ERB

What financial mistakes do US startups make in their first year?

Maya — Tue, 31 Mar 2026 17:50:55 +0000

Most startups don’t fail because of their product – they fail because of financial mistakes made early on. In the first year, founders are often focused on growth, hiring, and fundraising, while overlooking critical financial responsibilities such as tax compliance, payroll obligations, and cash flow management.

In the United States, even early-stage startups are subject to strict financial and regulatory requirements. Missing tax deadlines, misclassifying employees, or failing to track cash flow can quickly lead to penalties, legal exposure, and serious operational risks.

Understanding the most common financial mistakes -and how to avoid them – can be the difference between sustainable growth and costly setbacks

At ERB, we work closely with startups to prevent these issues before they arise – providing financial clarity, compliance support, and strategic guidance from day one.

Common First-Year Financial Mistakes

Underpaying Taxes and Payroll Deductions: Startups frequently overlook the necessity of making quarterly tax payments or withholding income taxes. According to the IRS, if you do not make at least $1,000 in expected first quarter payments, penalties will be incurred for failing to make estimated tax payments. The IRS will also impose severe penalties for not electronically depositing withheld payroll taxes (withheld income, Social Security, and Medicare) in a timely manner.

Why it is Important: Penalties range from 1% to 15% of the unpaid tax and can quickly accumulate. Indications of these problems include receiving notices of late payment and/or increased tax debts reflected on the accounting records.

Remedial Action: Register for the Electronic Federal Tax Payment System (EFTPS) and schedule your payments. If you do not have an accountant or an e-filing provider, you should take steps necessary to ensure you do not fail to make timely payments.

Mixing Personal and Business Finances: Business owners frequently maintain all of their personal and business finances in one account, which can lead to problems. According to the IRS, if you do not separate expenses incurred as a business from those incurred personally, it will be impossible to distinguish between legitimate business expenses and personal expenses and will result in disallowance of your deductions and trigger several red flags to the IRS.

Why it is Important: If IRS auditors identify co-mingling of business and personal expenses, this could result in disallowed business expenses and back taxes. An indication of co-mingling would be a bank statement that reflects expenditures for personal items (e.g. rent and groceries) that have been paid from the business account.

Remedial Action: Maintain separate business bank accounts and credit cards and reimburse any personal payments made by the owners of the business. Use accounting software to ensure your books accurately reflect only legitimate business expenses.

Misclassification of Workers: Some startups misclassify employees as independent contractors to save on benefits and taxes. Generally, the IRS considers control over the employee’s work to define whether an individual is an employee or an independent contractor. If the business shows control over when, where and how the employee performs the work, they should be considered an employee rather than as an independent contractor. Misclassification of your employee as independent contractor can result in state and federal assessment of back taxes.

Why it is Important: If you wilfully misclassify your employees, the DOL and IRS may assess multiple years of back payroll taxes plus penalties and may even impose criminal fines.

Remedial Action: Appropriate classification of your employees is imperative. Refer to IRS guidance in determining whether an individual is an employee or independent contractor (see IRS Form SS-8). When in doubt, treat the individual as an employee and withhold taxes according to IRS guidelines.

Skipping 1099 and Information Returns: Startups paying freelancers or vendors ≥$600 must file Form 1099-NEC. A common mistake is overlooking these filings. The IRS explicitly requires 1099-NEC for services from nonemployees (including law firms, vendors) paid ≥$600.
Why it matters: Failure to file 1099s on time results in penalties ($50–$290/form) and IRS matching. Sign: bookkeeping lacking 1099 records or missing IRS Form 1096 (report of 1099s).
Corrective action: Compile all contractor payments each quarter, issue 1099s by January 31, and e-file as needed. Use accounting software or a payroll service to generate 1099s for all qualifying payments.

Neglecting Cash Flow / Budgeting: Many new businesses operate on a month-to-month basis without forecasting. The effect here is that they may end up with low runway; as such, 20%-40% of small businesses will fail during their first year (Bureau of Labor Statistics).

Why This Is Important: Without a budget, companies can spend considerably more than their revenues which can then result in missing payroll or being unable to pay bills. Signs are bank balances below two months’ worth of operating expenses or frequently discussing cash-shortages.

What To Do: Create a basic cash-flow forecast; to do that, you need to monitor your monthly income and expenses and then divide your existing cash by your monthly cash outflow to calculate how many months of runway you have. If you have less than 6 months, what you should do is either cut discretionary spending or seek capital from external sources.

Assuming Licenses / Registration Will Happen Later: Startups frequently assume that getting their licenses and/or registering for taxes can wait. In fact, businesses should register for their state tax accounts (income/sales tax) and obtain any necessary permits to operate their businesses legally.

Why This Is Important: Doing business without proper registration/ licenses could result in penalties and may hinder future sales. Signs of this include: No registered state tax ID for each jurisdiction in which you sell and no local business license for your locality.

What To Do: As soon as possible, register for your Federal EIN, your state income tax ID, and your sales tax permit if you plan on selling goods and/or services. Also check applicable city/county requirements.

Making Tax Returns Using Non-Professionals: Some founders attempt to complete their tax liability without assistance from an expert tax preparer. The IRS specifically encourages all individuals working in any capacity with a qualified tax preparer to help them with their tax situation as well as filing electronically to further reduce the chance of errors.

Why This Is Important: Mistakes made to complete tax returns by individuals (i.e., non-professionals) can cause penalties or missed opportunities for benefits which could include capitalizing on a deduction for incurred expenses that the company was incurred during the startup period. Signs of tax mistakes will be if your tax forms are completed, but inaccurate or complex.

What To Do: Hire a CPA who has experience with helping startup founders with tax-related transactions; ask him whether your tax return has been completed or set up your accounting system. Use payroll and/or compliance databases to process payroll and pay taxes; please remember though that you will ultimately be responsible for these errors regardless of whether you relied on the database provider or the person aiding.

Mistake Table

Mistake	Impact	Immediate Fix
Underpaying taxes (e.g. no est. tax)	IRS penalties (1–15% of unpaid tax)	Calculate owed taxes; pay via EFTPS; set up est. tax schedule.
Late payroll deposits	Penalties, interest on payroll taxes	Deposit due taxes immediately; schedule regular payroll runs.
Misclassifying employees	Back taxes & fines (IRS/DOL audits)	Re-evaluate worker status; reclassify if needed; adjust withholding.
No 1099 filings	IRS fines ($50–$290/form)	Issue missing 1099-NEC/MISC forms; file with IRS.
Mixing personal/business accounts	Audit risk; lost deductions	Open separate bank/card accounts; reimburse personal charges.
No budgeting/runway tracking	Cash crunch or unexpected shortfall	Create a monthly budget; compute runway; trim costs or raise funds.
Missing licenses/registrations	Fines; business shutdown	Register EIN, state tax IDs, and necessary permits now.
DIY tax prep	Filing errors; missed deductions	Hire an accountant; use e-file or compliance software; review filings.

Action Plan (30/90-Day Checklist)

First 30 days:

Separate finances: Open business bank account/credit card.
Register & Document: Obtain EIN; register for payroll (Form 941) and state taxes; apply for necessary permits.
Set up recordkeeping: Choose accounting software; hire a bookkeeper or accountant.
Payroll setup: Decide on a payroll system; ensure tax withholdings (FICA, FUTA) are calculated.
Cash audit: List current cash on hand and monthly expenses. Compute initial runway.

Next 30–90 days:

Compliance check: Verify all IRS/State filings (business tax return due dates, quarterly reports). Pay any pending estimated taxes.
Issue forms: Compile contractor payments and issue 1099s. File W-2s and W-3 with Social Security by Jan 31 (if year-end reached).
Run budget vs. actual: Compare actuals to projections, adjust hiring/spend if overrunning.
Forecast & fundraise: Refine cash flow forecast. If runway <6 months, plan cost cuts or capital raise.
Seek professional help: Consult a CPA for tax planning and a lawyer for employee contracts or equity issues.

FAQ

What if I missed a payroll tax deposit?
Deposit taxes immediately with EFTPS. The IRS will impose a Failure to Deposit penalty (1–15% of unpaid tax, depending on lateness). You may also owe interest. To prevent repeat, automate deposits and consult a tax professional for any necessary penalty abatement.

How can we tell if a worker should be an employee?
The IRS looks at control: if you direct how/when work is done, it’s likely an employee. Misclassifying can trigger back payroll taxes and penalties. Use IRS guidance or Form SS-8, and if uncertain, treat them as an employee and withhold taxes.

Do I need to file 1099s for all freelancers?
Yes. If you paid an independent contractor $600 or more for services in a year, you must file Form 1099-NEC with the IRS. Missing this can incur fines. Keep diligent payment records to prepare 1099s by the Jan 31 deadline.

