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GAAP and Tax Advice for the Early Stage Company

In the current phase of your start-up you’re probably not thinking about taxable income or how Generally Accepted Accounting Principles (GAAP) will affect your business. That’s to be expected. We’re not suggesting that you need to be an expert but some of the decisions you make in this early stage can have substantial implications down the road. By having a basic understanding of GAAP and certain tax considerations you will be able to show potential investors that you’ve set the right financial foundation.

How GAAP Helps

GAAP sets out standards for the way that financial transactions should be recorded and presented that all companies can apply consistently. Once you have set these processes in place to record your most critical transaction cycles, you will find that the compilation of the information gets easier with every iteration. GAAP-informed processes will help you understand and interpret data across companies. Not only will these GAAP-based metrics help you benchmark your company against others in your industry, it will facilitate discussions with you investors and Board of Directors and ultimately put you in very good standing for when your exit events occurs.

Internal Controls

Establishing standardized processes for recording and reporting financial transaction is part of setting up Internal Controls. These checks and balances are meant to deter fraud and prevent honest errors.  Although internal controls may sound scary and something only “big companies” need to do, they important concepts of internal controls scale down to very early-stage companies.  Maintaining appropriate controls over cash, segregating incompatible duties and performing regular reviews of other people’s work are all the types of controls an entity can put in place from the very start. Doing so will give you, your co-founders and your early investors confidence you have your finances under control. 

Tax Considerations for Start-ups

Many entrepreneurs overlook anything related to tax in the start-up stage. There is a misconception that because there is no revenue, filing a tax return or paying state sales or payroll tax is unnecessary. While often misunderstood, these tax requirements aren’t optional. In fact, they are the way that the government will know about your business and who you have working for you. The government will come for this tax revenue at some point so it’s best to address these areas early. Additionally, the way you handle this signals to potential investors that you know what you’re doing and they don’t have to worry about your ability to handle situations like these if they provide funding.

GAAP gives you the best financial foundation and a standard language to express the financial results of your business. And taxes are real cost of doing business so best to start off on the right foot.  Your idea can be amazing, but investors will not be impressed if you don’t have the ability to clearly communicate your business from a financial standpoint. An entrepreneur with a thorough understanding of relevant tax and accounting issues is a much better bet to any VC.