end up losing track of their initial business.
Her advice? Go slowly in advising startup clients. “You have to start with something that people understand. Start with a little nugget of information that will help them,” she says. “If we go in too finance heavy, they might run away.”
It’s age-old business advice, Mastio adds, but it still applies for startups today: “It always costs more to fix mistakes than it does to pay upfront for help.”
The financial house
Burn rates, financial statements, sales tax filings, tax write-offs—it’s all well-known to CPAs who work with businesses, but not so much to those startups going it alone. Properly keeping the books—and then staying on top of them—remains an Achilles heel for many startups.
A CPA’s advice can be critical for those entrepreneurs who haven’t yet grasped the importance of keeping proper financial records—for everything from lunch receipts to complex investing, says Rob Pasquesi, CPA, MBA, who launched his Chicago tax and accounting firm, Pasquesi Partners LLC
, in 2014. “Startups have a hard time understanding what is revenue and what is cash flow, how to manage payroll and expenses,” he explains.
“They don’t have separate bank accounts, they don’t deduct business expenses, they don’t know how to pay themselves,” adds Mastio. “There’s a concern about being overwhelmed about everything that needs to be done from a tax perspective.”
But a CPA doesn’t necessarily need to be there every step of the way, Loftis and others say. Xero, FreshBooks and QuickBooks are just a few of the many software accounting and bookkeeping tools startups can use to get a handle on their financial requirements.
“We had a young company with a great product going out for venture funding. Venture capitalists want to see financial statements on a regular basis,” Pasquesi explains. “If you’re on an accounting software platform, it’s no problem. Instead, they had to scramble and put in hours and hours of work.”
“Help them with the software. Then, as the business grows, work with them on financial modeling and other things they’ll need,” Loftis advises.
The professional team
One of Mastio’s earliest forays into advising startups involved helping a college student’s bootstrapped company. This young entrepreneur decided not to hire a bookkeeper and had virtually no accounting background, which caused the company to miss multiple opportunities to save money through tax deductions and avoiding penalties.
“No two startups are really the same. You really need to find a specialized CPA who understands your business,” Mastio advises.
Having a CPA with a background in financial reporting, for example, is an asset for startups on the lookout for venture capital and angel funding—an activity that has increased significantly in the Chicago region, says Pasquesi.
While providing the necessary financial expertise, a CPA who works regularly with startups also can introduce much needed, and similarly experienced, attorneys, insurance agents, finance brokers and other professionals. Establishing a proper legal company structure (LLC, C Corporation, S Corporation, etc.), for example, is a key early task that usually requires an attorney.
“They’ll do their Google searches and register in Delaware because that’s what they hear everyone else is doing,” says Pasquesi. “It’s bad advice.”
In Lance’s opinion, however, the startup adventure really needs to begin with the CPA. “Of all your advisors, it’s the CPA who actually knows all of the nitty-gritty,” he says. “The CPA sees the whole playing field.”
If you’re a CPA wanting to find your niche in the startup arena, it’s important to understand the nature of the startup entrepreneur, which means finding out where they gather, what they talk about and what they want from their fledgling startups—especially with so many young, tech-savvy entrepreneurs on the landscape.
“Go to their conferences. Go to their software meet-ups,” Lance advises. “You have to be tech-forward. Startups are going to expect you to speak their language. Embrace the things that startups are using.”
And then embrace the business opportunities they offer.