Can hiring a payroll service avoid all these problems?
A payroll service can help compute and file taxes, but you remain responsible. Even if they err, the IRS can hold you accountable. Always review payroll reports and ensure timely payments yourself.

How do we know if our startup is running out of cash?
Track months of runway (current cash ÷ monthly burn). If it drops below ~6 months, you’re at risk. Also monitor key metrics like negative cash flow each month. Regular forecasting lets you spot a shortfall early and adjust before crisis.

הפוסט What financial mistakes do US startups make in their first year? הופיע לראשונה ב-ERB.

What financial reporting is required for US startups?

Maya — Sat, 28 Mar 2026 11:23:18 +0000

To be their tax and payroll compliance obligations to the Federal Government (and sometimes state governments) and the maintenance of their corporate filings in every state in which they are organized or registered to do business. Periodic reporting under the SEC is only mandatory for public companies or (to a lesser extent) for private companies who register their securities with the SEC or become an Exchange Act Reporting Company after going public, etc.

The key unknown facts that will materially affect a given start-up’s financial reporting obligations include: type of entity (corporation vs. limited liability company vs. partnership), size of company (how many employees, how much revenue, what is the public float if the company is going to go public), stages of funding (i.e., was the funding done under Reg D, Reg A, or Reg CF, etc.), and where the company is going to conduct business (i.e., what states will the company be operating in – nexus) Entity type drives federal income tax return form and due dates, employee presence creates payroll deposits and quarterly and year-end payroll tax returns for the business, the method of fundraising drives any required SEC notice filings and may also create audit/reporting requirements, and operating in more than one state creates a need for additional tax registrations with state departments of revenue and additional filings with those state departments.

Federal reporting obligations for startups

Federal business income tax filing depends on the chosen tax classification:

C‑corporation: Form 1120 (due generally on the 15th day of the 4th month after year‑end; special rule for June‑30 fiscal year).
S‑corporation: Form 1120‑S (generally due the 15th day of the 3rd month after year‑end).
Partnership / LLC taxed as partnership: Form 1065 (generally due the 15th day of the 3rd month after year‑end).
Sole proprietor / single‑member LLC taxed as disregarded entity: Schedule C attached to Form 1040; due the 15th day of the 4th month after year‑end (April 15 for calendar‑year filers).

Payroll withholding, deposits, and payroll forms

All the payroll taxes that a startup must withhold from its employees, including both federal income and FICA taxes (Social Security and Medicare), must be deposited on either a monthly or semiweekly schedule, which is determined by the lookback rules. It is also possible for the startup to qualify for the next day deposit rule if it is a high-liability business.

The core federal payroll filings include:

– Form 941 (Quarterly Payroll Taxes): Due by the end of the month following the end of each quarter (April 30, July 31, October 31 and January 31). If all deposit payments are made on time, then there is an opportunity for a 10-day extension.

– Form 940 (Annual Payroll Tax – FUTA): Due by January 31 (or February 10th if all deposits have been made timely).

– W-2 / W-3 (Annual Wage Reporting): The Social Security Administration requires that W-2 forms must be filed electronically or in paper format by January 31 and that copies should also be provided to employees by the next business day after January 31 if that day falls on a weekend or holiday.

– Form 1099-NEC (Independent Contractors): All 1099-NEC’s must be filed with the IRS by January 31 (may be in either electronic format or paper format), and copies must be provided to each recipient.

SEC requirements for startups

When do private start-ups have to file with the SEC?

Many private start-ups do not have to file Form 10-K, Form 10-Q, or Form 8-K. However, many private start-ups have dealings with the SEC through exempt offerings, and in rare cases, involuntarily through mandatory Exchange Act registration.

The primary triggering event for Exchange Act registration is found under Exchange Act Section 12(g): According to the SEC, if an issuer (exception for certain banking entities) has total assets of over $10 million, that issuer must register any class of equity securities that exceeds 2,000 record holders, or that exceed 500 record holders which are not accredited.

Initial Public Offering (IPO) or registration and ongoing reporting requirements for publicly traded companies

When an issuer becomes subject to Exchange Act filing requirements, it will be required to file periodic reports (10-K,10-Q) under the Exchange Act and to certify to the CEO and CFO is also subject.

Filing deadlines by filer status (summary):

Report	Deadline (typical)
10‑K	60 days (large accelerated) / 75 days (accelerated) / 90 days (others) after fiscal year‑end
10‑Q	40 days (accelerated & large accelerated) / 45 days (others) after quarter‑end
8‑K	Generally, within 4 business days for most triggering events

Regulation D and the Form D 15‑day rule

The Securities and Exchange Commission’s requirement for Form D Filing is to be filed up to 15 days from the date of the first sale when the first investor enters a binding contract. (Saturdays, Sundays, and Holidays are converted to the next business day when applying this rule).

The SEC has an added requirement for a Rule 506(b) Offering when there were non accredited Investors involved; therefore, under Reg D’s Rule 502(b), a Company must provide its investors with the required financial disclosure information established by the SEC.

Accounting standards: GAAP, tax accounting methods, and ASC 606

It is important for Startups to keep tax accounting separate from financial reporting to Investors and to the SEC. For Federal Tax purposes, the IRS has defined the Cash Method (recognizing income when received and expenses when paid) and the Accrual Method (recognizing income when earned and expenses when incurred).

The SEC continues to formally reaffirm that the Financial Accounting Standards Board is the designated private sector standard setter for U.S. Generally Accepted Accounting Principles (GAAP) for purposes of U.S. capital markets reporting.

The provisions of ASC 606 (Revenue from Contracts with Customers) establish a “core principle” and a “five-step model” for recognizing revenue in accordance with the transfer of promised goods and/or services to customers in an amount that reflects the expected consideration to be received for those goods/services (i.e., identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price to each distinct performance obligation and recognize revenue as each performance obligation is satisfied).

For many venture-scale Startups (and in particular, SaaS Startups), the practical implications of ASC 606 may include some or all of the following: documentation of performance obligations; Documentation of variable consideration; assessment of timing for point in time versus over time ; significant differences between revenue per ASC 606 and “billing/cash” and, therefore, KPI governance. Audit, assurance, and internal control thresholds

For public company audits, the Public Company Accounting Oversight Board requires registration of public accounting firms that prepare or issue audit reports for issuers (or play a substantial role).

SOX 404(b): the SEC explains that non‑accelerated filers are not required to provide an auditor attestation of management’s ICFR assessment, while accelerated filers generally are (and filer status depends on public float and, in some cases, revenue thresholds).

Exempt‑offering audit/review requirements (where applicable):

Regulation Crowdfunding (Reg CF): By tiering the required financial statements for Regulation Crowdfunding, the SEC guidance requires audited financial statements for raises greater than $107K and $500K, respectively, for Tier 4 and Tier 5 raises, respectively, as well as for issuers who are not first-time issuers.
Regulation A (Tier 2): As stated in the SEC guidance, audited financial statements must be included in offering circulars (in accordance with GAAS or PCAOB) by All Tier 2 Issuers and requires ongoing reporting (1-K/1-SA/1-U) depending on the deadline established for each offering.
Regulation D: With respect to non-accredited investor participation in an offering, the SEC guidance focuses on the delivery of the Form D and applicable disclosures made to the non-accredited investor when participating in an offering. The audit requirement is not a universal or statutory requirement for most non-accredited investors; however, some contracts entered with accredited investors may contain audit requirements based on due diligence and/or future public company plans.

State-level annual reports and franchise taxes

State example	Corporate maintenance filing	Franchise/annual tax (illustrative)	Penalties noted in official sources
Delaware	Delaware Division of Corporations: domestic corporations’ annual report & franchise tax due March 1; minimum franchise tax rates and filing fees described on state pages	Alternative entities (LLC/LP/GP) pay $300 annual tax due June 1 (no annual report)	Failure to file/pay can trigger $200 penalty + 1.5% interest per month (corporations; and similarly for alternative entities per instructions)
California	California Secretary of State: Statement of Information due within 90 days of registration; then annually for stock corporations and every other year for LLCs/nonprofits; SOS notes a $250 penalty for noncompliance	California Franchise Tax Board: corporations must pay $800 minimum franchise tax; LLCs also generally owe an $800 annual tax if doing business/organized in CA	SOS cites the $250 Statement of Information penalty; tax penalties depend on the tax type and facts
New York	New York State Department of State: biennial statement due every 2 years in the calendar month of formation/authority; failure shows as “past due” and may block transactions; fee schedule lists $9	New York State Department of Taxation and Finance: general business corporation franchise tax return (CT‑3) due within 3½ months after reporting period (April 15 for calendar‑year)	DOS “past due” status can impede certificates/status letters and business transactions

Operating checklist (calendar-year company)

Monthly Basis: Complete Bookkeeping for the Business, Prepare Payroll, and Make Required Payroll Tax Deposit(s) (Monthly/Semi-Weekly as Required).

