As the saying goes, the only certainty in life is death and taxes. In this article, we look at how start-ups can avoid the risk of both. Here goes!
Legal Structure
One of the easiest ways for start-ups to potentially reduce their tax obligations is to set up the right legal structure in the first place.
Launching as a limited company will mean your venture is taxed separately from yourself and taxed only on the business profits.
Many founders are juggling a job, freelancing or side hustle while launching their start-ups. Consider setting up a limited liability company, so your venture is taxed separately from your personal income.
This one suggestion could save you significant sums in the early days of your project. You will need to keep accurate records and file accounts, so there will be some necessary admin to stay on top of.
The correct legal structure will depend on your circumstances and jurisdiction, so consult a tax expert or accountant in your location for tailored advice.
Tax Identification Number (TIN)
Getting your Tax Identification Number or TIN is essential for any start-up.
In the USA the TIN is a nine-digit number that is used on all tax-related documents. Sometimes called a business tax ID number and also called an Employer Identification Number (EIN).
You will need this number to apply for a bank account, obtain credit and file accounts with the IRS (Internal Revenue Service). You will need to apply to the IRS for this number.
In the UK, the TIN is called a UTR. You will need to apply to HMRC (His Majesty’s Revenue and Customs) for your business UTR.
This process should be similar in most jurisdictions since most governments keep track of taxpayers as individuals and businesses via this method.
State and Local Taxes
Tax laws vary and understanding the specific requirements of the jurisdictions in which you operate is crucial.
In addition, US and UK businesses may also need to register for Sales Tax and VAT (Value Added Tax) in their jurisdiction. These taxes are added to the goods and services that you sell.
There may be additional taxes if you utilise a property for your business. So Property Tax or Business Rates (in the UK) may be relevant in that case.
The tax registration process will vary from business to business and depend on your jurisdiction. So, as mentioned above it’s important to look at what’s best for you and your business taxwise. Do not hesitate to consult a professional in your local area for advice for your particular business.
Business Expenses and Deductions
Generally speaking, most businesses would want to maximise eligible business expenses and deductions to minimise the taxable profits of the business.
As a founder, you will want to do this as it means more capital can be utilised in growing the business and business tax liabilities will reduced.
In practice, you will need to keep accurate records of everything you spend on the business. This could be costs related to your website, travel or equipment for example.
Once you have added up all these items this total figure is deducted from your total turnover (the money you have brought in) and what is left is your business profit. This figure is what is taxed as a business.
So, it’s essential you keep records of all business expenses and receipts and record them. You can use accounts software, hire someone to stay on top of things or do it yourself it’s up to you but it’s essential you do this religiously to avoid excess tax liabilities.
Also, be careful to understand what business expenses are acceptable and not acceptable, this will vary depending on your jurisdiction.
In addition, there may be tax advantages available in your area for certain businesses or for certain activities or purchases that your business makes. For example, a business may receive some tax relief for taking on an apprentice.
Check with your local expert on schemes that are relevant to your business.
Research and Development (R&D) Tax Credits
Many start-ups engage in research and development activities to innovate and improve their products or services.
Governments often offer Research and Development tax (R&D) credits as an incentive for such activities. Investigate whether your start-up qualifies for R&D tax credits in your jurisdiction, as these can provide valuable financial benefits.
Crowdfunding and Tax Implications
Crowdfunding has become a popular method for start-ups to raise capital, but it comes with its own set of tax implications.
For instance, funds raised as a donation may be classed as a ‘gift’ and therefore may be classed as tax-exempt. No tax to pay. Whereas, campaigns launched with a rewards-based incentive may be classed as income and therefore taxable.
If you have or are considering raising funds via these methods you should check with a professional in your jurisdiction to avoid any surprises.
Final thoughts
Navigating tax implications will be essential to the success of your start-up. Yes, it’s not the most glamorous activity a founder has to undertake but ignoring this one thing could literally cost you everything you are working towards.
Ensure you choose the correct legal structure for your business and that you understand the relevant sales taxes in your area. Take advantage of tax schemes and incentives in your locality and be aware of the potential tax implications of raising money via crowdfunding.
Finally, be sure to seek the guidance of tax professionals and stay up to date with new tax laws in your area of business.
Staying on top of all the above will ensure your business is tax efficient and has a good foundation for growth in the future.
All the best!
Disclaimer: This article is not tax advice. It’s written to offer you general thinking points that you should raise with a qualified tax professional in your local area. Tax for businesses is complex and can vary depending on your location, personal circumstances and type of business. Always look for professional tax advice for your individual circumstances.
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