A U.S. startup should build accounting in a clear sequence: choose the legal entity and tax classification, obtain an EIN, open a dedicated bank account, decide on cash or accrual bookkeeping, configure a chart of accounts and software, and then set payroll, sales-tax, and reporting controls before the first filings arrive. The primary federal guidance comes from the Internal Revenue Service, the U.S. Small Business Administration, and the U.S. Securities and Exchange Commission; state rules then layer on separate payroll, sales-tax, and business-registration requirements.

Core Setup

The first accounting decision is choosing an entity because your entity affects your taxes and the forms you will file with the government. According to SBA resources, your structure will affect your taxes and liability. The IRS also states that the type of business determines what type of tax return will be filed on a business. In the case of LLCs specifically, the IRS has ruled that a single-member LLC is treated for tax purposes as if it has elected not to be taxed but as a corporate entity, unless the entity elects to be taxed as a corporation. When there are two or more members, a multi-member LLC is a partnership, unless it elects to be taxed as a corporation.

After registering your business, you should obtain your EIN as soon as possible. According to the SBA, you need an EIN to pay federal taxes, hire employees, open a bank account, and apply for licenses. The IRS states that all businesses formed must be registered with their state before applying for an EIN, and once registered, the EIN can be used immediately when applying for a bank account or licenses.

The next step is to set up an accounting system to demonstrate clearly the income and expenses of your business. The IRS has ruled that as long as the system used can be shown to accurately report the income and expenses of the business, any type of recordkeeping is permissible as long as there is a summary of all transactions recorded in journals and ledgers and the business checking account is the primary source for transactions for most small businesses. This means the business should be established with a chart of accounts that follows the structure of the financial statements used by the business (ex. assets, liabilities, equity, revenue, cost of sales, employee payments, taxes and operating expenditures). The SBA recommends that someone within the organization have oversight for the management of receivables, payables, cash, bank reconciliation and payroll.

When recording cash, there are straightforward records reflecting cash activity: cash records establish income at the time it is earned and expenses at the time they are incurred, respectively. The IRS has stated, “generally speaking,” a business must maintain inventory for businesses that produce, purchase or sell goods, and the method of recording sales/purchases should follow the accrual accounting method, but there are some situations where exceptions to this general rule apply to businesses.

Tax and Workforce Compliance

Before you can run your first payroll, you must set up payroll. SBA outlines payroll setup with simple steps: acquire your EIN, qualify for any state or local tax ID, determine if your workers are either employees or contractors, collect Form W-4 from all employees, select a payroll provider, and remit payroll taxes to any applicable federal or state tax agencies on a quarterly or annual basis.

One of the most important pieces of information in managing payroll is the classification of your workers as either employees or independent contractors because there are significant differences between how employers withhold, remit, and report payroll taxes for each type of worker. For all workers classified as employees, the employer must withhold and remit federal employment taxes (income tax and both share of FICA) for his/her employee; the employer must also pay the employer’s share of the FICA tax and unemployment tax; finally, the employer must issue W-2 to the employee at the end of the year. In the case of independent contractors, either will report the income received via 1099-NEC at tax time, but just possessing the contractor’s 1099-NEC does not automatically create the contractor’s independent contractor status with you. Classification depends upon the totality of the relationships between the workers and the employer as well as on the level of control, independence, and the entire working relationship.

Sales taxes are typically assessed based on the seller’s place of business, and while the IRS does not consider sales taxes collected from purchasers and remitted to state or local taxing authorities as income; as indicated in SBA’s guide, each state may have a different procedure to approve the sales tax rate, and there are different criteria for registering to collect sales tax; if you conduct sales in more than one state or if you have multiple business locations, you must verify the applicable rules and requirements with the revenue departments of any and all states in which you are conducting business. At the state level, please note that withholding taxes, unemployment insurance, sales taxes, and filing of annual business filings are all managed by the state; therefore, it is critical for you to keep track of each state’s requirements with regards to compliance.

Capitalization, Reporting, and Controls

A startup should quickly put into place a capitalization policy, as not all purchases made by a startup will require an expense to be incurred immediately. The Internal Revenue Service states that costs incurred before a business begins operations generally will qualify as capital expenses and further provides that businesses may take a maximum deduction for business organization and start-up expenses of $5,000 and may recover the balance of those expenses over a period of 180 months once the business has started operating. From a tax perspective, the IRS provides a de minimis safe harbor for some tangible items for up to $5,000 per invoice or item when the business has prepared an applicable financial statement and up to $2,500 per invoice or item for items for which the business does not have an applicable financial statement as long as the business meets the criteria for making the election. The capitalization policy must clearly detail which items will be expensed, which will be capitalized, and which items will be included in the company’s books and records for amortization or depreciation.

Preparation of the company’s financial statements is not limited to tax compliance reporting. According to the Securities and Exchange Commission (SEC), the financial statements that are to be included in the Financial Statements of a company are the balance sheet, the income statement, the statement of cash flows, and the statement of shareholders’ equity. The Securities and Business Administration (SBA) reports that the balance sheet provides the structure from which the company will track the company’s capital, assets, liabilities, and equity, as well as states that publicly held companies are not required to follow Generally Accepted Accounting Principles (GAAP). However, companies that anticipate obtaining funding from outside sources or are subject to an audit or other outsider scrutiny will find it advantageous to prepare accounting records that will allow them to prepare their monthly, accrual-based, GAAP-compliant financial statements.

As a minimum requirement, companies should implement internal control policies and procedures that require appropriate authorization for all transactions, including but not limited to approval limits, restricted access to bank accounts and payroll systems, documented journal entries, and independent review of reconciliations, as the SEC defines an internal control system to mean a formal set of procedures to protect the company’s assets and to ensure that every transaction is accurately approved and recorded.

Lastly, record retention should follow IRS retention policy, which consists of a three-year retention period for most tax-related records, four years for employee-related records, and longer than three or four years regarding bad debt or worthless securities claims. According to the SBA, founders may use their CPA or bookkeeper, or an online bookkeeping service, to assist with the establishment of a capitalization policy. Another practical benchmark for establishing a controller position is $10 million to $20 million in revenue; however, in cases where the company has significant quantities of inventory, operates in multiple states, has significant debt, or has significant investor reporting obligations, the company will benefit from having a controller position in place prior to reaching such revenue levels.

Software Comparison

FAQ

Should a startup default to cash accounting?

Cash is simpler, but accrual is often the better foundation if you sell merchandise or need more standardized financial reporting.

Do founders really need a separate business bank account?

Yes. SBA says separate accounts keep personal and business funds distinct, and the IRS says the business checking account is usually the primary source for book entries.

Can a startup put a worker on a 1099 just because that is easier?

No. The IRS says worker status depends on the facts of control and independence, not on whether you issue a 1099-NEC or W-2.

How long should records be kept?

Generally, three years for most tax records, but employment tax records should be kept at least four years, and some situations require longer retention.

Why ERB Proximo Fits?

ERB Proximo is a suitable publisher for this topic because founders need one practical guide that connects startup formation, tax registration, payroll, bookkeeping, and reporting controls into a single operating framework. This subject is most useful when presented as implementation guidance rather than abstract theory, which makes it a strong fit for a U.S. business-services audience.