Every business starts with a “seed” idea that germinates into a fledging business under the right conditions. The decisions that owners make when launching a start-up will impact its financial well-being for years to come. Here are five ways financial advisors can provide critical guidance at this phase of development:

1. Business Planning

You’ll need money to start a business. However, gaining access to bank loans and attracting equity investors requires more than just an idea. You’ll need a formal business plan to present to prospective lenders and investors.

Financial advisors can help draft a comprehensive business plan that tells your backstory, describes your products and/or services, and highlights the research you’ve done to bring them to market. You also should explain how you plan to use the capital you’re raising to grow the business — and why you’re destined to succeed.

Elements of a business plan that lenders and investors will turn to first are:

• The executive summary,
• Management’s qualifications, and
• Financial projections.

Without a proven financial track record, you’ll need to create a projected balance sheet, income statement and statement of cash flows, using market-based assumptions (rather than your gut instinct). You can also develop multiple scenarios, including best, worst and most-probable results, and identify which variables are most critical to the business’s success (or failure).

Additionally, in today’s technology-driven marketplace, a critical part of business planning is to design and develop a website to showcase your offerings. The wording that’s used in your business plan can often be repurposed to populate your website. But you should be mindful of search engine optimization techniques to ensure that your business will be near the top of customer search results. It’s also critical to have a social media presence. This is a cost-effective marketing tool to maintain visibility for your business.

2. Bookkeeping

Lenders and investors will want to know whether your business is meeting the performance targets outlined in your business plan. So, you’ll need to set up an accounting system to record transactions and generate financial statements that can be used to communicate results to stakeholders. Your advisors can recommend cost-effective accounting software solutions. Above all, it’s imperative to separate business and personal finances — commingled financial records can cause a myriad of tax and financial reporting headaches as your business grows.

Initially, start-ups may elect to use cash-basis or income tax-basis methods of accounting to simplify matters. Indeed, it’s often easier for start-ups to have one set of books for both tax and accounting purposes. However, owners with an accounting background may opt to tackle accrual-basis accounting from the get-go.

3. Tax Planning

Many start-up ventures aren’t profitable when they launch, but tax planning is still essential to position your new business for future success. A major decision for start-ups is choosing the right entity structure, based on cost considerations, legal concerns and tax issues. The basic choices include:

• Sole proprietorships,
• Partnerships,
• Limited liability companies (LLCs),
• S corporations, and
• C corporations.

C corporations pay tax at the entity level, then dividends and capital gains are taxed at the level of the individual owners. This results in double taxation for C corporations. Other business structures are known as “pass-through” entities. That is, their income generally isn’t taxed at the entity level, instead it passes through to the individual owners and is taxed on their individual returns. Distributions from pass-through entities are usually tax-exempt.

Recent tax rule changes have effectively leveled the playing field between traditional C corporations and pass-through entities. But the situation could change as certain Tax Cuts and Jobs Act provisions are scheduled to expire after 2025 — and depending on the outcome of the 2024 general elections.

Another major tax issue for start-ups is the appropriate tax treatment for start-up expenses vs. regular business expenses. The timing and amount of expenses are key to determine what’s immediately deductible and what amounts must be capitalized and amortized over time.

In addition, new businesses need to think beyond federal and state income taxes. They may need systems in place to file and pay property, sales and employment taxes. Often these administrative tasks are outsourced to third-party providers so entrepreneurs can focus on daily business operations.

4. Estate Planning

Another tax-smart consideration for start-ups is estate planning. It’s common for entrepreneurs to solicit help from friends and family members. In exchange, founders may decide to make gifts of ownership interests while the fair market value of the business is relatively low.

Your financial advisors can help determine the fair market value of a start-up based on objective market data and financial projections. Proactive estate planning at this phase can save significant tax dollars over the long run as the value of the business grows.

5. Human Resources

Most start-ups operate lean. That is, they have a few key employees who wear a lot of hats and invest sweat equity to get the business up and running. In fact, some may agree to forgo high salaries for equity-based compensation. This can help your start-up avoid a cash crisis and attract top talent. But there are various types of equity-based compensation to consider, such as stock grants, stock options and profits interest awards.

Having a stake in a promising new business venture can be a huge financial asset for employees in the future. Plus, employees who own equity are invested in the success of the start-up. But entrepreneurs may be hesitant to give up too much equity — and control — to others. A financial professional can help determine what’s reasonable based on your situation.

Seeking Professional Guidance 

Businesses need guidance from experienced professional advisors as they mature and evolve from an innovative idea hatched in an entrepreneur’s brain to a private sale or initial public offering. Sometimes even the best laid plans may need to be revised as market conditions and owners’ personal circumstances change. If you’re struggling with getting your start-up off the ground, don’t hesitate to contact your financial advisor for guidance.