Finance for Founders Part 2: Selecting a Tax Accountant

In Part 1 of this series, we discussed the importance of selecting the right bookkeeping firm and building solid financial foundations early. In this installment, we’ll dive into another critical relationship for venture-backed startups: selecting a tax accountant.

Many founders delay addressing tax compliance, but this can lead to costly consequences, particularly during fundraising or M&A transactions. Establishing a partnership with a tax accountant from day one can de-risk your company and ensure that taxes won’t become a stumbling block in your growth journey.

Common Tax Mistakes Startups Make

Early-stage startups often fall into similar traps when it comes to taxes:

1. Not Filing Taxes at All
   Every company must file federal and state tax returns annually, even if you’ve only been operational for part of the year. For instance, if your company launches in December, you’ll still need to file returns for that year. While it may feel like an unnecessary expense, compliance is non-negotiable and critical for long-term success.
2. Missing State Tax Requirements
   The rise of remote work has brought unexpected tax complexities for many startup founders. Hiring employees in other states or establishing a physical presence, such as a warehouse or office, can trigger state tax filing requirements. Additionally, revenue thresholds in certain states may necessitate filings even if you don’t have a physical presence there.

Why You Need a Tax Accountant Early

To avoid costly mistakes, establish a relationship with a tax accountant before your first tax deadline. Having a professional on board ensures compliance and helps you navigate evolving tax regulations.

When selecting a tax accountant, consider the balance of cost and expertise:

• Regional and National Firms
  These firms typically have higher fees but offer deep expertise, including specialized support for M&A transactions, international expansion, or complex tax scenarios. If your startup anticipates these events, partnering with a larger firm can save headaches down the road.
• Local or Boutique Firms
  Smaller firms often have lower fees, making them a good fit for startups focused on burn minimization. However, these firms may not have the resources in house to handle unique or complex transactions, so assess their capabilities carefully.

At Topo, we work with tax accountants across the spectrum to match companies with the right expertise for their needs.

Don’t Forget About Sales Tax

For software and service companies, sales tax compliance is an area that is often neglected. While many states don’t require the collection of sales tax for digital products, some do, and the rules vary widely.

States that require sales tax collection often enforce “nexus” thresholds, which are triggered by factors such as:

• Revenue Levels
• Number of Transactions
• Physical Presence

Failure to comply can lead to significant liabilities down the line. Startups should proactively assess where they have sales tax obligations and ensure they’re in compliance.

Why Tax Compliance Matters for Venture-Backed Startups

For startups targeting an M&A event or other exit, outstanding tax liabilities can derail or devalue a deal. Buyers will often scrutinize a company’s tax compliance during due diligence, and any unresolved issues can stall negotiations or even block the transaction.

Investing in the right tax accountant isn’t just about meeting filing deadlines—it’s about building a foundation that supports your company’s long-term growth and success.

Key Takeaways

• Start Early: Establish a relationship with a tax accountant during your first year of operation.
• Stay Compliant: File federal and state taxes annually, even if your company is new.
• Plan for Growth: Choose an accountant whose expertise aligns with your company’s trajectory.
• Monitor Sales Tax: Understand nexus thresholds and sales tax requirements in relevant states.

Tax compliance might not be the most exciting part of running a startup, but it’s one of the most critical. By proactively managing your tax obligations, you’ll set your company up for smoother fundraising rounds, cleaner audits, and more successful exits.

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