Quarterly Basis: File Form 941 Within 10 Days After Month-end Following End of Each Quarter and Receive 10-Day Extension on Filing if Employer Deposit Is Made on Time.

Annually (January): Prepare/Form W-2/W-2 (Employee) for All Employees; prepare/Form 1099 Non-Employee Compensation for All Independent Contractors; File Form 940 Based on How Payroll Taxes Were Deposited.

Annually (March/April): Prepare/Submit the Entity’s Federal Partnership/Corporation Income Tax Return (1065/1120-S/1120) to Federal Government and Any State Equivalent; File State Annual Reports/Franchise Tax with Appropriate State(s).

Regarding Fundraising Events: File Form D With SEC Within 15 Days After First Sale of Securities If Using Regulation D or If Using Regulations Crowdfunding or Regulation A to Fundraise Must File Required Form Financial Statements (Audit/Review) Continuing Reporting Under SEC Rules.

FAQ

Do private startups file 10‑K/10‑Q?

Usually no-unless they become Exchange Act reporting companies (IPO/registration trigger) or hit Section 12(g) thresholds.

What is the Section 12(g) thresholds I should monitor?

>$10M assets and either 2,000 holders of record, or 500 non‑accredited holders of record.

When is Form D due for a Reg D round?

Within 15 days after the first sale (first irrevocable commitment).

What are the “hard” annual January deadlines?

W‑2 filing/furnishing is due January 31; 1099‑NEC filing and furnishing is due January 31.
When do audits become mandatory?

Public company audits must be performed by PCAOB‑registered firms; Reg A Tier 2 requires audited financial statements; Reg CF can require reviewed or audited statements depending on amounts raised.

הפוסט What financial reporting is required for US startups? הופיע לראשונה ב-ERB.

Do Delaware startups need a CFO

Maya — Mon, 23 Mar 2026 16:36:48 +0000

At ERB, we work closely with startups and international founders establishing Delaware C-Corporations, helping them navigate financial strategy, compliance, and growth. One of the most common questions we encounter is whether hiring a CFO is necessary.

Starting a business in Delaware (and a C-Corp specifically) offers an abundance of flexibility from a legal standpoint and expectations from a financial perspective. One question many founders have about hiring a CFO is if it’s necessary; and the answer can be somewhat complex. While you don’t have to have one by law, as your company’s revenue starts increasing, there will be a greater need for financial leadership.

This blog explores the legal framework, practical needs, and strategic reasons for having a CFO at your start-up in Delaware.

Are CFOs Required for Delaware Startups?

Delaware state corporate law does not require a startup to have a CFO or any other specific officer title. All companies must appoint senior executives to manage the day-to-day operations of the company, but the law does not specify the titles or roles that are required.

In fact:

*A single founder can serve in multiple roles (Example: As a CEO, CFO and Secretary)-

*Delaware does not specifically define any of the officer titles, but only the general responsibilities associated with the office. In conclusion, based on the law, the position of CFO is optional.

Why Financial Management Still Matters

The discipline associated with finance is critical from the very beginning regardless of whether a company requires a CFO. Startups across the United States, particularly Delaware C Corporation, should possess verifiable financial records adhering to US Generally Accepted Accounting Principles (GAAP) for reporting purposes.

Investors will expect to see an easy-to-use and standardized method for evaluating financial performance. Your financial results will be a component of your valuation; therefore, you should also utilise your financial records to ensure compliance and for forming strategic decisions.

Incorrectly managing your financial data may delay funding for the company and expose it to litigation.

For this reason, it is beneficial to have a CFO (either formally or informally).

The Role of a CFO in a Startup

A Chief Financial Officer has a wider range of responsibilities than just maintaining records of finances. The following areas are normally included as part of the CFO role within a start-up:

1.Financial Strategy and Planning

A CEO will assist in developing financial strategies, budgets, forecasts, and long-term financial plans that align with growth objectives.

2.Fundraising and Investor Relations

To obtain funding through venture capital firms, a start-up must have a proper financial model and provide accurate reports to investors. To assist with this, the CFO will prepare forecasts and will communicate with investors on behalf of the CEO.

3.Compliance and Risk Management

The CFO ensures that any company is compliant with laws related to taxation and financial reporting and has a process for identifying any potential risks.

4.Cash Flow Management

CFOs monitor the cash flow of a start-up, maintaining awareness of its burn rate and remaining runway. CFOs also have the responsibility of optimizing all expenditures to ensure there will be cash available when it is needed.

When Do Delaware Startups Actually Need a CFO?

Start-ups usually lack a Chief Financial Officer. Yet there are numerous signs that indicate it’s time for such a financial leader within the organization:

1. Fast Growth: The fast growth of your organization will result in more complex financial management systems. Thus, it becomes imperative that you have structured processes with the appropriate controls over your finance function in place.

2. Capital Raising: Investors will typically look for high-quality financial statements and/or a comprehensive strategy plan. This means you will need to have either a CFO or a Finance Leader to provide the expertise to satisfy those requests.

3. Expanding into U.S. Markets: If you are a foreign company entering the United States, then you will need to know the many additional regulatory/financial obligations your business will incur. A CFO can assist you in understanding those requirements and will provide you with the financial and regulatory expertise to comply.

4. Increased Financial Complexity: As your business expands, you are likely to develop new revenue streams, add employees and have additional compliance responsibilities. The hiring of a CFO will provide you with the financial expertise needed to perform specialized oversight functions.

Alternatives to Hiring a Full-Time CFO

Many new companies find it hard to pay for the salary of a full-time CFO. Fortunately, there are alternatives:

Outsourced CFO Services: startups can work with an experienced financial leader, on an as needed basis (part-time). This allows startup owners access to expertise without having the expense of a full-time CFO.
Founder-led Finance: in the early days of running your business, many founders do their own bookkeeping and may have an accountant or bookkeeper support them.
Fractional CFOs: this trend, that has been growing among startups, allows them to use the services of an experienced CFO as needed, based on their current workload.

By utilizing these 3 alternatives, you will be able to get the financial support that will allow your company to grow as fast as possible!

Why Investors Care About CFO-Level Expertise

Many Delaware startups are set up to get investment from venture capitalists, so financial transparency and governance are the two main priorities for venture capital investors.

CFO level capability also makes it possible for the startup to:

*Build investor confidence

*Increase valuation

*Support funding due diligence

*Provide accurate financial statements for funding.

While many startups may not currently have a formal (outside) CFA, establishing strong financial leadership and demonstrating that they have currently established themselves as a successful startup is critical to helping with fundraising success.

The Delaware Advantage and Financial Expectations

Due to its legal environment favourable to businesses as well as its recognition by investors, Delaware is often chosen as the company formation State for new organisations. However, these benefits are accompanied by certain expectations, such as:

Professional governance
Transparent financial reporting
Scalable financial infrastructure Because of this, although there is no requirement for a Delaware corporation to appoint a Chief Financial Officer (‘CFO’), the Delaware business community supports the promotion of well-managed financial practices.

Key Takeaways

There is no legal requirement for a CFO for a Delaware startup.
While having a title is not as important as having the function or overall financial leadership, either of these can be provided by the founders, or an outside resource, i.e. an outsourced CFO.
At different stages of growth (such as fundraising), your startup will require the experience and expertise of a CFO.
There are many flexible solutions available today (i.e., fractional or outsourced CFOs) for early-stage companies.

Ultimately, the real question will not be whether you need a CFO, but rather, when does your startup need CFO-level skills?

FAQ

1.Is a CFO legally required for a Delaware startup?

No. Delaware law does not require a company to appoint a CFO or specific officer titles.

2.Can a founder act as the CFO?

Yes. In early-stage startups, founders often handle financial responsibilities themselves.

3.When should a startup hire a CFO?

Typically, during rapid growth, fundraising, or when financial operations become complex.

4.What is a fractional or outsourced CFO?

A part-time financial expert who provides CFO-level services without a full-time salary.

5.Do investors expect a CFO?

Not always initially, but they expect strong financial management and may require CFO involvement as the company grows.

הפוסט Do Delaware startups need a CFO הופיע לראשונה ב-ERB.

Transfer pricing for startups: Navigating international growth

Maya — Sun, 15 Mar 2026 11:48:55 +0000

What Is Transfer Pricing?

entities related to one another. For example, a parent company pricing the sale of goods to a subsidiary or a subsidiary loaning money to its parent would fall under transfer pricing. Transfer prices can include products, services, loans and intellectual property. Governments are very involved with transfer pricing because they want to ensure that taxes are being paid by a corporation in each country where they operate in accordance with the corporation’s profits.

