12 Tax Issues for Startups to Watch

Business.com
12 Tax Issues for Startups to Watch

There are so many factors for new startup companies to consider. Between planning how to handle management, hiring, buying, marketing, restructuring and all of the other facets of a new startup, the issue of taxes can often be placed on the backburner.  

The key is to set aside time to learn what common tax issues plague businesses similar to yours, to avoid making the same kinds of mistakes. After all, a little well-researched information can go a long way in preventing any taxation-based unpleasantness later on.

Below, 12 members of Young Entrepreneur Council (YEC) discuss ways to avoid tax problems that many startup companies experience. Here's what they advise you consider:

1. Form a proper structure from the beginning

"An LLC is an easy way to have the losses offset other ordinary income of the shareholders, but might not be the best structure long term. If a startup seeks funding, most investors and VC funds prefer a C Corp. It offers investor protection, the 1244 small business stock provision, where a loss can offset ordinary income, and the 1202 gain provision, which excludes 50 percent of cap gain if held five years." – Vincenzo Villamena, Online Taxman

2. Separate personal and business expenses

"Speaking from experience, I can tell you that not separating your personal and business expenses from day one will cost you a lot more down the line. It'll make tax filings much harder and costlier because you'll have to go through every receipt with a fine-tooth comb, instead of simply building a report from your business banking and credit card accounts and handing it over to your accountant." – Amine Rahal, Little Dragon Media 

3. Get it right the first time

"Although the business setup takes time, do your research and decide on the best federal and state structures for you. Redoing it all later takes far more time and effort than doing it right the first time. If you're not sure, invest in expert advice from an accountant. You'll get your investment back later in both time and tax savings." – Stephanie Wells, Formidable Forms

4. Don't forget about payroll taxes

"Startups facing payroll-related tax issues might end up paying steep penalties. Besides, not filing or paying taxes related to payroll intentionally is a federal crime. The IRS can come after you even if your startup is registered as an LLC or a corporation. Avoiding this problem is easy. Pay your state and federal payroll taxes in a timely manner, within three days of issuing payroll checks." – Derek Robinson, Top Notch Dezigns

5. Seek home office deductions

"Many startups will try to deduct a home office for tax purposes and it's been an issue for some time with the IRS. In order to get a deduction for a home office, your home office must be a separate office used solely for business purposes. Be sure to check the requirements for deducting a home office and what records you should keep first." – Chris Christoff, MonsterInsights

6. Consider real estate property tax

"Before starting a new business, keep in mind that the area in which you want to build may have high real estate property tax that can raise your own operating costs. Even cities that have a business-friendly tax rate can still have higher than average property tax rates or other hidden taxes, such as a road tax. Before you build your business, make sure you are aware of your city's tax laws." – Shu Saito, Godai Soaps 

7. Hire consultants with proper agreements

"Often, as the head of marketing for many organizations, I was tasked with managing consultants and their work. Even though they were task focused, I would end up having to expense everything. This creates a problem for the business because it is expensed on my behalf and not seen as a service-level agreement. Make sure you have agreements in place before the work starts to avoid issues." – Sweta Patel, Silicon Valley Startup Marketing 

8. Hire experienced tax professionals

"Based on experience, I can tell you that our tax code is very confusing. The only way to truly understand how to apply it to your business is through experience, so lots of burgeoning startups struggle with this aspect of their business. My advice to them is to bring an accountant or another tax professional onto your team as early as possible to get a handle on your finances and taxes." – Bryce Welker, Accounting Institute for Success 

9. Understand your tax credits and write-offs

"There are so many write-offs and deductions available to startups that they might not know about. We use one called an R&D tax credit which allows us to get a deduction on our R&D expenses, which as everyone knows is pretty heavy during the early days of a startup. Take one hour to do a paid consultation with a tax consultant to figure out where you can save." – Andy Karuza, FenSens 

10. Properly document all income and expenses

"Many startups fail to document all of their income and deductible expenses. Use an accounting software like Quickbooks to easily and accurately document all income and expenses for your business. And check out the IRS website for a list of all the transactions and documents you should be keeping track of." – Blair Williams, MemberPress

