In today’s economy, with fewer
established company job opportunities, university students are
creating their own jobs with start-ups. Campus incubators are one
of the many factors that attribute to this trend. Universities
account for around one-third of business incubators in the United
States. Universities such as the Massachusetts Institute of
Technology with its $100,000 Entrepreneurship Competition have
helped to create 130 start-ups and 2,500 jobs. There is a growing
opportunity in providing university start-ups with tax,
accounting, and business advice.
Many founders of university start-ups are from the burgeoning
Science, Technology, Engineering, and Math (STEM) fields.
Individuals from these backgrounds may have great ideas for new
businesses however, typically do not have accounting and tax
Choosing a Start-Up Advisor
One of the best ways universities can
aid start-ups in addressing business concerns is to introduce
start-ups to experienced accounting firms and advisors, especially
firms with flexible fee structures. Firms and advisors with
flexible fee structures work by charging low or sometimes no fees
in the beginning and then increase fees later when companies begin
to generate a profit. Many accounting firms provide this
kind of service for promising start-ups because they know that it
takes some time for a newly formed company to become profitable.
Accounting firms and advisors offer flexible fee structures as a
strategic way to build long-term relationships with newly formed
businesses that have strong potential for growth.
Keeping Track of Capital
Advisors should endeavor to identify
all capital contributions. With these types of start-ups, capital
contributions include and are not limited to:
1. Personal contributions
2. Friends and family contributions
3. Credit card funding
4. University Grants
Properly categorizing capital contributions is important for
multiple reasons. Accurate accounting will keep from inadvertently
classifying capital contributions as gross receipts that might
trigger income taxes or sales tax. In addition, accurate capital
contributions are crucial for establishing “tax basis” that may
reduce future income taxes on distributions or business income.
Recording capital contributions in the beginning stages also
allows founders to keep track of how much equity they have
invested in their start-up and helps to mitigate equity disputes
in the future.
Managing Payroll Tax
Many founders may be “do-
it-yourselfers” and think that with a little research and hard
work they will be able to navigate the complexities of payroll tax
filing successfully. This may not be the best approach
because every hour spent on trying to learn and execute support
functions takes away time from core business activities and future
growth of the business. Another factor that makes it impractical
for start-ups to undertake the responsibilities of payroll is that
the state and federal laws associated with payroll are always
changing. It can be easy to make mistakes or miss deadlines.
Failure to report payroll tax filings in an accurate and timely
manner can result in large penalties.
A practical option for start-ups is to seek out a third party
payroll processer or even a Professional Employer Organization
(PEO) to manage payroll and compliance. A PEO is a company that,
for tax purposes, employs the workers of several other businesses
and provides human resource related functions for those companies.
PEOs perform employee benefit administration, payroll, recruiting,
employee training, worker compensation administration, and safety
and risk management. The main advantage of a PEO is that it
allows the start-up to focus on future growth while at the same
time address the complexities of human resources.
PEOs can also help to provide start-ups with more attractive
benefits packages. PEO's are often larger companies, so they can
negotiate with insurance companies for better benefits at cheaper
prices. University start-ups can take advantage of these superior
benefits to attract and retain talented employees.
Research & Development Tax
Start-ups often generate an
opportunity for the federal Research and Development Tax Credit.
It is important to calculate the R&D credit on a
contemporaneous basis. Even in initial tax loss years, the credit
can be a deferred asset that can be used to offset future
perspective tax owed by the company.
The number of university start-ups is
on the rise. It is important to provide these start-ups with sound
business advice. It is recommended for accountants and tax
professionals to over communicate when dealing with university
start-ups. Professionals working with start-ups can play a
valuable role in this growing sector.