Some suggestions and practical tips about accounting and tax considerations that are critical to your start up (and why).

1.
Mission Critical Elements:
Accounting and Tax Considerations
Mission Critical Elements
 Accounting system
 Method of accounting
 Accounting policies
 Budget, cash flows, projections
 Internal controls

2.
1. Accounting System
Quickbooks or similar programs offer a flexible, off the shelf, inexpensive solution

3.
2. Create Chart of Accounts appropriate to your business
3. Choose an Accounting Method
Make an informed choice based on your business:
 Cash: easier to maintain, won’t work with inventory-based businesses (but investors and
banks generally need more information than what this method provides)
 Accrual: more transaction intensive, but more clear to investors, others
 OCBOA (tax): a hybrid method which gives a clearer picture from a tax point of view
Consider:
 Does accounting method work for your tax issues (incl. state tax and nexus issues)?
 Depreciation methods?
 What is deductible?

4.
4. Create Accounting Policies
Include how you’ll handle:
 Revenue recognition
 Capitalization
 Equity
Look to the SEC, to industry, to GAAP rules to provide direction appropriate for your business
Revenue recognition: Different Approaches
GAAP: comprises broad revenue recognition concepts and numerous requirements for particular
industries or transactions that can result in different accounting for economically similar
transactions.
SEC: Must meet all the following criteria :
 Persuasive evidence of an arrangement exists,
 Delivery has occurred or services have been rendered,
 The seller's price to the buyer is fixed or determinable, and
 Collectibility is reasonably assured.
Tricky parts are:
 Revenue arrangements with multiple deliveries
 Bill-and-hold arrangements
 When does delivery occur, what about immaterial remaining obligations
 Non-refundable up-front fees
Capitalization
An accounting method used to delay the recognition of expenses by recording the expense as
long-term assets.
Consider how to treat:
 Long lived assets
 R&D
 Software development
Equity
You can give away the farm here if not careful
 Stock options
 Hybrid instruments
 Donated / in-kind services
How these agreements are structured will help point the way in terms of how the accounting
takes place

5.
5. Tax Consequences of Formation
Neither a corporation, a partnership, nor an LLC is ordinarily taxed on the receipt of capital contributions
by shareholders, partners, or members (as applicable).
Shareholders, partners, or LLC members may be taxed on the contribution, depending on the nature of
the contribution
Contributions of Property
The contribution of property in exchange for shares of corporate stock (including shares in an S
corporation) is a taxable event for the contributing party unless the transaction constitutes a
tax-free exchange (transfers to a controlled corporation).
If a contribution of property to a corporation is taxable, it will be treated as a sale of the property in
exchange for the shares of corporate stock and the shareholder will usually be taxed on the
difference between the shareholder's basis in the property and the property's fair market
value.
The contribution of property in exchange for an interest in either a partnership or an LLC is
generally not a taxable event, and will not subject the contributing partner or member to tax
liability. If the contributed property is subject to a liability, the contributing partner or member
may recognize gain.
Sweat equity and the LLC
If a person contributes services to an LLC in exchange for a member's interest, the contributing
member will not generally be taxed so long as he or she receives only an interest in the profits
of the LLC.
If the contributing member receives an interest in the capital of the LLC in exchange for past or
future services, he or she will be deemed to have received taxable compensation income
equal to the value of the capital interest. The LLC will have a corresponding deduction for
compensation paid.
Services in exchange for stock are generally taxable

6.
6. Financial Statement Characteristics:
Understand the need/use
Prospective financial statements have four characteristics. If a presentation lacks any one of the four, it
is not a prospective financial statement. Prospective financial statements should
a. Include certain minimum financial statement elements
b. Cover a future period
c. Be prepared for an entity
d. Be the responsibility of the responsible party
Minimum Items The minimum items that are required, to the extent that they are applicable, include:
Minimum Financial Statement Elements
 Sales or gross revenue
 Gross profit or cost of sales.
 Unusual or infrequently occurring items
 Provision for income taxes.
 Discontinued operations or extraordinary items.
 Income from continuing operations
 Net income.
Significant changes in financial position
Required Disclosures
 A description of what the responsible party intends the presentation to present, a statement
that the assumptions are based on the responsible party's judgment at the time the
prospective information was prepared, and a caveat that the results may not be achieved.
 Summary of significant assumptions.
 Summary of significant accounting policies.

7.
7. Internal Controls:
A system of specific policies and procedures designed to provide management with reasonable
assurance that the financial objectives can be met. Should be applied to manual and computerized
systems.
Why have them?
 Support operational efficiency
 Provide confidence in financial information
 Safeguard your assets and records
 Have proper authorization for transactions
 Comply with regulations and investor expectations
 Attract more capital
 Reduce opportunity for fraud
Your Control System should include:
 Tone at the Top: strong highly ethical ownership / senior management team which sets the
tone that permeates the corporate culture (i.e. talk the talk, walk the walk)
 Segregation of Duties: Separate incompatible functions; remove possible temptations and
opportunity (e.g. can’t steal and conceal)
 Analysis of potential exposure and systems to mitigate risk
 Clear procedures for authorization
 Principal incompatible duties to be segregated are:
– Custody of assets
– Authorization or approval of related transactions affecting those assets
– Recording or reporting of related transactions