11. Keep an eye on taxable perks and bonuses

"Startups are more likely than traditional enterprises to think outside the box with nontraditional perks and bonus structures – but they still need to ensure they’re staying inside the lines of tax code." – Sam Saxton, Paragon Stairs 

12. File 83(b) elections

"If you purchase stock that vests and do not file an 83(b) election, you will pay income tax on the difference between the price paid for the stock and its fair market value when it vests, even if you do not sell the stock at that time. In contrast, if you make an 83(b) election the income from the stock is recognized at the time of the stock purchase date rather than when the stock vests." – Doug Bend, Bend Law Group, PC

A Small Business's Guide to the Different Types of Cloud Services

It's impossible to talk about optimizing business today without making cloud computing a big part of the conversation. This makes the cloud big business: Worldwide spend on public cloud services and infrastructure is expected to reach $266 billion in 2021, according to IDC. The cloud can enable more efficient use of resources in nearly every aspect of business, from the underlying technical infrastructure that supports the entire operation to snazzy mobile applications that make life easier for marketing.

Large enterprises have been leveraging the benefits of cloud computing for years. Now that the cloud is becoming commoditized and more easily accessible, small and midsize businesses (SMBs) want to realize those same returns. It can be hard, however, to read through the hype to understand exactly what the cloud is, what it can do for your business, and how you can implement a strategy around it.

 

What is the cloud, anyway?

With traditional IT infrastructure, an organization's data and processes are all housed in an internal network. All of its data is stored either in a server that the business owns and that usually resides on its own premises, or in a server at a data center that is offsite and managed by a third party, but still local and dedicated only to that organization. Any applications, such as a CRM, accounting platforms, or office applications like word processing and email, are stored in these local servers, and the business's processes all run on this network. It's a closed, private, proprietary loop.

Cloud computing uses the internet to open that loop so users can house data, provide processing power, and run applications on a server where they essentially rent rather than own space. Programs live in the cloud, which is really just another giant server farm somewhere that's connected to local users through the net, like AWS or Microsoft Azure. That means organizations don't have to manage their own storage and power, can access applications from anywhere and at any time, and only pay for what they use.

One example of how cloud computing benefits businesses is with cloud-based POS systems. According to Lori Fairbanks, "cloud-based systems offer convenience, allowing you to access back-office features from any browser, which means that you can view your store's sales performance and run reports wherever you are." That convenience means business owners can be immediately up to speed on sales, inventory, and other data without interrupting workflows or even stepping foot inside the store.

The implications of these capabilities on business are broad and deep. Gartner predicts that half of global enterprises using the cloud now will become cloud-only operations by 2021 because of the advantages it holds for operations – advantages enjoyed by organizations with deep pockets for years, and which are finally becoming accessible to the SMB.

Where do you fall in the stack?

There are, generally speaking, three layers of cloud applications: infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS). When people talk about "moving up the stack," they're referring to these three elements.

Let's start at the top of the stack with SaaS. Similar to traditional, on-premise software, cloud-based applications still run on servers, just in the cloud, so they are accessible via the public network by anyone with a subscription. These are set-and-forget applications that companies don't have to worry about managing, and that in most cases can be used on a pay-as-you-go model rather than for an upfront cost. Salesforce, Office 365 and Dropbox are all good examples of commonly used SaaS applications.

Moving down the stack, we come to PaaS. Broadly, this is where software applications are built and deployed. If you're buying a PaaS offering, you're paying a provider to deal with most of the servers, operating systems and network infrastructure so you can just focus on the development of the actual business application. Think Heroku and Google Apps when you think of PaaS providers.

IaaS is the bottom, most foundational layer of the stack. This is where the most fundamental elements of computing reside, such as servers, storage, hardware and networking. Organizations that want to develop the entire application themselves look to IaaS providers to provide these elements, along with the security and ongoing maintenance they require. There is an IaaS provider for just about every use case out there. Navisite and Softlayer are just two of the more popular offerings.

 

What are some pros and cons of cloud services?

