What did I do wrong? (Common traps small business owners can avoid)
If you’re like most founders, when you first begin the process of starting a company, you’re focused on being compliant in every way. You aim to build a business people want to invest in. But even with the best of intentions, you could overlook some rules that have big implications.
Taxes are an area in which new small business owners make frequent mistakes. It’s not intentional, they’re usually just unaware.
Let’s talk about two specific tax-related errors many of our clients make and how you can circumvent them as you set the foundation for your business.
Mistake #1: Filing income tax in Delaware
We’re revisiting Delaware to illustrate this first common mistake because of the unique advantages the state offers business owners.
Many founders who formed their C-corp or LLC in Delaware also file income taxes in the state, with the impression that they’re doing the right thing. Unless you have nexus in the state, there’s no need to file a tax return.
By submitting a return, you’re inviting scrutiny — most of the time, unnecessarily.
Furthermore, it’s easy to forget to pay the state’s annual franchise fees. Insignificant as they may seem, neglecting to pay the annual fee will trigger a negative mark that could impact both banks’ and investors’ decisions to work with you.
When completing an investment round or seeking a loan from a bank, you’ll need a Certificate of Good Standing with the state. We hear from clients all the time who say they don’t have good standing in Delaware and have no idea why (because the state doesn’t disclose the reason). Often, it’s because they forgot to pay the state’s franchise fee.
Once you’re in bad standing with the state, you’ll be forced to use unnecessary time and resources to understand and solve the issue. In the meantime, you’re missing out on potentially lucrative relationships. You could even be accused of fraud for something as small as forgetting to pay a $200 fee.
Mistake #2: Incorrectly submitting payroll taxes for remote employees
The prevalence of remote work has introduced new tax dilemmas for many businesses.
For each employee whose tax you withhold, you must be certain about which state their payroll taxes should be sent to. Even if you’re using a payroll service, you have to be cognizant of where your new employees are located and notify the service of the appropriate state to which each person’s taxes are paid.
If you mistakenly send an employee’s tax withholdings to the wrong state, your employee will often have to pay the outstanding amount to the correct state out of their own pocket and wait for reimbursement.
Both of these errors can make or break an early-stage startup with minimal cash flow — all because the owner was ignorant of the correct way to maintain compliance.
Moral of the story? Even if you think you’re perfectly in accordance with tax laws, take a second look. Discovering these mistakes too late could cost you a lot more than a small penalty.
This article is based on an episode of the WTFAQ Podcast.