Tax authorities’ guidance on transfer pricing is mainly based on the OECD’s Transfer Pricing Guidelines, which promote the application of the “arm’s-length principle”. This principle means that related parties must set their transfer prices as if they are independent parties and must set their transfer prices so that the terms and conditions are equivalent to the terms and conditions of an uncontrolled transaction between unrelated parties in accordance with the normal market conditions existing at any time.

This principle prevents related companies from shifting their profits to a jurisdiction with lower taxes by allocating the profits of a corporation to the countries in which the respective economic activities occurred.

Why Transfer Pricing Matters for Startups

When companies begin setting up their subsidiaries and hiring expatriate or international intellectual property (IP) employees, they may be surprised by the importance of transfer pricing.

Startups need to be aware of the following transfer pricing issues:

1) Compliance with Regulatory Regulations: Many governments require companies operating internationally to maintain appropriate transfer pricing documentation for auditing purposes (for example, the OECD transfer pricing guidelines).

2) Reduction of Double Taxation: The use of appropriate transfer pricing documentation may assist a business in establishing an appropriate allocation of taxable profits between jurisdictions.

3) Properly Managing Growth: When startups grow internationally, they often create multiple legal entities with varying levels of sales and operating expenses. For example, when a US-based parent corporation employs support/production personnel in several countries around the world to provide services to support its international sales.

4) The Due Diligence Process for Investors and Acquirers: Increasingly, investors and potential acquirers are placing significant emphasis on establishing appropriate compliance with international tax regulations during the due diligence process prior to investing or acquiring a business. Startups that maintain well-documented and established transfer pricing policies will be in a stronger position during any fundraising, merger, or acquisition process.

Common Transfer Pricing Scenarios for Startups

Startups expanding globally often encounter transfer pricing issues in several common situations.

Intellectual Property Licensing

Many startups centralize intellectual property-such as software code or patents-in one jurisdiction and license it to foreign subsidiaries. Transfer pricing rules require that licensing fees reflect market conditions.

Cross-Border Services

A startup may have engineering teams in one country providing services to another group entity. These services must be priced using appropriate transfer pricing methods.

Intercompany Financing

Loans between related entities must also comply with transfer pricing standards. Interest rates should align with market conditions.

Distribution Structures

If a startup sells products globally through local distributors or subsidiaries, transfer pricing rules determine how profits are shared between entities.

Key Transfer Pricing Methods

The OECD guidelines and many government or international organization recommendations discuss different ways to arrive at a “reasonable” transfer price using different methods of evaluating transfer pricing. To establish the “best” method to use:

Comparable Uncontrolled Price (CUP): This method compares the price paid for a product to the price at an arms-length transaction between unrelated parties selling the same or similar goods/services.
Cost-Plus: This method begins with the cost of producing or providing a good/service (ex. materials + Labor), then adds a reasonable profit margin (ex. 5%) to that price.
Resale Price: The resale price method measures a manufacturer’s profit margin from resale in comparison with that of other manufacturers.
Transactional Net Margin Method (TNM): This method utilizes the profit margins of similarly situated entities to determine an appropriate level of profit for the transaction at issue.

To ensure that related party transactions are as comparable to independent entities as they can be is the cornerstone of all the methods outlined above.

Documentation and Compliance Requirements

Companies will want to follow the guidelines they must meet under the law to create documents proving how prices for goods are determined between companies belonging together. Increasing transparency and fighting against tax avoidance is one way for authorities to make changes and increase their reporting methods.

As part of the OECD BEPS initiative, nations have made efforts to develop standard requirements allowing business to report at a country-by-country basis and creating related documentation that verifies both the location of the business activities and profit creation.

Typical documents that provide evidence of transfer pricing include:

– Descriptions of your company’s worldwide structure

– Analysis on intercompany transactions

– Industry benchmarks

– Reasons for pricing method used

– Financial data relating to the method of pricing selected

When new businesses begin operations, creating good documentation upfront will save them a great deal of time and money during their existence.

Strategic Considerations for Startup Founders

Tax compliance isn’t the only consideration for transfer pricing. When done right, transfer pricing can help support your business strategy as well as operational efficiency.

Start Early: Creating your transfer pricing policies should happen as soon as you begin any international operations.

Connect to Your Business Operations: Ensure that your pricing structures depict actual economic value generated by your entities.

Follow Regulatory Changes Closely: As International Tax Laws are evolving and changing constantly; there will be an impact on international tax rules which are continuously being established by the OECD’s work on the Digital Economy.

Get Your Experts’ Advice: Having specialty tax advisors can help new businesses create a scalable structure that maintains compliance while they are growing.

By proactively addressing transfer pricing, new businesses can avoid costly disputes and establish a strong foundation for sustainable international expansion.

Conclusion

Worldwide tax and financial strategy, as well as a global organization’s tax and regulatory risk at both the government level and the company level, depend significantly on transfer pricing when startups expand internationally. Therefore, as more governments focus on determining whether income generated by cross-border transactions is “real,” the arm’s-length standard will remain a measurement system for appropriately measuring and regulating fair transfer pricing among affiliates, as outlined in the OECD Guidelines.

Recognizing transfer prices early in an international growth strategy will benefit startups’ ability to mitigate regulatory risk; improve investor confidence; and maintain the ability to continue to grow. By having the right planning and documentation in place today, startups can create compliant global organizations and provide for continued growth without incurring disputes with tax authorities that would have been preventable through appropriate planning and documentation.

FAQ

What is transfer pricing?
It is the pricing of transactions between related companies in different countries.

Why is transfer pricing important for startups?
It ensures compliance with international tax rules and prevents double taxation.

What is the arm’s length principle?
It requires related companies to price transactions as if they were independent businesses.

When should startups implement transfer pricing policies?
As soon as they begin operating in more than one country.

Do small startups need transfer pricing documentation?
Yes, if they have cross-border transactions between related entities.

הפוסט Transfer pricing for startups: Navigating international growth הופיע לראשונה ב-ERB.

How to Get the Best Bookkeeping for Your Startup

Maya — Mon, 09 Mar 2026 20:26:57 +0000

For any startup based in the United States, establishing an accurate and timely bookkeeping system is imperative. This article details how to select between the cash and accrual accounting methods (per IRS rules), the criteria for choosing an accounting software vendor, how to staff your bookkeeping by means of in-house employees, outsourced services or a hybrid service solution, your compliance and tax recordkeeping requirements, internal controls, cost projections, as well as an actual onboarding checklist. The recommendations presented throughout this article are based on guidance provided by the SBA and IRS (and thus include links to the primary sources) as well as other authoritative data sources such as the Bureau of Labor Statistics (BLS). The examples used in this guide are based upon the typical small or medium-sized startup located inside of the U.S. regardless of which industry it might be classified and apply the best practices for each of those examples.

Choosing an Accounting Method (Cash vs. Accrual)

When a startup prepares its first tax return, it must choose an accounting method that will be used consistently going forward.

The cash method records revenue when payment is received, while the accrual method records revenue when it is earned, even if payment has not yet been collected.

The accrual method provides a clearer snapshot of a company’s profitability, while cash accounting mainly reflects real-time cash flow.

According to IRS rules, the accounting method used in bookkeeping must match the one used for tax reporting and must clearly reflect income. If a business maintains inventory (goods or raw materials), the IRS generally requires the accrual method for recording purchases and sales.

Most startups begin with cash accounting because it is simpler, unless they manage inventory or experience rapid growth.

Choosing the Right Accounting Software

After deciding on an accounting method, startups must select accounting software that fits their needs. It is important to choose a vendor with good reviews from businesses of similar size.

Simplicity is also important. Software with overly complex interfaces or enterprise-level features may require additional training and consulting costs, which can slow implementation for small teams.

Cloud-based solutions are often recommended because they can integrate with other tools such as banking systems, payment processors, payroll services, and CRM platforms. This reduces manual data entry and helps prevent errors.

Finally, look for software with flexible pricing, such as free trials or monthly plans. This allows startups to begin with a basic package and add more features as the company grows.

According to guidance from the U.S. Small Business Administration (SBA), small businesses should evaluate four key factors before purchasing accounting software:

simplicity of the user interface
vendor reliability
integration with other tools
scalability as the business grows

Hiring and Outsourcing Bookkeeping

You can staff your bookkeeping in-house or outsource it (or use a mix). Each option has pros, cons, and cost implications:

Option	Pros	Cons	Typical Cost (US)
In-house employee	Full control and immediate access	Higher fixed cost	$30K–$80K/year
Outsourced service	Scalable and flexible	Less direct control	$300–$2,000/month
Hybrid approach	Balance of control and cost	Coordination required	$10K–$40K/year

Compliance & Tax Recordkeeping Requirements

Tax Record Retention Rules
Have organized files to support every line item you report on your taxes. Follow IRS guidelines for income documents such as invoices, receipts, and bank statements, as well as any documents that support income or deductions. Records should generally be kept 3–7 years after filing, while payroll tax records must be kept at least 4 years from the tax due date or payment date.

