Yes, even bootstrapped pre-revenue startups must pay taxes. You might not be subject to Income Taxes (which are based on profitability) but you will still be subject to a wide variety of other taxes which aren’t always connected to Revenue.
Bootstrapped vs Funded
Understanding the types of startups and their tax obligations is the first step in navigating the complex landscape of startup taxes. One fundamental distinction exists between bootstrapped and funded startups. Here’s what you need to know.
What Are Bootstrapped Startups?
Bootstrapped startups are businesses that are launched and grown without the raising of external capital. In other words, these startups rely primarily on the founder’s own savings or revenue generated by the business to fund operations and growth. There’s no venture capital or angel investment at play. Instead, bootstrapped startups often take a slow and steady approach to scaling, reinvesting profits back into the business. My CPA firm is a bootstrapped company, although I’m not sure we count as a real “startup” seeing as how we are 10 years old and have been on the Inc 5000 fastest growing private companies for six years straight.
Funded Startups: A Brief Overview
Funded startups, on the other hand, secure external funding through venture capital, angel investors, or other financial instruments to accelerate growth. This funding often comes in stages, known as funding rounds, and is intended to help the startup scale rapidly. In exchange, investors usually receive equity, convertible notes, or other financial incentives. These days, it usually starts with pre-seed funding.
Both of these types of early-stage companies have tax obligations. This means that they have tax filings that they need to make, even if they are not profitable.
Location-Based Tax Calendars: More Than Just Dates
The tax calendars we list below for metro areas like New York, Palo Alto, Santa Monica, and San Francisco offer valuable guidelines for managing your startup’s tax obligations. However, remember that tax regulations can differ significantly from one jurisdiction to another. For example:
San Francisco imposes a Gross Receipts Tax on your total revenue.
New York startups have to deal with keeping current on NYC business registrations.
Always consult with local tax experts to understand any unique obligations.
Here are 4 Startup Tax Calendars, based on metro, that will be helpful to both bootstrapped and funded startup founders:
- New York Startup Tax Calendar
- Palo Alto Startup Tax Calendar
- Santa Monica Startup Tax Calendar
- San Francisco Startup Tax Calendar
Quick caveat though, these startup tax checklists aren’t complete. There are actually a bunch of taxes out there, some of which may or may not apply to you (depending on your unique circumstances, of course). Here’s a list of just some of the different types of taxes out there that you may need to consider:
We also have a tax calendar for DE C-Corporations, which most funded startups are. However, we don’t have one for LLCs, which is the organization type that many bootstrapped companies take, since it can be helpful for the owners tax purposes to be an LLC instead of a C Corporation
Taxes Boostrapped Companies Have to Pay
Income Tax: this type of tax is what most people think of when they hear taxes. It’s taxes based on your Net Income, or profit. You have to file these taxes for both federal and state, even if your bootstrapped startup is not profitable. And we strongly recommend you use a startup accounting software so that it’s easy to calculate your income tax at the end of the year.
Gross Receipts Tax: some cities, like San Francisco, will tax your Gross Revenue.
Franchise Tax: this type of tax is imposed on businesses who just…exist. Yes, for the pleasure of existing, you will be asked to pay a tax. There’s often a minimum fee, and most times it has nothing to do with whether you’ve generated income. The most common type of Franchise Tax for venture backed startups is DE Franchise Tax, which runs $400+ every year.
Payroll Tax: if you have employees, you have payroll tax. Be sure to use a payroll provider like Gusto to help you pay the right taxes at the right time, and file all the requisite forms (like the 941s). Always run all salaries through a payroll provider, since they take care of the payroll taxes.
Sales Tax: if you tangible goods (eg clothes, furniture, widgets, stuff you can hold in your hand), you’ll need to register, pay, and file sales tax. Use Avalara, because like payroll tax, it can get super crazy very quickly.
SaaS Tax: see more here.
Property Tax: if you have significant property holdings, whether that be land, or even just computers/tables/chairs, you might be subject to property taxes. This type of filing is frequently known as a “571-L.”
Foreign Tax: if you have a foreign subsidiary or parent company, you might be subject to withholding tax, or FBAR/5471/5472 reporting. Be sure to get this one right; the penalties for getting it wrong can be $10K+.
A very common misconception is that the CPA or firm that filed your annual tax return (the 1120) will have taken care of all these types of taxes: that is never the case!! It is always the CEO’s responsibility to make sure that these taxes are addressed and paid on time. Granted, a CEO can only know so much… and the CPA can only guess as to which types of taxes a company might be subject to. Hence, it’s really important to sit down with a CPA to make sure that all bases are covered based on your company’s unique situation.
Kruze Consulting handles all things Accounting, Tax, Finance, & HR: interim CFO Consulting, financial modeling, annual taxes, R&D tax credit studies, venture debt consulting, 409A reporting, bookkeeping, AR/AP, and Seed/Series A/B Fundraising Preparation - only for funded startups. Find out why Kruze Consulting has so many successful startups as clients. Contact Kruze today!