The pay-as-you-go nature of cloud computing gives us most of what is so transformative about it. But as much of a game-changer as the cloud has the potential to be, it's important to take all of those stratospheric value propositions with a grain of salt. Like anything, moving operations to the cloud requires research, planning and a comprehensive change management strategy. Yes, the benefits can be significant and immediate, but if executed poorly, the disadvantages can cause damage.

Short- vs. long-term affordability

Since organizations don't have to build and support their own IT infrastructure, they save a great deal of money on the front end. But it's important to understand that cloud computing isn't always the least expensive option. Remember that cloud spend is essentially renting storage and computing space on a third party's server. The more you access it, the more it will cost. For applications that an organization needs frequent and regular access to, it may very well be cheaper to build and maintain them in-house.

You must also take into account the costs that can come with migrating applications from an on-premise server to the cloud. Newer, "born in the cloud" applications are purpose-built to operate and scale horizontally in a public cloud model. But many legacy applications just weren't built for a cloud world. These apps require a customized, resource-intensive effort to get the legacy app and the cloud architecture to play well together. If you don't adequately plan for such an undertaking, the unexpected costs that come along with migrating to the cloud can be a major budgetary concern.

The key is to research your options and weigh them against your budget. After all, what's right for one SMB may be a poor fit for your business, and vice versa.

Agility vs. security

Because organizations that use cloud computing don't have to invest heavily in the underlying infrastructure required to build out projects or proofs of concept, they can spin up new capabilities much faster and more inexpensively. If the application is a dud, there's little lost in terms of IT spend. And if it's a hit, a company can very easily scale to accommodate demand, since the cloud provider is handling all of the resource-intensive parts of the operation.

This agility is only possible because the underlying infrastructure is shared among the cloud provider's customers. That means you're sharing storage space, operating systems and security protocols with potential competitors. If you aren't comfortable with that idea, or have concerns about trusting a cloud provider with your proprietary data, a public cloud solution might not be for you.

From a security perspective, the cloud can make spinning up and accessing applications too easy. With traditional, on-premise infrastructure, most IT spend goes through the IT department. In the age of "there's an app for that," employees and managers can often procure and implement third-party applications without going through IT. These "shadow apps," therefore, aren't subject to the same standard of security measures as the rest of an organization's processes.


How to take your first steps toward the cloud

If you investigate cloud services for your SMB and find it to be a worthwhile endeavor, you need a plan for implementation. Like any fundamental change to the business, a strategy for moving toward being a cloud-based business should be taken in steps. If you start down the cloud road without a clear understanding of your existing infrastructure cost and anticipated future needs, you may wind up costing yourself more than the cloud can save you.

Evaluate your current position. There's more to IT spend than meets the eye. You need to account for what you spend running your server or renting space in a data center, the cost of the actual hardware, and how much you spend on mission-critical applications. Otherwise, it's impossible to calculate whether it's more cost-effective to buy and manage an application outright or procure it on a subscription basis in the cloud. Establish priorities. Don't get sucked into thinking you have to move the entirety of your operations to the cloud all at once. A good rule of thumb is to start with applications your operations depend on least in order to get a real-world feel for how processes work and are billed in the cloud. Cloud-based backups are a good jumping-off point too, since the actual day-to-day running of the business isn't dependent upon backup and disaster recovery applications. Make sure your people are equipped. Compared to the shift that people and processes have to make, the technology part of a cloud migration is easy. Will your employees' job functions change? Do they need additional training? Make sure you have a change management strategy in place for your people.

The expensive pieces of hardware and software necessary to run sophisticated business applications are now within reach of the SMB. This is the real beauty of cloud computing: It helps even the playing field. With research, deliberation and a little faith, SMB owners can put enterprise-grade solutions to work bettering their own businesses.

Kick Off the New Year With a Company Culture Event

As the new year begins, people are coming down from the high of the holidays and facing the slump of the dark, cold days of January and February. 

It’s the perfect time for a company culture event.

Whether people have been traveling to see relatives for Christmas or celebrating Friendsgivings, they’re eager to counter the ensuing social lull with another excuse to get together. The new year also provides the perfect time to recognize your hard-working employees and make a fresh start by ensuring your company's mission and values are aligned with the people who work for you.

