A start-up company is a company which is being created which has little to no amounts of operation history in the past. This type of company typically seeks to create a new market or to build upon a newly opened channel of commerce.

These types of companies are often associated with new technology or inventions, especially in the computer and internet sectors. Because these types of business operations are so new, they may be associated with various risks and concerns.

For example, the law may not always have complete coverage of very new:

  • Products;
  • Inventions;
  • Medication; or
  • Technologies.

In addition, a start-up company may experience high growth at the outset but may be subject to limited markets. In many cases, a start-up business is a business that is expected to grow quickly.

A start-up company is common in the technology industry because it is typically started because there is a market for a product that is expected to reach a wide range of individuals. In addition, an online business is available to individuals all the time without access restrictions such as geography or time zones.

A start-up is often smaller and less structured than a traditional small business model. Start-ups are typically innovative and are able to adapt quickly to changes in technology or changes in the market.

A start-up also tends to be more efficient and has less overhead costs. This allows start-up businesses to be competitive in their pricing.

A start-up often also has more of a team feel. The employees are typically more close-knit, which may contribute to a culture of collaboration, shared ideas, and working together for the benefit of the company.

In many cases, a start-up emphasizes providing personalized experiences for their customers. The ability of start-ups to personalize their services as well as adapt to the unique needs of their customers means that a start-up will often enjoy a degree of loyalty that other businesses do not.

Although there are many advantages to start-up companies, there are also many disadvantages. One of the biggest disadvantages of a start-up company is the level of risk.

In many instances, start-up businesses fail within the first year. Getting a start-up off the ground requires a substantial amount of work hours.

It takes a start-up business time to be profitable so the compensation to the owner or employees may be low in the beginning. In addition, the cost of the start-up is high.

One issue that contributes to the cost of the start-up is working to acquire customers as well as a share of the market. If the start-up does not have the capital to complete the necessary market research or to hire competent employees who share the same vision and dedication to the company, the business may be less likely to be successful.

The start-up likely has less financial resources, which means that it is vulnerable to competitors even when it begins to gain customers. A bigger business may be able to use its larger budget to push the startup out of the market.

What Should I Consider When Starting Up a Company?

Although it may appear a start-up company starts from scratch, a start-up company does not come out of nowhere. A start-up company requires careful planning as well as significant foresight in order for the company to be successful.

Part of the many challenges and excitement associated with a start-up company is finding a niche in the market. This requires understanding the business field of the start-up company as well as the laws which will apply to the business.

There are numerous aspects to consider when creating a start-up company, which may include:

  • Planning and expenditures;
  • Tax laws;
  • Startup business regulation. The laws may differ in each state and, in some cases, even in different areas of town due to zoning, etc.;
  • What type of business structure to use, such as LLCs, partnerships, etc.; and
  • Contract rights and limitations.

What are Start-Up Expenditures?

There are some expenses which may be considered start-up expenditures. There are two requirements an expense must meet in order to be considered a start-up expense, which include:

  • The expenditure was paid or incurred in connection with:
    • Investigating the creation or acquisition of an active trade or business;
    • Creating an active trade or business;
    • Any activity which was engaged in for profit and for the production of income prior to the day on which the active trade or business began, in anticipation of that activity becoming an active trade or business; and
  • The expenditure must be a cost which would have been allowable as a deduction if it had been paid or incurred in connection with an existing active business in the same field as that which was entered by the taxpayer.

It is important to note that certain expenses are not considered start-up expenses. These include:

Can I Deduct the Expenses for Starting My Business?

In general, start-up expenses that are paid or incurred are not currently deductible and are required to be capitalized. A taxpayer can elect to amortize these expenditures over a period of time, not less than 60 months, which begins in the month in which the business begins.

If start-up expenses were paid or incurred after October 22, 2004, a taxpayer can elect to currently deduct those start-up expenses up to a total of $5,000 as well as $5,000 in organizational costs. This is only permitted, however, if the total start-up costs are $50,000 or less.

If the start-up costs in either category exceed $50,000, the amount of the allowable deduction will be reduced by the overage amount. If there are any remaining start-up expenses after the deduction, it will be capitalized and amortized over a period of 180 months.

Typically, start-up expenditures are expenses which are paid or incurred by the taxpayer when acquiring or creating a new business. The costs incurred to expand an already existing business are not considered start-up expenditures.

Can I Deduct the Investigatory Expenses if I Decide Not to Create a New Business?

It may be possible to deduct the investigatory expenses if an individual decides not to create a new business. This may be permitted if the individual invested a sufficient amount of time and incurred sufficient expenses in preparation for starting the business.

The deductibility of these expenses, however, will vary depending on the facts and circumstances of the individual business and taxpayer.

What if I Have a Legal Issue with a Start-Up Company?

In general, it may be difficult to legally engage a start-up company prior to it becoming officially recognized under the business laws of the state. This means that liability for violations which may occur by the organization may change once the business owner files for incorporation with the state.

This applies especially to business forms such as limited liability companies. If an individual has a legal issue with a start-up company, they should consult with an attorney as soon as possible. It is important for the individual to gather and retain any supporting evidence or documents, both so that the attorney can review them and in case of future litigation.

Do I Need an Attorney to Help Me with Start-up Expenditures?

It is essential to have the assistance of a corporate lawyer for any business start-up issues or questions you may have, including expenditures. Your attorney will assist you in understanding the start-up process. This includes providing advice regarding any tax issues which are related to your new business venture.