By Donna Woronka, CPA, MBA
Early stage entrepreneurs have plenty on their minds, from developing and launching their new product or service, to establishing customer and vendor relationships, to hiring employees and raising capital to make it all possible. There’s a lot that can potentially slip through the cracks. Issues related to state and federal compliance is an area that is not frequently at the top of the list.
In my 20+ years working with over one hundred early stage companies, the following are the most common oversights. Often, they’re the result of the business having not yet established a relationship with an accounting firm who can point out these issues before they become costly.
Forgetting to register to do business in your state. You incorporated in Delaware, so you think you’re through with state-based registrations. Maybe not. If you’re physically operating your business outside of Delaware, you’ll most likely also need to register in that state too.
If you have a single office or retail shop, your location is obvious. But it can get more complicated than that. For instance, your main office is in New York State, but you have an employee who works from home in New Jersey. Your company “footprint,” or nexus, may be in two states, and registration to do business may be required in both.
Overlooking the filing of state Annual Reports. You file business tax returns and pay all pertinent taxes, so you’re golden -- right? Not quite. Your company is also expected to file an Annual Report in each state that you are registered. The purpose of the report is for the state to keep current on details that might change from year to year, such as your business address, names of officers, and registered agent.
Forgetting to file can carry a raft of penalties. Non-filers can be labeled as “inactive” or “not in good standing”. This can cause concern with potential investors because the business is unable to provide a Certificate of Good Standing. Late filers can get hit with penalties and interest.
Not keeping track of out-of-pocket expenses. Many new business owners pay for expenses out of pocket and forget to include these purchases on their business tax returns. I once chased down valid expenses that a client hadn’t submitted for deductions to the tune of about $4,000 in tax savings. There’s no excuse for missing this deduction unless you enjoy paying taxes. There are numerous expense report apps that can make the data capture as easy as snapping photos of receipts with your phone.
Commingling business and personal expenses on the same credit card. Getting a business credit card is difficult when you have no history. Often, entrepreneurs will use a personal credit card early on for business expenses. That works, except when you use that same card for personal expenses too! Was that lunch you had on a Tuesday in September business or pleasure? Do you really have time, inclination and patience to review your year, transaction by transaction? No. Keep your business and personal expenses on separate credit cards.
Hiring an employee as a contractor. You need the help, but money’s tight. An employee hire can cost you payroll taxes, and perhaps benefits and vacation pay. A contractor relationship saves you all of those costs, so it’s a no-brainer.
Except, your hires aren’t contractors just because you say so. As soon as taxing authorities see that you put your workers on a schedule, control their work environment, dress code, lunch breaks and availability, you’ll learn that you have employees regardless of what you called them. You could easily end up with a Department of Labor audit on your hands.
Forgetting to obtain W9 forms and certificates of insurance from contractors. There’s never a better time to require necessary documentation from a vendor before the beginning of a financial relationship. Ask for a completed W9 form and certificate of insurance before you make that first payment. If you have to ask them after you paid them, they’ll be much less driven to comply.
Collecting -- or not collecting -- sales tax. Is your product or service sales taxable? If it is, you’re responsible for the sales tax whether you collected it from your customer or not. It’s easy to see the financial hardship of failing to charge sales tax, since you must then make it up out of your own pocket. Or face the embarrassment of trying to collect taxes from important clients months after you’ve been paid in total.
The lesson here is there’s more to starting a new business than you may realize. It’s important to establish a relationship early with a trusted accounting professional to get the right guidance. While there is a cost to this help, it can be more than offset by offering peace of mind, satisfying investor expectations and no surprising bills for not doing something that you didn’t realize that you had to do.
Donna Woronka, CPA, MBA is chief client officer at WEST, a division of Wiss & Company, LLP. You can reach her at (973) 994-9400 or firstname.lastname@example.org.