A Startup Checklist for NJ Tech Companies

Melissa R. Crowe is a CPA with WithumSmith+Brown in Morristown. She works in the technology niche in the startup and emerging growth technologies sector.

Over the last five years, the technology sector has enjoyed substantial growth. As tech companies open shop and begin to grow, there are several important items to keep in mind to ensure these startup technology companies have everything they need to succeed. Some important items to consider are listed below.

Proper entity selection is a critical first step in a tech company’s life cycle. It sets the stage for future financing and tax implications for founders and employees. Choosing between an LLC, C-Corp or S-Corp structure should be carefully considered with both short-/long-term goals in mind. Bringing your attorney and accountant into the fold early is extremely important to arriving at the correct selection.

Compensation in the form of stock options is common in the tech industry. A common mistake that companies make is failing to obtain a third-party valuation (or “409A valuations,” named after internal revenue code 409A) to substantiate the strike price used when issuing options to employees that will protect both the company and the employees should the IRS review the option plan. Companies should update this valuation annually if they are actively issuing options.

Tech companies often turn to PEOs (Professional Employer Organizations) to streamline the payroll process. A PEO is a third-party payroll provider that, unlike typical payroll providers, pays your employees directly (under their company name), then issues an invoice for the cost of the employees. PEOs provide bundled payroll and health insurance services at a rate that is typically more affordable than traditional payroll and insurance providers.

The services provided by tech companies have to be examined closely for sales tax and income tax exposures. Management needs to determine what states the company should be filing in and whether or not the company’s goods/services are subject to sales tax. For instance, companies doing business in New Jersey, whether incorporated in the state or doing business as a foreign corporation, are required to file a corporate tax return in New Jersey if they have sufficient “nexus”, or presence in the state, which is determined by several factors.The determination of sales tax applicability and income tax nexus can be a complex process and should be addressed early in the business’ life cycle to prevent unfavorable tax repercussions in the future.

There are a number of federal, state and local tax credits that are specifically geared towards tech companies. It is not uncommon for some of these credits to result in refunds even if there is no tax liability, which can certainly help with cash flow. Specific to New Jersey are the following programs:

• The NJ Grow program offers a tax credit for the creation and retention of jobs in defined New Jersey geographic zones.

• The NJ Angel program incentivizes investors to invest in small New Jersey emerging technology businesses by providing them with a tax credit based on their investment in the technology company.

• The NOL Sale program allows small technology and biotechnology companies to sell their net operating losses and research and development tax credits to other unrelated profitable corporations.

Company founders should talk to their accountants about what additional credits are available for New Jersey based companies.

Budgets and forecasts are essential to the business plans of tech companies. Proper forecasts provide indicators for the right time to plan for additional venture or debt financing. Failure to properly plan for cash shortfalls can put companies in a stressed position and result in lower valuations from outside investors. A forecast format should be addressed early on and constantly reassessed to ensure that is it properly reflecting the state of the company.

Online accounting applications have proven to be invaluable resources to new companies as they are affordable solutions which provide 24/7 access to both management and service providers. Founders should consider using cloud-based solutions for their accounting software as centralized and easily accessible records are critical to staying organized in a quickly evolving company.