Separating Business Finances
To simplify recordkeeping, maintain a separate bank account for your business. Deposit all business income into this account and pay business expenses from it. This practice helps keep financial records clear and reduces potential IRS questions.

Basic Bookkeeping Structure
Recordkeeping should be part of your regular bookkeeping process. Transactions (such as invoices or payments) are first recorded in a journal and then posted to a general ledger. These records are used to prepare a trial balance and financial statements.

Monthly Reconciliation
Regularly reconcile bank and credit card accounts. This helps ensure the balances in your books are accurate and allows you to quickly identify errors or discrepancies.

Cost Estimates / Ranges (Assumptions)

For a U.S.-based startup, bookkeeping costs vary depending on size and needs. Cloud accounting software typically costs $50–$100 per month, with some free trials available for very small businesses. Larger enterprise systems are much more expensive but usually unnecessary in the early stages.

An in-house bookkeeper may cost $30,000–$80,000 per year (the median salary is about $49,000 annually, including benefits).

If you outsource bookkeeping, services may cost a few hundred to a few thousand dollars per month, depending on the level of support (such as payroll or CFO advisory services). Most small startups spend roughly $5,000–$20,000 per year on outsourced bookkeeping.

If your startup has employees, payroll services may add $25–$100 per month plus per-employee fees. Additional small expenses-such as office supplies, filing fees, or software add-ons-can add a few hundred dollars per year.

Overall costs depend on transaction volume and the level of financial expertise required.

Startup Bookkeeping Onboarding Checklist

Register Your Business: Get an Employer Identification Number (EIN) from the IRS for opening a separate business bank account and credit card; keep your personal and business finances separated .
Accounting Method: Choose a method of accounting – either cash accounting or accrual accounting – and document your choice (simple start-ups almost always use cash-based accounting unless they have inventory).
Chart of Accounts: Create a chart of accounts specific to your business to document revenue, expense and asset and liability accounts.
Software Installation/Set-Up: Set up accounting software and input opening balances for capital, assets, and liabilities; configure the invoice process, expense process, and connect to various systems (bank feeds, payment processors.
Set Up Payroll: If you plan to hire employees, you will need to register for payroll tax accounts and set up payroll software to manage employee earnings, withholdings, and tax filings.
Plans and Schedules: Create a schedule to complete bookkeeping tasks in a timely manner (example: reconciliations completed monthly, books closed at least monthly or quarterly, and financial reports generated).
Policy and Controls: Identify procedures (examples: expense approval procedures, receipts) and assign responsibilities (examples: who enters transactions and who reviews statements) for bookkeeping tasks.
Initial Filing and Taxation: Record any pending tax due dates (example: estimated tax payments, sales taxes) and ensure your bookkeeping system will account for and reconcile tax payments to the proper account on your financial statements.
Documentation: Keep and file all invoices, expense receipts, and any other financial documentation; consider digitizing and backing up documents for easy access later for possible audits.

FAQ

Which accounting method should my startup use, cash or accrual?
Most startups begin with the cash method because it is simple and tracks real cash flow. Use accrual if you manage inventory or need a more complete financial view.

What business records must I keep for tax purposes?
Keep receipts, invoices, and bank statements that support income and expenses for 3–7 years. Payroll tax records should be kept for at least 4 years.

How do I choose the right accounting software?
Choose reliable software that is easy to use and integrates with banking, payments, and payroll systems.

Should I hire a bookkeeper or outsource bookkeeping?
Hiring provides control, while outsourcing is often cheaper and easier to scale.

Do I need a separate bank account for my startup?
Yes. A dedicated business account keeps finances organized and simplifies bookkeeping and taxes.

הפוסט How to Get the Best Bookkeeping for Your Startup הופיע לראשונה ב-ERB.

Startup Due Diligence Overview

Maya — Mon, 09 Mar 2026 19:15:28 +0000

The Startup Diligence Process allows an Investor to investigate all Legal, Financial, and Operational aspects of a startup to gather information on the characteristics of the startup and any potential hidden risks before providing funding (the Investor’s due diligence). Pursuing the Diligence Process is crucial for providing critical verification of facts as well as unearthing any potential hiding liabilities resulting from a startup’s past. Failure to perform sufficient diligence could have a significant negative economic, legal, or reputational impact on the Investor or Startup’s Founder.

Definition and Purpose of Due Diligence

Due diligence refers to the process in which investors conduct detailed research and investigation into a startup before making an investment, into the accuracy of any claims made by the startup to an Investor. The purpose of this due diligence research and investigation is to validate any claims as well as investigate any unknown or undisclosed liabilities. According to the SEC, Investors are said to put forth effort to perform due diligence investigations by reviewing an Investor’s financial records. Thus, the investor is reducing the likelihood of incurring potentially serious risks in the Legal, Financial, and Operational sectors.

Key Due Diligence Areas

The primary focus areas of diligence that an Investor will evaluate during due diligence are as follows:

Legal/Regulatory – Startup’s Corporate Charter, Agreements, Licenses, Permits, and existing/Open Litigation or Regulatory Issues, as well as whether the startup complies with all relevant federal and state laws (i.e. Labor Laws, Securities Laws, Intellectual Property Laws, Tax Laws, etc.).
Financial/Tax – Startup’s Financial Statements, Budgets, Cash Flow, and Tax Returns; verify completeness and correctness of all accounting records and whether there are any outstanding obligations or debts that have not been disclosed.
Corporate Governance – Cap Table, Articles of Incorporation, board of directors/shareholders, bylaws, and minutes of all board/shareholder meetings. As stated by the SBA guidelines, “investors will look at the Diligence documents as a significant factor in determining how the startup is owned and controlled;”
Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets, and Key Software; verify that all Intellectual Property is owned by the startup and free and clear from any encumbrances.
Market/Commercial – product/service, market size, competition, and customers; verify that Startup’s product/service has a valid product market/fit and demand; and
Technology/IT/Security – Technology, Code Base, IT Infrastructure, and Data Security: review Technology to determine if it can scale; and if it is compliant with all applicable Laws regarding data privacy.
Human Resources – resumes of founders/key team members, Employment Contracts for Independent Contractors, and summary of Equity Incentives; ensure that there are no employee retention issues or undisclosed disputes with respect to Independent Contractors.
ESG and Risk Management Compliance – Environmental, Social and Governance: per the new EU Guidelines, Investors must identify and analyse the human rights and environmental impact resulting from the business operations of the startup. Investors are very diligent in reviewing, assessing, and analysing ESG matters at a startup (e.g. Legal Compliance, Labor Practices, Ethical Supply Chain, Environmental Liabilities) to minimize any potential Regulatory Liability and/or Reputational Liability.

Due Diligence Process and Timeline

The standard process involves the following:

Step 1: Founders meet with potential investors to pitch their business; if potential investors are interested, they sign a non-disclosure agreement and execute a letter of intent (LOI) or term sheet to memorialize the key terms of this potential investment.
Step 2: Founders provide their investors with all the necessary, organized documentation (financial statements, corporate records, contracts, intellectual property, etc.) in a secure data room. Investors will review the documentation in detail and will often have question and answer sessions with the founders.
Step 3: After reviewing all the documentation, various experts (lawyers, accountants and technical professionals) will evaluate the information in each of the above categories and will look for any discrepancies, issues or risks. The experts will prepare a report to the Founder on their findings.
Step 4: Once the experts’ reports are delivered to all parties, the parties will work toward finalizing the terms of the investment agreement. This step is usually a negotiation between the parties, where the parties may agree to alter the price, warranties, indemnities or warranties in the investment agreement. Once the parties agree to all the terms and sign the necessary documentation, the investment will close, and the funds will be transferred.

Common Red Flags and Mitigation

During startup due diligence, investors look for warning signs that may indicate potential risks. Common red flags include undisclosed debts or pending lawsuits, errors in the capitalization table, and missing or unassigned intellectual property such as patents or software code. Financial inconsistencies can also raise concerns, especially when financial statements are unsupported by clear records or contain unusual transactions. In addition, weak cybersecurity practices, regulatory compliance issues, or environmental, social, and governance (ESG) concerns-such as environmental liabilities or labor rights violations-may signal operational or legal risks.