Only 65 percent of companies were planning to hold a holiday party this year, the lowest number since the recession in 2009, according to the Challenger Gray & Christmas Inc. "2018 Holiday Party Survey." That's a mistake, especially for small and mid-sized businesses that often have tight-knit employees who welcome social time together.

December is a busy time for employees spending time with loved ones, so throw a holiday-themed party in January or even early February instead. Employees won’t care if it’s “late.” Or if you've given the holiday party a pass, take an opportunity to celebrate your people and your company.

The key is to create an event that gets your people excited about the year ahead. Here are four things to remember as you plan.

1. Create a unique event for your people.

The point of a start-of-year event is to show your appreciation. This can't be faked. A cheese plate and some beer won’t make anyone feel valued and appreciated, much less start the year off with some hype. Make sure there's a bar or drink tickets, food for everyone and professional staff like bartenders and servers. If you're allowing your team members to bring guests, take them into consideration, too.

Find an idea that suits your people. If your team members are more introverted, maybe they would prefer a game tournament over a swanky night out on the town. If your people are dripping with high-end elegance, make sure they would be on board with a costume party before hosting a retro prom. If they’re goofy creatives, any theme should be easy to sell. And if you have a healthy mix, you can focus the most on good food and drinks, plenty of recognition and a cool environment that will make people happy.

That being said, remember to be a responsible host and plan ahead to manage alcohol consumption. Alcohol can help people relax and loosen up, but it also carries the risk of overindulgence. You don’t want people embarrassing themselves, and you don't want those who aren't big drinkers getting upset. Make sure everyone knows a company party is still a professional environment.

2. Use the party to build bridges.

This should be a fun, comfortable event for employees, but for leaders, it's work. Shake some hands, hold some babies and introduce people. I barely ate at our Thanksgiving potluck because I was busy walking around, admitting I hardly knew people and taking every opportunity to introduce people to others they might not have met yet.

Be proactive in your leadership, and build bridges to and between others. The benefit of a smaller organization is that everyone can pretty much know who everyone else is. These parties are perfect for making that happen, but leadership needs to be intentional and use the event to make a cultural impact.

Depending on the size of your organization, consider appointing cultural ambassadors. Get these people excited to facilitate connections before the event and follow up with teammates afterward. These individuals can also help with accountability. For example, if you tell an employee before the event, "I really want you to meet Chuck in accounting," those ambassadors can help you make sure you follow through on that intro.

3. Don't make attendance mandatory.

You can’t force fun, so work hard to create something people want to attend. According to a U.S. survey by Randstad, 90 percent of workers would rather get a bonus or a few extra vacation days than go to a company holiday party. This is tough competition for priorities, but a bigger bonus doesn’t build culture or get your teams unified around a purpose.

To create an event that’s worth their time, don’t make it too corporate. Have a toast, and talk about the vision, but don't make it a meeting. That's not the point of this sort of event. If you’re struggling for ideas to fill the night, talk to employees to find out what excites them.

4. Don't blow your budget.

Renting out the top floor of the Ritz doesn't necessarily translate to culture. Use thoughtfulness and creativity to cover any budgetary gaps. There’s often a wealth of resources connected to people you already know.

We have a friend who was working as a DJ at one of our cultural events and he wanted to bring his “hype man” as well. We told him up front that we couldn't afford his normal rate, so we offered half the price but added free food and drinks throughout the night. The hype man was amazing – starting parties, dance-offs and generally creating an incredible atmosphere.

As we end one year and begin looking to the next, business leaders are thinking about ways to get everyone on board with the company’s goals and direction. If you don’t want to obliterate your chances of building excitement, don’t try to celebrate people or build excitement with a PowerPoint presentation. Show people that your company is something worth throwing a party for.

10 Email Etiquette Tips for Small Businesses

Email has become a standard form of communication for close to 90 percent of U.S. internet users, especially those in business. In the world of professional written communication, there’s nothing that destroys someone’s credibility faster than typos or grammatical mistakes. Every email you send is delivered and stored in someone’s mailbox. Once you hit “send,” there’s no turning back.

