4 Signs You Need an Accountant
Originally published on July 13, 2016
Updated on October 27th, 2023
“I don’t need an accountant if my company isn’t profitable yet.”
“We only have three employees – how hard can it be to manage our finances?”
“There’s no way we can afford an accountant when we’re so small.”
It’s easy to understand why many tech startups hesitate to consult with or hire an accounting firm. As a company in its infancy, your needs are likely simpler than a large corporation or even a moderately-sized local business. But as a tech company, you’re also probably growing faster than new businesses in most other industries – and growth means financial changes that can get pretty complicated.
You might not have a big corporate building or thousands of employees on your payroll (not yet, anyway!). But here are a few signs that hiring an accountant would be not only a good idea, but a necessary step in your company’s growth.
You have received (or are getting ready to receive) equity funding, and you’re not sure how to account for it.
Equity funding is capital you generally receive from outside sources in exchange for an ownership stake in your company. Such funding is often used to purchase needed equipment, hire more staff or take other steps that help your company transition to a new level of operations. Recording equity funding properly is important because it leads to better transparency of your financial records, which in turn are looked at by additional potential investors or lenders who want to make sure your finances are properly managed.
How you receive and record this funding depends in part upon your company’s structure. Partnerships, for example, require agreements dictating responsibility, reflecting the influx of funding and specifying allocation of future activities. These organizations cannot issue stocks. Corporations can issue stocks for outside funding, but exactly how that’s done depends upon whether your business is an s corp or a c corp (a decision that also has far-reaching tax implications).
Because of these options, proper management of this funding actually begins before it comes in, because you want to select a company structure that best suits your long-term growth plan. And once your company’s structure is determined, there are many rules to navigate about how equity funding is accepted and then recorded in your financial records (to show receipt, allocation, etc.). An accountant’s knowledge of these guidelines, considered in partnership with legal advice, will help ensure that you select the best structure for your company (and once you make the selection, that your reporting is accurate and sound).
You have hired new employees in a different state and need to be sure you are filing all of the appropriate state forms.
Remote employment is growing fast in popularity, especially in the tech industry. But different states have different rules on hiring processes, income/payroll taxes and other employment terms.
For example, state personal income tax rates in 2015 ranged from less than one percent to as much as 9.85 percent (nine states have no state personal income tax). Individual states can also have different exemptions, regulations and other stipulations that make your withholding obligations even more complicated. Some states also have reciprocal agreements with other states in which they don’t require each other to withhold their respective income taxes.
A handful of states and one U.S. territory (California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico) also mandate temporary disability insurance programs for their employees. If your state does not have this mandate but your remote employee’s state does, you still have to fulfill your payroll tax responsibilities regarding the mandate. Other workers comprehension insurance requirements might also apply to out-of-state workers.
Whether a current team member is relocating or you’re hiring a new remote employee, an accountant can help you keep track of these and other stipulations involved with out-of-state employment.
You have revenues generated from another state and you need help determining if you have nexus with that state.
Nexus is the link between a business and the territory governed by a taxing authority. If you have established nexus with a particular state, for example, you are required to collect the payroll taxes, sales taxes, etc. required by that state and pass those funds to the state. Failure to do so can result in significant penalties, so it’s important to know whether you have established this link.
There are some basic guidelines that most taxing authorities follow. For example, most taxing authorities consider nexus established if your company either maintains a facility or pays the wages of an employee located within its geographical borders. Some entities, however, expand their nexus criteria to gain more tax revenue – for example, if your company transports goods inside the territory or regularly sends employees there to conduct training or make sales calls.
It takes a lot of time and knowledge to determine whether nexus has been established and follow the varying tax rates and requirements. An accountant is your best resource for these important responsibilities.
You have received grants and are required to submit a compilation, review or audit.
Research grants are a great source of funding for fledgling companies without much (if any) revenue that want to research new technologies and methods or make scientific discoveries. Tech startups in particular benefit from grants, especially with the recent changes in research and development grants. (see our previous entries on the R&D tax credit and its associated payroll offset).
While research grants often come from federal entities such as the Department of Defense and the National Institute of Health, they are also issued by private foundations and other organizations that like to promote and fund these efforts. Regardless of source, however, a variety of conditions must be honored if you accept these grants.
For example, you will likely be required to provide a compilation, review or audit of your financial statements. And if you spend over $750,000 in federal grant money in a single year (regardless of whether it’s from one or multiple grants), you must provide an audit for that year of both the company’s financial statements and grants or, if eligible, on a single grant to the funding source. Once you have your audited financial statements, they must be submitted directly to the donating agency or entity. This differs from the procedures nonprofits follow, in which they upload their statements to a single data collection site. So the process to submit your paperwork is more involved, especially if your company has received grants from multiple agencies or institutions.
If you aren’t compliant with your grant regulations, or you don’t properly submit the documentation required, you might be required to repay your funding and/or risk your ability to obtain future grants. Having an accountant is key to ensuring that all requirements are properly met.
With so much at stake and such rapid growth, you’ll want a certified professional accountant on your side to help you navigate these and other challenges. We can put our extensive experience in these areas to work for your startup, so don’t hesitate to contact us for an evaluation. It is certainly much easier to ask questions early so you can make informed decisions – rather than having to correct errors and risk future funding options or face penalties.
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