To reduce these risks, investors may negotiate legal protections such as representations and warranties, place funds in escrow for potential indemnity claims, adjust the valuation of the company, or require the startup to resolve certain issues before closing the deal. Thorough due diligence helps investors identify problems early and avoid unexpected liabilities.

Due Diligence Checklist

For Investors: Prepare and compile a list of documents you will want to review. You will require 3-plus years of corporate legal formation papers, capitalization table with current stockholder agreements, financial statements and tax returns for the previous three years, IP registrations and licenses including patents, major contracts, insurances and potential disputes with investors (e.g., customers, suppliers, employees) and interview with founders and key executive officers/managers.

For Founders: You should prepare your records, so they are up to date. Maintain your corporate and equity records (minutes of board meetings, capitalization table) always. Ensure your IP assignments and non-disclosure agreements are completed. Maintain accurate and timely financial statements and projections including your financial projections covering all foreseeable development. Document your market analysis, product development and any policies relating to risk management. A well-organized virtual data room will substantially assist with a quicker process.

Stage-by-Stage Due Diligence Focus

Stage	Focus Areas
Pre-Seed	Team quality and track record; market research and product validation. Basic legal setup (incorporation, founder splits) and initial funding plan.
Seed	Early customer traction and product-market fit; basic revenue model. Corporate documents (cap table, contracts) and initial financials; early IP/tech proof-of-concept.
Series A	Scalable business model and growth metrics; detailed financial forecasts and budgets. Mature governance (board, preferred terms) and full IP portfolio; market expansion strategy.
Late Stage	Proven scalability and profitability; complex legal/compliance issues (e.g. international regulations). Formal risk-management and ESG programs; advanced governance and HR (executive team, stock option pools).

FAQ

What is startup due diligence? It’s a systematic vetting by investors of a startup’s business, finances and legal status before funding. It verifies key information and uncovers risks.

Why is due diligence important? It ensures an informed investment decision and avoids surprises. Without thorough diligence, hidden problems (debts, legal claims or ESG issues) can cause serious financial or reputational harm.

What documents should a startup prepare? Organize company formation papers, cap table and bylaws, financial statements/tax returns, IP filings, contracts (customer, supplier, employee) and any regulatory filings. Having clear, up-to-date records makes due diligence much faster.

What are common red flags? Watch for inconsistent or missing financial records, unresolved lawsuits or debts, unclear IP ownership, and lack of customer traction. Environmental or social compliance issues (e.g. Labor or environmental violations) are also warning signs.

הפוסט Startup Due Diligence Overview הופיע לראשונה ב-ERB.

Tax Credits for startups – All you need to know

Maya — Sat, 28 Feb 2026 12:28:35 +0000

Early-stage companies in the United States often operate at a loss while investing heavily in research, product development, and growth. Fortunately, the U.S. tax system provides several powerful incentives designed specifically to support innovation and startup activity.

The most significant tax benefits available to startups include:

The Federal Research & Development (R&D) Tax Credit (IRC §41)
The Payroll Tax Offset Election for qualified small businesses
Qualified Small Business Stock (QSBS) Exclusion (IRC §1202)
General Business Credit carry forwards
State-level R&D tax credits

When structured properly, these incentives can meaningfully improve cash flow, reduce tax liability, and enhance investor returns.

1.The Federal R&D Tax Credit (IRC §41)

The Federal Research & Development Tax Credit is one of the most valuable incentives available to technology-driven businesses.

What Qualifies as R&D?

Under Internal Revenue Code §41, qualified research activities must generally:

Be technological in nature
Aim to develop or improve a product, process, software, technique, or formula
Involve a process of experimentation
Address technical uncertainty

Common qualifying expenses include:

Employee wages for engineers and developers
Contractor research costs
Supplies used in development
Certain cloud computing costs tied to development

Importantly, startups do not need to be profitable to generate the credit.

2.How the R&D Credit Is Calculated

There are two primary calculation methods:

Alternative Simplified Credit (ASC)

This is the most used method.

14% of qualified research expenses (QREs) that exceed 50% of the average QREs from the prior three years
If there were no QREs in the prior three years, the credit equals 6% of current-year QREs

Example:

If a startup incurs $1,000,000 in qualified research expenses and qualifies under the ASC method, the credit could be approximately $60,000–$140,000 depending on prior activity.

The credit is claimed using IRS Form 6765 and flows through to the company’s tax return as part of the General Business Credit.

3.Payroll Tax Offset for Startups

Many early-stage companies do not owe federal income tax. To ensure the R&D credit still provides value, Congress created the Payroll Tax Offset Election.

Who Qualifies?

A company may qualify if:

Gross receipts are under $5 million in the current tax year
The company has not had gross receipts for more than five years

What Is the Benefit?

Eligible startups may apply up to:

$500,000 per year

of R&D credit against employer payroll taxes (Social Security and certain Medicare taxes).

This election provides immediate cash-flow relief, even if the company is operating at a loss.

For early-stage technology companies, this can be one of the most impactful federal incentives available.

4.Qualified Small Business Stock (QSBS) – IRC 1202

For founders and investors, QSBS may be even more powerful than the R&D credit.

What Is QSBS?

Under IRC §1202, investors may exclude up to:

100% of capital gains

on the sale of qualified small business stock held for more than five years (subject to limitations).

Key Requirements:

The company must be a C corporation
Gross assets must not exceed $50 million at issuance
The stock must be acquired directly from the company
The business must be an active operating company (not an investment vehicle)

Why It Matters

QSBS can result in millions of dollars of tax-free gains for founders and early investors if structured properly from the beginning.

This is often a critical consideration when forming the corporate structure.

5.General Business Credit Carry forwards

The R&D credit is part of the General Business Credit framework.

If a company cannot fully utilize the credit in the current year:

Credits may generally be carried back one year
Credits may generally be carried forward up to 20 years

This ensures that unused credits are not lost, even if profitability occurs years later.

6.State-Level R&D Credits

In addition to the federal credit, many states offer their own R&D incentives, including:

California
New York
Texas
Massachusetts
Georgia

State credits vary widely in structure and refundability.

Some states offer refundable credits or transferable credits, which may provide additional cash benefits even in loss years.

Startups operating in multiple states should evaluate nexus and apportionment carefully to maximize state-level benefits.

7.Common Mistakes Startups Make

Assuming They Don’t Qualify

Many software, AI, fintech, and SaaS startups assume they do not qualify because they are not performing laboratory research. Most software development involving technical uncertainty may qualify

Poor Documentation

The IRS requires:

Project-level descriptions
Identification of technical uncertainty
Time tracking or wage allocation support
Clear expense categorization

Insufficient documentation is one of the most common reasons credits are challenged

Waiting Too Long

R&D credits must be claimed with timely filed returns. Amended return rules have become more technical, and proper filing is critical

Ignoring Corporate Structure Impact

Entity structure affects:

Eligibility for QSBS
Ability to claim R&D credits
Treatment of investor equity
Exit tax consequences

Choosing an LLC vs. C corporation has long-term implications.

8.Strategic Planning for Founders

To maximize startup tax benefits:

Evaluate R&D credit eligibility annually
Consider QSBS implications before issuing shares
Maintain detailed development documentation
Review state-level credit opportunities
Plan equity structure with exit strategy in mind

Tax planning should be integrated into fundraising, compensation structuring, and expansion decisions – not treated as an afterthought.

FAQ

1.Can a startup claim the R&D credit if it is not profitable?

Yes. Eligible startups may apply up to $500,000 of R&D credit against payroll taxes even if they have no income tax liability

2.Is the R&D tax credit refundable?

At the federal level, it is generally non-refundable. However, the payroll tax election allows qualified startups to convert it into immediate payroll tax savings.

3.How long can unused R&D credits be carried forward?

Generally, up to 20 years, subject to limitations

4.What is the biggest tax opportunity for startup founders?

For many founders and investors, properly structured Qualified Small Business Stock (QSBS) can provide substantial capital gains exclusion after a five-year holding period

5.Do software companies qualify for R&D credits?

Often yes, if the development involves technical uncertainty and a process of experimentation.

הפוסט Tax Credits for startups – All you need to know הופיע לראשונה ב-ERB.

How to Incorporate a Startup

Maya — Thu, 26 Feb 2026 21:18:20 +0000

Setting up a corporation is not merely some formality of creating some paper documents; rather, it forms part of the legal system required to define ownership interests, liabilities, taxation structures, what types of investments are allowed, and how businesses maintain good standing on a state-by-state and regulatory basis. Most founders of U.S. companies choose to incorporate their businesses as either a “C” corporation, an “S” corporation (the type of federal tax election available to certain corporations that qualify), or a “Limited Liability Company” (LLC). The U.S. Small Business Administration (SBA) stresses that these decisions will impact liability issues; taxation; documentation/filing procedures; and that certain laws may differ based upon the state where the business is registered.

