When you’re building a startup, the last thing you want is to be derailed by accounting mistakes or missed filings. A recent panel featuring three accountants with extensive experience with startups – Angelina Lam, CPA at Carta, and Bill Hollowsky and Dave Lowe from Kruze Consulting – unpacked the most common tax and compliance pitfalls that early-stage founders face and shared actionable advice to prevent them. Here’s what every founder should take away.
Start Strong with Financial Hygiene
According to Bill Hollowsky, good accounting begins with good habits. Founders should establish strong compliance processes from day one, properly registering their businesses, opening separate bank accounts, reconciling books each month, and staying current with filings. “There’s nothing worse,” Bill said, “than scrambling to clean up your books during a fundraising round or due diligence review.”
Investors often request detailed financial documentation during due diligence, so financial hygiene from day one makes that process faster and easier.
Dave Lowe added that compliance isn’t just an IRS concern; investors are watching, too. Clean, organized financials increase credibility and streamline due diligence. “Compliance makes you look great for both the IRS and your VCs,” he noted.
Avoid the Most Common Mistakes
The panelists agreed that startups often trip up by mixing personal and business expenses. This blurs the line between founder income and company assets, creating accounting confusion and potential tax issues. Another frequent error? Recording investor funding (like SAFEs) as revenue. “Investment capital belongs on the balance sheet, not the income statement,” Dave reminded. Such mistakes often surface during investor due diligence, potentially delaying or jeopardizing funding rounds.
Their advice: use dedicated startup accounting software from the start. QuickBooks Online was the favorite choice for early-stage companies, while NetSuite comes into play as the business scales. Keep things simple and consistent.
Build a Scalable Compliance Stack
Founders should think strategically about their financial tech stack – accounting software, payroll systems, bill pay, and credit card management tools. Dave emphasized: “Don’t pay yourself as a contractor. Get on payroll early.”
Setting this up correctly avoids misclassification penalties and helps with state and local compliance. He also warned against do-it-yourself Delaware franchise tax filings. “Many founders accidentally overpay,” he said. “Let your CPA file – they’ll make sure you only pay what’s required.”
Why Incorporate in Delaware
Delaware remains the gold standard for incorporation because of its business-friendly laws, predictable courts, and efficient process. Dave explained that venture-backed investors expect to invest in Delaware C corporations, because it simplifies governance and protects both founders and shareholders. It also eases due diligence reviews since Delaware’s legal framework is recognized and trusted by investors globally.
Understanding QSBS and the 83(b) Election
The panel spent time discussing two major tax advantages for founders and investors:
Qualified Small Business Stock (QSBS) and the IRS 83(b) election. QSBS allows investors to exclude up to $16 million in gains from taxes (as of recent tax law updates) if they hold qualified startup shares for at least five years. Founders benefit by making sure their C corporation qualifies under this rule. QSBS documentation frequently comes up during VC due diligence, as investors must verify the company’s eligibility.
The 83(b) election, meanwhile, can save founders huge future tax bills by letting them pay taxes when shares are initially granted – often when their value is low. The catch? It must be filed within 30 days, or the benefit is lost. And investors will check for proof during due diligence.
Equity and Valuations: The 409A Must-Have
Before issuing stock options, startups must obtain a 409A valuation to determine the fair market value of their shares. Angelina underscored that this valuation expires annually or after any major company event, like a funding round. Keeping it current is essential for compliance and fair employee stock pricing.
“The 409A affects everyone – founders, employees, and investors,” she said. “Outdated valuations create uncertainty and potential tax issues.” Updated 409A valuations also smooth the due diligence process, since outdated valuations can raise investor concerns about accurate share pricing and tax exposure.
Deadlines Founders Can’t Afford to Miss
Dave and Bill listed several dates that every startup founder should know:
- April 15: Corporate tax filing and extension deadline
- October 15: Extended corporate return deadline
- January 31: W-2 and 1099 filings
- March 1: Delaware franchise tax filing
- November 1: TCC code registration deadline for electronic IRS filings
They also cautioned that states like California and New York have additional early payment requirements and minimum franchise taxes.
If you’re on a calendar-year fiscal schedule, these dates apply directly – but remember that alternative fiscal years shift the timeline. Stay synchronized with your CPA to avoid late fees or penalties. Missed or incorrect filings can become red flags during due diligence.
Don’t Overlook Payroll and Sales Taxes
Founders often focus on income tax and forget about payroll and sales taxes. Hiring even one employee in a new state triggers a filing requirement there, while sales tax rules vary by jurisdiction. Both must be carefully monitored and filed on schedule, ideally through automated payroll providers or accounting integrations.
Tap Into the R&D Tax Credit
Finally, the group highlighted one of the most valuable tax incentives available to startups: the R&D tax credit. This credit rewards companies conducting qualified research and innovation in the U.S. Even pre-revenue startups can offset up to $500,000 in payroll taxes annually by applying the credit.
“It’s basically cash back for innovation,” said Dave. “You’re required to document and substantiate your expenses, but it’s a no-brainer if you qualify.”
The Bottom Line for Founders
The discussion closed on a recurring theme: proactive compliance. Founders who invest early in proper accounting and tax systems not only reduce risk but also position their startups as investor-ready.
Bill summed it up best: “Clean books aren’t just about taxes. They’re your story, showing how you run your business, how you treat investors, and how you prepare to grow.”
Key Takeaways for Startup Founders
- Separate personal and business finances from day one.
- Stay current with federal, state, and payroll filings.
- Use GAAP-compliant accounting tools like QuickBooks or NetSuite.
- File your 83(b) within 30 days.
- Refresh 409A valuations annually.
- Leverage R&D credits to cut payroll costs.
- Maintain investor readiness by organizing financials for due diligence, since clean, consistent records make fundraising faster and more successful.
- Work with professionals like Kruze Consulting, who specialize in all of the above so founders can focus on growth.
In short: Good accounting isn’t just compliance – it’s strategy. And for startups looking to scale, the right financial foundation may be your most valuable early investment.
The full webinar is available on Carta’s website.