Below are 10 etiquette tips you should follow before you send your next email.

Subject line

A subject line is a poster board for your email and arguably the most important differentiator between open and discard.

To capture the receipients' attention, use a clear, concise subject line that accurately represents the body of your email message. If you’re planning a meeting with your colleagues, instead of just writing “meeting” use “Meeting January 15th” to be more specific. Avoid overly long subject lines. Remember that people are reading your emails on mobile devices. The best practice is to keep your subject line fewer than 50 characters long, according to Hubspot.  

Formal language

It’s always important to know your audience. If you’re emailing a colleague, your language may be a bit more informal than if you’re responding to a client. Generally, professional, direct language stays away from idioms and phrasal verbs. Replacing contractions such as “we can’t reschedule this meeting” with “we cannot reschedule this meeting” is more formal as well.

Editor's note: Need help with your email marketing? Fill out the below questionnaire to have our vendor partners contact you with free information.

 
Contact information

A company email should always include an email signature. Your email signature should display your company’s name or logo, website, phone number and your name and title. Many professionals will also choose to display an electronic signature as well. An email signature should be consistent throughout the entire organization for branding and compliance purposes.

A consistent email signature not only legitimizes you professionally but gives people more information should they wish to contact you directly.

Overuse of word elements

Word elements are powerful when used properly, but can send the wrong message when misused.

Bold

Bolding emphasizes a sentence or phrase, drawing the reader’s attention to that particular text. It should be reserved for more important text within your email rather than just used at random.

Capitalization

Using capital letters is extremely risky. Outside of acronyms, titles or branded names, capital letters can come across as very aggressive when applied to normal text. PEOPLE MIGHT THINK YOU ARE ANGRY or shouting at them through written text. Only use capitalization when it’s necessary.

Grammar marks

Have you ever received a text from a friend using an absurd amount of exclamation points and question marks?!? What might be OK in an informal text, is certainly interpreted differently in business. Question marks and exclamation points should be used as they are intended and without over repetition. There is no need to add four question marks at the end of a single question.

Proofread

Have you ever opened up your email inbox to a never-ending list of new messages? Before you start firing off your responses, don’t forget to proofread. Proofreading your email is a good habit to get into before you hit “send.” Typos and grammatical mistakes are embarrassing and can quickly discredit a professional email. It only takes an extra minute or two, and you’ll be glad you did.

Add email address last

You’re in the middle of typing an email when all of a sudden your computer or keyboard decides to hit send before you’re finished typing. Sound familiar? It’s happened to the best of us. For important emails, it’s always a good idea to draft your email, proofread it and then put the email address in when you’re ready to send. This helps avoid any mistakes.

Reply all

Your boss sends you an email about a company event copying all of your colleagues on it. You can’t go because you’ve got a doctor’s appointment for a mole removal that day. Is that information you really need to share with everyone? Probably not. Be careful with “Reply all." If your response isn’t relevant to everyone, then don’t send it.

Out-of-office reply

If you’re planning on going on vacation, setting an automatic “out-of-office reply” is a common courtesy letting people know you’re not available. How much detail you are willing to share is up to you, but usually, the dates you will be out and who people can contact in your absence usually suffices.

Is email always best?

As we mentioned above, email is the most common and easiest mode of communication, but sometimes it’s not always the best option. The written language can be tricky to gauge meaning, tone and attitude. Many times an email can be read with a different interpretation than the writer intended. Instead of going back and forth over email, picking up the phone or walking into someone's office can offer a better solution.

To the point and readable

People are busy and emails that can be easily skimmed and quickly conveyed are appreciated. Be informative but to the point. If you are making multiple points, use bulleted or numbered lists for faster skimming.

So, how can you improve your emails? Following the tips in the list above will ensure your next email is professional, concise and error-free.

MIT Sloan Management Review

Many companies are just like us, and the start of the new year means making their own resolutions as organizations. Often these revolve around increasing their sales metrics and implementing new technologies. But one of the most effective goals is much simpler — something they can, and should, start doing for free.

After 20 years of working in sales, including eight years running my own consulting practice, I’ve discovered that a simple test can help transform how sales teams operate. In fact, I recommend that teams encourage their managers to give them this test.