Many venture-capital-backed startups are structured as Delaware C Corporations due to investor expectations and the widespread use of standardized investment documentation.

Choose the Incorporation Jurisdiction

Founders must decide whether to incorporate in Delaware or in their “home state” (where they reside or primarily operate). If a company incorporates in one state but conducts business in others, it may need to qualify to do business in those additional states.

Many founders choose Delaware. Delaware is widely recognized for its sophisticated and frequently updated corporate law, its specialized Court of Chancery focused on business disputes, and the predictability of its legal framework due to well-developed case law.

However, incorporating in Delaware does not eliminate obligations in other states where the business operates. The SBA notes that companies operating in multiple states typically must pay additional fees and taxes in those states, in addition to maintaining their Delaware registration.

Incorporating in the home state may reduce complexity, including fewer registered agents, fewer filings, and avoiding the “two-state” issue of incorporating in Delaware while qualifying elsewhere.

Steps to Form the Entity:

Select the entity type and state of incorporation.
The decision often depends on fundraising plans and tax considerations. The SBA cautions that tax structures vary by entity type and state.
Appoint a registered agent.
Required in the state of formation. The registered agent receives official government documents and must have a physical address in that state.
File formation documents with the state.
- Corporation: File a charter (in Delaware, the Certificate of Incorporation).
- LLC: File required formation documents and prepare an operating agreement (strongly recommended).
Adopt internal governance documents.
- Corporation: Adopt bylaws, appoint directors and officers.
- LLC: Prepare an operating agreement.
Establish founder ownership properly.
Ensure accurate capitalization records. Required organizational documents typically include appointment of directors/officers, adoption of bylaws, stock issuance, and intellectual property (IP) assignments.
Apply for an EIN.
The IRS recommends obtaining an EIN after forming the entity. EINs can generally be issued within minutes at no cost.
Foreign qualification (if required).
If operating in multiple states, the SBA states that companies must register in those states. This typically requires a Certificate of Authority and may require a Certificate of Good Standing from the formation state.

Tax and compliance basics

Obtaining a “federal tax id” or an “Ein” must be kept in mind when dealing with payroll and/or employment taxes (hiring employees). Employers will generally file and report federal income tax and Social Security and Medicare taxes using Form 941. New employers will want to make sure that they collect Form W4 from their employees and refer to employer publications for instructions on how to deposit and report employment taxes.

In regard to the state of employment, many states have varying requirements. Delaware serves as an excellent resource for this, as they have published clear requirements for the types of businesses that they own, including filing annual reports and paying franchise taxes. For example, corporations formed in Delaware have an obligation to file an annual report and pay franchise tax (with strict deadlines for each type); limited liability companies, limited partnerships, and general partnerships (created in Delaware) only have to pay a flat rate of $300.00 per year, and they do not have to file any annual reports.

The federal government has made several revisions to the reporting requirements under the FinCEN, as it was recently established that any entity formed in the United States after March 2025 would no longer be subject to report as a beneficial owner to the FinCEN (with certain conditions for U.S. persons) while obligations to foreign entities may still remain; However, the time frame to file continues to be uncertain. funding and equity basics stock classes and investor readiness. A venture financing often introduces a new equity class (commonly “preferred stock”).

securities compliance and Form D (when you raise). if you sell securities relying on Regulation D exemptions, the sec states you must file Form D within 15 calendar days after the first sale (defined as when the first investor is irrevocably contractually committed), the sec charges no filing fee, and paper filings are not accepted. the sec also notes that-even where federal law pre-empts state registration under certain rule 506 pathways-states can still require notice filings and collect fees.

Timelines and typical costs

costs and timing depend on state, complexity, and whether you pay for professional help. sab notes that state registration fees vary by state and structure and are often under $300, but founders should verify with the relevant state offices.

Delaware example (state fees that founders commonly benchmark):

formation filing fees (Delaware): domestic corporation “incorporation” filing is listed as $109 (noted as varying based on stock); domestic llc formation is $110.
expedite options (Delaware): Delaware offers next-day, same-day, 2-hour, and 1-hour expedited services with published add-on fees (e.g., 2-hour $500; 1-hour $1,000), plus schedule-specific next-day/same-day ranges.
annual obligations (Delaware): corporations: annual report fee $50 plus franchise tax (minimums published), due March 1, with a $200 late penalty and 1.5% monthly interest on unpaid balances.
LLCs/lps/gps: $300 annual tax due June 1, no annual report; penalties also apply for nonpayment.
Ein timing: Irs says Eins can be issued immediately online if approved.

FAQ

When is s corporation status a bad fit for startups?
if you need multiple stock classes or non‑U.S. investors: Irs rules require only one class of stock and no non-resident alien shareholders, and s corps have shareholder limits.

If I raise money on a Regulation D exemption, what filing should I expect?
the sec states Form D is generally due within 15 days after first sale; it must be filed electronically and has no sec filing fee.

How Can ERB Assist With U.S. Company Formation and Compliance?

Forming a U.S. entity involves more than filing documents. ERB assists founders with selecting the appropriate entity structure, coordinating state filings, obtaining an EIN, ensuring proper corporate governance documentation, and addressing ongoing compliance requirements. For startups planning to raise capital, ERB also helps structure companies in a way that aligns with investor expectations and long-term growth strategies.

הפוסט How to Incorporate a Startup הופיע לראשונה ב-ERB.

How Startups Can Avoid 409A Pitfalls and Penalties

Maya — Thu, 26 Feb 2026 21:09:54 +0000

IRC 409A establishes a tax system through which “equity compensation” and other forms of deferral can potentially create significant issues. Specifically, if a plan does not comply with Section 409A’s requirements (e.g., it is administered mistakenly), the affected service providers may be subject to immediate taxation upon inclusion, plus an additional 20% tax and a premium that will be calculated based on the interest rate.

The most significant areas of “risk” associated with the 409A compliance regime for start-up companies are equity awards (stock options/SARs and related timing/term changes (e.g., extensions, repricing’s, dividend-equivalent features)) in conjunction with a lack of adherence to fair market value and valuation standards (i.e. compliant valuation). A practical compliance check-list when addressing the 409A risk is to: (i) always set the exercise price of any option/SAR at or above the fair market value of the underlying stock on the date of grant; (ii) always use a safe-harbor valuation method and perform at least an annual update, or after a material event; (iii) always maintain rigorous corporate governance practices and timely documentation; and (iv) promptly utilize correction procedures as set forth in the IRS guidance when something goes awry (i.e., detrimental events occur with respect to service providers).

What Creates 409A Exposure in Early-Stage Companies

IRC 409A governs “nonqualified deferred compensation plans” which are any type of arrangement (unless excluded) that provides for compensation to be paid in a subsequent year.

There are two patterns found in start-ups that result in 409A compliance issues:

Formerly, the definition of and rules governing “discounted” equity interests is clearly set out in Treasury Regulations. In this regard, a no statutory stock option is this defined and treated as deferred compensation unless it satisfies four specific tests including the requirement that “[t]he exercise price may not [emphasis added] be less than the fair market value” as of the grant date and total option shares are determinable on the grant date.

The same rules apply with respect to stock appreciation rights (SARs).

Second, “ordinary” (wages or salary) earned within a certain time frame can inadvertently be transformed into deferred compensation due to Section 409A’s short-term deferral exclusion. There are provisions within Section 409A that establish how deferred compensation bonuses are treated. The regulations provide that bonuses paid after a 2½ month period are considered deferred. When a bonus is deferred in this manner, Section 409A regulations would apply. Also, a bonus that is paid earlier than the 2½ month period is an impermissible acceleration.

The 409A Penalty Landscape

If a nonqualified deferred compensation plan does not comply with Section 409A or was not operated in accordance with the rules, all deferred compensation earned in the year and in prior years would be included in gross income to the extent there is no substantial risk of forfeiture and have not been included in income within the Code.

If there is a trigger for inclusion, the Code also imposes an additional penalty of interest on the amount included in income (at the underpayment rate plus 1%) as well as an additional 20% penalty on the amount included in gross income.

From a reportability/payroll perspective, the IRS audit technique guide provides that amounts that should be included in income due to violations of Section 409A must be reported separately on Forms W-2 (Box 12, Code “Z”) and 1099 (if applicable), and are subject to the additional 20% penalty and imputed interest a type of “premium interest tax” whenever it exists.

Valuation Discipline: Safe Harbors and Refresh Triggers

For private companies, the principal question will be common stock’s FMV on the date granted. The Treasury regulations provide that when stock is not readily tradable, the FMV shall be determined based on the reasonable use of a reasonable valuation method that takes into account such things as: tangible and/or intangible assets; discounted cash flows; comparable companies; an arm’s-length transaction, marketability discounts; whether the valuation was used elsewhere and with a material economic impact.

