A chance to be the Chief Executive Officer (CEO) of a startup company can be one of the most exciting, challenging, inspiring, risky and adrenalin-filled periods of your life. Particularly for young innovators and entrepreneurs, the dynamic and fast paced environment can leave little time to reflect on your own tax position or obligations to any new employees.
A lot of great startups come undone by neglecting the mundane — but essential — regulatory or compliance functions. So while I would love to write an inspiring story of innovation and success, I am going to make you think a little about taxes instead. Why? Because you are the CEO, and startup or not, it is your job to get it right.
If you are operating as a sole trader, you will also need to determine if your startup is a hobby or a business. This article assumes you are running a startup business. I also assume many older CEOs understand the basics of personal taxes, so I am targeting this to the new kids on the block.
A CEO is the senior executive of a company, not-for-profit or other entity, usually reporting directly to a Board of Directors. Several years ago, a change occurred allowing single-director companies. This created a new breed of startup CEOs who may effectively be sole traders but who also need to understand the personal tax obligations of being paid as an employee of an incorporated single-director company.
Any legal entities will also have tax responsibilities, as there is a raft of other tax obligations such as Goods and Services Tax (GST), company taxes and others that we won’t touch on here.
Startups may take on many forms. Many begin as a company, but others may have evolved from a sole-trader operation or a partnership and then turned into an incorporated entity.
As CEO you have many responsibilities, and it is important to get your own personal tax affairs in order, that of the startup and, perhaps most importantly, ensure you are meeting the personal tax obligations of employees.
Here are some pointers:
1. Find a good lawyer, accountant and tax agent for your startup
They do this day in and day out and will give you the professional tax and structural advice you need, not only on your startup business structure, but also on personal tax responsibilities for employees.
2. Personal services income
If your startup concept is based largely on providing customers with your services, the company income may be deemed to be your personal income even if your business is incorporated. Chat to your accountant about this.
3. Cash flow is king
Working with your business coach or accountant, ensure you have enough cash flow to meet your startup business needs and enough set aside to meet employee tax obligations. I suggest PAYG and other taxes like GST be deposited into a different bank account and remain untouched until paid to the tax office — plan to be one of the five percent of businesses that succeed.
4. Look at outsourcing your payroll
Understanding your own personal tax deductions and preparing your own income tax return is one thing, but tax that is deducted from employee’s salary and wages is another thing. Unless you are a super star, outsource it or get an experienced bookkeeper to handle it.
5. This is serious
Pay As You Go (PAYG) employee tax deductions are the employee’s money and must be paid, together with superannuation and other obligations, on time, every time. There is little pity for employers who fail to get their employees’ payroll right.
6. Employee paperwork
Hiring an employee — be it yourself as a sole trader company director or small startup CEO — requires registering with the ATO as an employer and having a new employee offer and pack with Tax File Number (TFN) declaration and superannuation elections.
As the CEO, you have an obligation to yourself and your employees to pay the right amount of wages and entitlements. You need to provide pay slips, and record hourly employee timesheets and special award entitlements. Good accounting systems will have an integrated solution to most of these issues, and cloud accounting makes payroll outsourcing easier as well.
8. Fringe Benefits Tax
This will impact employees, including you as CEO, so be careful not to unwittingly provide these benefits. Mixing personal and startup company costs together can be complicated and needs to be discussed with your accountant.
9. Capital Gains Tax (CGT)
If you operate your startup from home, there may be CGT implications when you sell your home. Also consider who owns the business. When you sell your startup for a massive profit, understand how it will be taxed before you lock in your business structure. Will small business rollover provisions impact you?
10. Bonus and stock issues
Many startups rely on all kinds of arrangements to see them through their cash flow challenges. If company shares are being offered in lieu of a direct wage, there may be CGT implications and personal income consequences for a stake in the company.
When and if you get to pay a dividend will depend a lot on who your funders are, their tax obligations and other circumstances. Plan well in advance and understand the benefits of franking credits — and how to use them.
Record keeping is incredibly important for both personal and startup entity taxes, for you and any employees. The books need to balance. Taxes need to be paid. Workers compensation needs to be based on your records, and it all needs to tie together neatly at the end of the day.
This information is obviously of a general nature and not advice specific to your individual circumstances. The Australian Taxation Office provides many great resources for starting up a business, as do many state business or innovation offices. Speaking from experience, if you are going to have employees other than yourself in the startup, invest in an accounting system that meets tax obligations from day one. Good luck.