The Start-Up Tax and Accounting Ten Commandments
Robert Krigsman, Principal at Krigsman Partners, outlines the dos and don'ts of startup tax and accounting.
So you have been working at ‘[insert name here] Probe’ as the tech lead for the last three years, another day there and you will strangle someone. You have a plan. You and your mate have developed a killer idea to address a problem that has never been tackled by technology. It is pure genius – scalable, disruptive, investor worthy and there is a readymade market. So you develop a prototype and the two of you are exhilarated by the prospects to take it to the next level and turn this into a real business.
You quickly realise that to turn this into a real business will require working with strategic and experienced advisors. You will immediately need a tax accountant and commercial lawyer who understands tech, startups, deal flow and transactions. So you sit down with your trusted tax accountant and put together the ‘Ten Commandments’ for your start-up:
- Structure – this is as important as breathing for a startup. Get the right structure up and running and you can easily bring in investors, apply for R&D Tax Incentives, access tax concessions etc. Get it wrong and the consequences aren’t pretty nor cheap.
- Paid equity vs sweat equity vs phantom equity – important to agree and determine for the founders, investors (current and future). A discussion involving the founders, lawyer and accountant.
- Employee vs contractor – this relationship is determined based on facts and commercial agreements and reality rather than avoiding obligations like superannuation, PAYG Withholding, WorkCover and leave entitlements.
- Registrations – are you registered for GST, PAYG Withholding etc? These are important registrations that will allow you to claim back GST on purchases and correctly withhold and pay staff.
- Choosing your accounting software – get this right and doing your accounts, BASs and keeping great records will be a breeze. This isn’t just important for your accountant. This will become increasingly important for financial analysis, investors and third parties such as banks. Choose cloud based software with proven ease-of-use.
- Compliance and knowing your obligations – understanding your tax obligations (i.e. GST, Income Tax and PAYG Withholding) and factoring in these payments into any cash flow forecasts and projections is critical. Ignorance is certainly no excuse!
- Manage your cash – are you managing your cash flow or is it managing you? Before you hire that gun developer and take staff out to the latest food craze venue - be clear. Can the business afford it? Check points 5 and 6.
- Know the tax rules – stay as legally close as possible (without intervention orders being issued) to your tax advisor. Know the rules of what is deductible and plan for it. How is entertainment treated? Who pays Fringe Benefits Tax? What happens with asset purchases?
- Tax Planning – ties into Point 8 and depending on size and need of the business this can be done monthly, quarterly or annually.
- Exit – you need to have a plan for this one. If you don’t, trust me – someone else will have one for you – and it won’t be optimal! This one ties into the structuring in Point 1.
These are but a summary of some of the key considerations for any viable startup. There are many others – but a healthy working relationship between the troika of the business, accountant and lawyer will make sure you sail towards success.