According to the same rules, an adjustment for a previous valuation is not reasonable if it overlooks new material information (e.g. resolution of a major lawsuit, patent issuance) or the valuation date is more than 12 months prior to the date of use.

A “presumption of reasonableness” is established by the regulations (a powerful safe harbor for taxpayers): it can be rebutted only by the IRS showing that the method or its application was grossly unreasonable.

Specific safe-harbor paths include:

Independent appraisal of the subject property within 12 months before the relevant transaction (e.g., option grant) and
a formula-based valuation that meets certain parameters.
A written valuation of the illiquid common shares of a startup corporation, prepared by a person that the taxpayer reasonably considers qualified (with “significant experience” generally being defined as having at least five years of experience in valuation/appraisal, finance, investment banking, etc.). This startup method is not available for a valuation if a change of control is expected to occur within the 90 days or an IPO is expected to occur within 180 days after the valuation is utilized.

Common 409A Pitfalls in Equity Compensation (and How to Mitigate Them)

The “classic” pitfall is to grant options/SARs with a strike price below the FMV. The regulations will treat such a discount stock right as deferred payment; therefore, they will not constitute short-term deferrals even What is involved in fixing process errors? Use of the IRS Safe Harbor rules will assist to ensure that the exercise date of an award is well documented and has Board approval. Once this is done, it is essential to provide clarity regarding the Fair Market Value (FMV) determination regarding the FMV of the Company as well as ensuring that there is a Grant Calendar established and used by the Company.

Inappropriately using an “innovative payment” or “payment feature” in relation to an option can lead to a mistake if that option is granted with an incorrect strike price and/or an incorrect dividend equivalent.

The IRS will consider the total value of the strike price and the fair market value of shares at the time of the extension/making modification to the option in determining if a new stock option has been created.

Tips: If you plan to reprice or extend an option prior to granting it, you should conduct a tax review prior to moving forward.

If you have a tax issue with respect to your stock options, there are several ways to achieve compliance; however, you will need to act quickly to document the issue and correct the issue as soon as possible.

Correcting 409A Failures: IRS Relief Programs

The IRS has issued Notice 2010-2006 outlining formalized correction procedures for certain taxpayers who have failed to properly correct an operational failure under IRC 409A. Notice 2010-2006 states that taxpayers may voluntarily correct third-party documentation errors to mitigate the taxpayer’s income recognition and/or additional tax based upon failure to provide third-party documentation for tax years 2010 and 2011.

Notice 2008-2013 provides for methods of correcting operational failures and methods for making a retroactive operations correction, as well as providing a limited number of (relatively low) cost methods of correcting operational failures to mitigate the attributing taxable income for the next tax year.

Although there are multiple methods provided by the IRS for correcting operational failures under IRC 409A, the most important takeaway for startups is to identify operational failures before they occur, preserve the documentary record and promptly correct all operational failures.

FAQ

How does the 409A independent tax penalty affect me?
In essence, 409A imposes a tax liability on employees for any unrecognized amount at the time an employee exercises their NSO if they have previously received an award involving a 409A operational failure; additionally, 409A imposes a second tax penalty of 20% plus 39% (interest plus additional underpayment tax) on the employee’s tax liability at the time the employee has to pay taxes.

Do all stock options qualify for IRC 409A?
Stock options that qualify as a No statutory Stock Option (NSO) are not deferred compensation if the strike price is greater than or equal to the fair market value of the underlying stock at the time the award is granted along with any other 409A requirements.

How often do I need to re-value my company’s 409A valuation will be needed?
The IRS states that an asset will be considered excessively valued if it has existed for more than 12 months and/or if there have been any material events that will impact the value of the asset, therefore a valuation should be updated at least once per year and also at any time there has been an event that would materially impact the value of the asset.

Is there any safe harbor from liability for purposes of 409A valuations?
The IRS has established safe harbors for purposes of presuming value for assets under IRC 409A. Examples of these safe harbors include a properly prepared and obtained independent appraisal, performed within 12 months of the date of valuation.

הפוסט How Startups Can Avoid 409A Pitfalls and Penalties הופיע לראשונה ב-ERB.

How to prepare for seed funding due diligence

Maya — Thu, 26 Feb 2026 21:05:55 +0000

Having a successful seed funding round is a huge accomplishment for any startup; However, before an investor can formally agree to provide funding to a new company, that company must pass through the due diligence stage, which is an extensive review by prospective investors of all pertinent items regarding your business prior to committing any money. Due diligence allows the investor to verify that all the information that you have provided them is correct and provides the investor with an assessment of potential risks associated with your company. Therefore, the due diligence process provides the investor with the opportunity to gain a detailed perspective of how your company operates and to reinforce your credibility or identify any issues. If you are properly prepared for due diligence, you will not only expedite the funding process, but you also build the investor’s trust. Therefore, if you produce unexpected information or inconsistencies during this process, it could jeopardize the deal.

Key Areas To Prepare For Due Diligence

During the due diligence process, investors typically review a startup’s core attributes, such as:

Corporate documents: Have all the documents that represent the formation and governance of your company available (e.g. incorporation documents, bylaws, stock ownership records). The investor will review these documents to determine the legal formation and ownership of the company. If your records do not have information that corresponds with the way you have presented your company (e.g. unclear equity splits, lack of formal approvals), this may raise a warning sign for the investor.

Financial records: Be prepared to provide financial statements and forecastsq for the investor to examine. The investor will carefully review your revenue, expenses, cash flow, and financial projections and ensure that the information matches. Expect questions and delays if the financial figures you present to the investor at the meeting differ from the books.

Legal & Ip: Make sure that your major contracts, regulatory documents, and intellectual property (ip) rights are all in order. The investor will ensure that you own the key assets of your business, such as your technology and your trademarks, and will ensure that you do not have any hidden liabilities and/or lawsuits.

Founders and key team members: Be prepared to provide the investors with the backgrounds of the founders and key team members. An important part of the investors’ review will include assessing the management team’s experience and integrity. A strong, transparent management team will give the investors confidence that the company will be able to successfully carry out their plans.

Market and product traction: Provide evidence of your market opportunity and product traction to date. Investors will want to see how big your market is, your competitive advantage, and how fast your customers or users are growing before determining your potential as a company. Evidence of real interest in your product, such as pilot users, early revenue, or partnerships, will strengthen your argument.

Tips For A Smooth Due Diligence Process

Follow these steps to complete due diligence quickly and efficiently:

Start early: Don’t wait for the investor to request it – get started preparing documentation well in advance of response requests from the investor. The companies most successful in treating due diligence preparation as a continuous process will begin working on it long before the requested date and therefore will not experience distress created by scrambling at the last minute.

Stay organized: Create a secure shared folder or “data room” and keep your due diligence files organized logically, not just in chronological order. Therefore, once your financial, legal, and equity records are complete and up to date, the due diligence process will consist of verifying the information rather than looking for the information.

Conduct a mock audit regularly: Conduct a mock due diligence review regularly to assess the efficiency of your own due diligence preparation process. An investor checklist helps you identify documents that might be missing or don’t have enough information before they are flagged by the investor during the audit process.

Be transparent with investors: Openly communicate issues/risk with investors (e.g. if you know that you have issues with sales or distribution). Having a plan on how to resolve outstanding issues shows integrity. Investors will value honesty – not being forthright about an issue found in the due diligence process will erode trust and credibility. Be sure that you align your messaging (in your presentation, conversation with potential investors, etc.) with what is on your documentation, as a significant / major variance could be interpreted as a red flag.

FAQ

when does due diligence take place in a seed finance round?
Due diligence will occur following the investor expressing their serious interest (often once they issue an offer/term sheet) but prior to finalizing the funding. In other words, due diligence is one of the last steps(s) in the process before closing the investment.

what type of information will be requested from investors during the due diligence process?
A range of documents will typically be requested during due diligence: articles of incorporation, cap table/stockholder record, historical/current financial statements and projections, major contracts, intellectual property documentation, and details about the founders/management team. In essence, anything that can help validate your company’s representations and obligations can be requested.

how long will due diligence take for seed investments?
There is no set answer. A simple seed due diligence review can take several weeks to complete, and a more comprehensive review can take multiple months. The time it takes to finish the review is largely dependent upon the investor’s thoroughness and the speed with which all information is provided.

will the founders be evaluated as part of the due diligence process?
yes. Investors will assess the ability and integrity of the founders as a part of their assessment. They may want to know more about the founding team and may also conduct reference checks, because the quality and integrity of the team is vital to the ultimate success of a start-up.

הפוסט How to prepare for seed funding due diligence הופיע לראשונה ב-ERB.