Launching a Technology company? Things you need to know if you are launching your own Technology Company.
a) Company entity type
Software development companies are most likely to acquire or be acquired, get an investor on board or sell equity to find the right leadership team. Forming a Limited Liability company is easier to manage is ambitions are for big. The choice of entity is vital for the company’s growth as a change later could have serious tax implications on the company and affect how it’s perceived by investors, staff and customers.
b) Financial viability of the idea
Before you dive into buying/renting the infrastructure, necessary hardware and software, hiring, it is vital to understand the financial viability of the idea that you have, for a product or a service offering. It entails doing the right market research, listing out sources of funds, estimating expenses extrapolated over at least 3 years and a risk management plan.
c) Cash flow statements
Understand the cash flow statements before you begin. Some of it will be forecasted of course however the detailed projections for cash flow will help you understand the risks and work out a plan for the same in advance. Try to work out your projections in as much detail as you can to anticipate how resources will be utilised and when are you likely to need external sources of funds.
d) Debt and equity transactions
Software companies are likely to have several kinds of owners and consequentially different kinds of debt and equity transactions. Deciding between debt and equity transactions may result in tax implications. Hence as a business owner you need to stay on top of the accounting practices.
e) Stock options as compensation
It is common practice in growing software/technology companies to use restricted stock, stock options and other forms of equity-based compensation to attract key leadership talent. This arrangement should be measured for both the employer and employee. As long as the tax ramifications are not seriously hindering the growth of the company the distribution of stocks is considered as standard practice. You should also bear in mind how much of your business you really want to give away as these are potentially long term rewards.
f) Start-up business costs
The business owners should confirm if the tax laws/rules allow capitalisation of costs categorised as start-up costs. If well recorded and identified, they can be amortised over a longer period of time, 10 to 15 years. Certain expenses made might be absolved of some rules. It is important to take stock of deductions so they are not lost due to inaccurate cost calculations.
g) Revenue recognition
Software development companies could have a very high margin on sales. Software projects can be complex in nature and the continual deliverables of components after the initial sign up govern the recognition of revenue during the development stage.
h) Scaling & Double taxation issues
There is a real possibility of your technology business going overseas and working from different offices across the globe. Not only will cultural factors matter and affect the hiring process but the application of taxation laws will be pertinent to maintain a growing business. A detailed analysis of what the local taxation laws are and how they are applicable to the company formation as well as human resource laws will give you a better picture of how the new business kick-starts. The same applies to scaling up, even if not geographically. Opening up a new office or ramping up the hiring plan will affect the taxation of the company.
i) Mergers and Acquisitions
Inevitably, if the software business runs well you may well to acquire like-minded companies. This could be a part of your scaling business plan. If you have been involved in doing some path-breaking work, it Is more likely that you will receive an offer of a buy out or a merger. In such cases for the seller the tax result can range from totally non-taxable to double taxation. It can reverse itself for the buyer or the acquirer.