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Writer's pictureZen Associates

Taxes: What Startup Founders Need to Know


Posted and written by Zen Associates, May 29, 2024.


Taxes: What Startup Founders Need to Know


Running a startup, especially a Delaware C-Corp with venture capital funding, means navigating the complex world of taxes. Understanding these tax implications is crucial for your startup's financial health. As a leading accounting firm serving startups and businesses, we've helped thousands of founders tackle their startup's taxes. Let's break it down.


Pay the Founders Through a Payroll System


Founders often overlook payroll taxes when taking money out of the startup. However, for C-Corps, paying founders through a payroll system is crucial to comply with tax laws. Not paying these taxes can lead to serious legal issues. Using a payroll system, which can cost less than $50 per month, ensures compliance and avoids problems with the IRS.


Yes, Your Startup Needs to File a Tax Return


From the moment you receive your EIN letter from Uncle Sam, you're required to file a tax return, even if your startup hasn't started business activities yet. Filing a startup tax return isn't expensive, and it's a necessary step to stay compliant with tax regulations.


What if My Startup Isn't Making Money Yet?


Even if your startup is not profitable, you still need to file taxes. The losses incurred can be used to offset future profits, reducing your tax burden in the long run. Make sure to capture all expenses, as Net Operating Losses (NOLs) carry forward and can be used as credits when your startup becomes profitable.


Consequences of Skipping Tax Filings


Skipping tax filings can result in fines and interest from the IRS. It can also affect VC diligence and potential acquisitions. VC-backed startups are often required to present their tax returns during diligence processes. Failure to file taxes can jeopardize potential acquisitions by major tech companies.


Tax Filing and Benefits for Your Company


Delaware C Corporations Tax Basics:


  • Corporate Income Tax: Pay this on your profits and file a federal filing (Form 1120) even if you are losing money.

  • State Taxes: File state returns if you have employees, rent, or revenue in a state.

  • Delaware Franchise Tax: Ensure correct calculation to avoid overestimation.


Smart Tax Moves: Credits and Deductions:


  • R&D Tax Credits: Can be a significant help if you're innovating.

  • Startup Costs: Deductible early expenses can be claimed.


Tips for Success


Tax rules change frequently, so stay updated. Keep thorough records of all transactions and expenses. Consider using accounting software like QuickBooks Online. Finally, hire a good tax professional to ensure compliance and avoid costly mistakes.


Navigating startup taxes can be daunting, but with the right knowledge and assistance, you can manage your tax obligations effectively. If you need help with your startup's taxes, feel free to reach out to us. We're here to help!



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