You may be wondering why we should add a test on top of what are often already heavy burdens for sales teams. The answer: because many teams miss their quotas. In fact, in 2018, Salesforce found that more than half (57%) of sales representatives expected to miss quotas for the year.

The Challenge

The test involves having a manager look at a salesperson’s notes about prospects listed in the salesperson’s customer relationship management (CRM) platform. Without providing names or any identifying information, the manager reads back the notes to the employee.

The employee then tries to identify each prospect based just on that information alone.

I often find that salespeople can’t identify many or most of their clients. And it’s not due to a lack of effort or engagement with the clients. Rather, it’s most often due to a lack of asking clients the right questions and getting the right information to drive sales.

Problem-Centric Selling

Often, managers are directing their sales teams to focus on determining their prospects’ needs. This advice often boils down to: Ask the client questions, listen to what they say they need or want, and recommend a solution.

The problem is this traditional method is not enough. In many cases, the first thing a client needs or wants doesn’t necessarily solve their core problem. This new method means salespeople must first diagnose the real problem, as in many cases the potential buyer cannot yet articulate it themselves.

An experience I once had as a customer helped open my eyes to this phenomenon. In the early 2000s, I had a then-popular PalmPilot. While in Boston for a conference, I realized the battery had died, and I didn’t have my charger. I walked into a store and asked whether they had one. The salesman said yes, then asked whether he could interest me in something else, such as a case. A bit annoyed that he was trying to upsell me, I said no.

But just as he was about to ring me up, he looked me in the eye and asked me a question: Was the device out of power because when I put it in my pocket or briefcase, buttons got pressed, wasting the battery?

“Yes!” I yelled, excited that he had guessed it. “That’s exactly what happens!”

He then showed me a case specifically designed to prevent that. I bought it.

I had thought I needed only a charger, but I also needed a case. I wasn’t focused on the real problem and didn’t share it with him because I didn’t know what my options or solutions were. But with his problem-centric approach, the salesperson was able to diagnose my issue and make the sale.

Buyers aren’t as similar as they appear. By taking the time to diagnose problems with as much specificity as possible, salespeople discover important differences among potential customers that are crucial for tailoring offerings and pitches.

Take, for example, two buyers who say they need new productivity systems at their businesses that will allow employees to delegate better and spend more time away from the office. Most salespeople would simply offer them the same solution.

But that solution may require the buyer to contact their manager frequently for approval. This may suit a customer whose motivation for the new technology is to save on gas and avoid road congestion. But it does not suit the other customer who is about to adopt twins with special needs and needs to work off-hours, when the manager isn’t available.

The Five Elements of Problem Diagnosis

To enable problem-centric selling, managers should focus their teams on five critical elements:

Know key facts about the customer. This include descriptions of the environment in which the buyer works, the processes they use, the structure of the organization, the tools they have, the current goals of the business, etc. Getting to the facts that go beyond basic names, size of company, and industry helps establish the context for where customers’ problems live. Understand the problems the buyer is facing. Don’t just go by what they think their problems are. Ask so much about their process that you help them discover what their real problems are. Help to identify the problems before they do. Measure the impact of those problems. How does this problem affect their business, their team, and their own work in terms of productivity, revenue, and other important metrics? By applying measurements to the problem, you can help the buyer understand the benefit they’ll get from addressing this root issue. Help identify the root causes. Dig deep to find out what’s behind the problems. Offer ideas about possible causes, as a different perspective may help the customer problem-solve in new ways. Employ empathy. How is the problem making the customer feel? By cultivating an emotional connection, the sales representative can come to understand and empathize with the client, building trust.

Of course, customers don’t have endless time to spend with your teams. So it’s important for managers to train their employees to get this critical information early on in the process. This is also an opportunity to use customer data that the teams may already have. For instance, user-generated content can provide your teams with great insight into customer needs.

In my experience working with all different kinds of sales managers and teams, I’ve found that when you put problem-centric selling into action, customers are so happy to have someone who “gets it” that they’re ready to spend more time on the phone and, much of the time, more willing to invest in your solution.

No comments