Startup Life

I have been working in small startups for a few years now. Started this page to share my experience about working in smaller organizations, things I am learning and how I am helping build the finance organization.

Creating company policies

At an early stage startup one doesn’t need detailed accounting policies. But a general guideline helps set up some order. Most common policies are Travel and Entertainment Policy, Capitalization policy, Revenue Recognition policy.

The T&E policy could be detailed but what usually works for startups is a generic policy which conveys what the culture is regarding spending. Letting people take ownership of the company’s money is a good way to define the policy. Spend the company money like you would yours, could be how the policy is written.

Capitalization and Revenue Recognition have to have a bit more structured as these are governed by Generally Accepted Accounting Principles. But you still have some leeway in defining the policies.

For example, the capitalization policy will state whether the company will book the purchase of an asset like computer as a fixed asset and then depreciate over a period of time or would it book the entire purchase as an expense in the period it was bought. The policy defines what will be capitalized, usually for small companies anything under a particular amount ($1000 or $500) is expensed vs. capitalized. Big companies would usually have a bigger threshold for capitalizing.

Dealing with Taxes

Most startups end up incorporating in the State of Delaware. The head office could be in another state. So on an annual basis company needs to file and pay Annual Franchise Tax for Delaware which is based on the Authorized Shares of the company or the Assumed Par Value Capital Method. Also annually federal and state taxes need to be filed. End of the year, employee W2’s and consultant 1099s are also to be completed and sent out. Quarterly sales tax filings need to be done and quarterly payroll tax filings need to be done as well.

Whether you are profitable or not, if you are incorporated you should be filing income tax returns- federal and in state of incorporation and where you have nexus (usually meaning where you have employees). Even though it is time consuming, filing taxes is helpful in the future. As a startup that is loss making, you could use these losses in the future. Tax rules allow you to offset the profits by these losses. The losses can be carried forward for 20 years. So if you become profitable in year 15, you can offset the profit with the loss for the first year onwards, thereby reducing the tax liability you may have. The tax losses for a startup could also be useful for negotiations at a time of acquisition. A big profit making company could use the losses to offset their profits and lower their tax obligation.

Handling Credit Cards

Lets simplify the expense process and give every executive a corporate card. Sounds simple but if not managed well this could be a nightmare for the company.

Credit cards are definitely a simple way to pay for expenses, but from an accounting perspective all expenses should have receipts to ensure whether the expenses are legitimate, are for the business not personal, for which period and what type, to have an audit trail and for tax documentation.

Maybe as a startup the audit is not on your mind, but ensuring receipts for all expenses puts a sense of accountability on the employees. It sets the tone for fiscal responsibility in the company. Setting the right fiscal culture goes a long way in the company.

Fiscal responsibility doesn’t mean the company has to be stringent, but setting up right expectations definitely is a must. Once the norm is to have $150 dollar dinner for two people, it’s hard to go back.

A good strategy is to set a policy that gives general guideline about using the card. Let employees know that the card is for business purpose and for each transaction they should provide receipts. Let employees know that they should be spending the company money like they would their own.