US taxes and reporting: What founders need to know

Starting a company is exciting – but alongside the challenge of building your business comes the task of keeping on top of taxes and annual reporting.

For many founders, this is where things get overwhelming. That’s because in the US, there are a few layers of rules and filings to keep on top of: federal, state, and sometimes even city rules. And each comes with its own forms, deadlines, and penalties for missing them.

In this guide, we’ll take you step by step through what you need to do to stay compliant from day one without losing focus on building your company.

Step 1: Choose the right company structure

Your tax obligations depend heavily on the type of entity you set up:

• C-corporation (C-corp): This is the most common choice for venture-backed companies. A C-corp pays tax on its own profits. If the company then distributes some of those profits to shareholders as dividends, they also pay tax on that income. This is called “double taxation”. Most VCs will expect a C-corp structure that’s incorporated in Delaware.
• Limited Liability Company (LLC): They’re flexible and simple to run. Instead of the company paying income tax itself, the profits (or losses) “flow through” to the owners, who then report them on their personal tax returns. So you don’t have the “double taxation” of a C-corp because the money is only taxed once. But when you try to raise money from VCs, most will prefer (or even require) you to convert to a C-corp, since it’s easier to issue stock and manage investor rights. If you’re already structured as an LLC, here’s how you can convert to a C-corp.
• S-corporation (S-corp): The S-corp structure also avoids double taxation by passing profits (or losses) directly through to the owners, similar to an LLC. Shareholders report their share of the profit on their personal tax returns. But S-corps have strict ownership rules. For example, you can’t have shareholders from outside the US, and you’re limited to 100 shareholders in total. So, they usually aren’t a fit for startups planning to raise venture funding.

So, in most cases a Delaware C-corp will be the way to go. But whichever structure you choose, here are a few more things you’ll need to do.

File incorporation documents in your state

To legally create your company, you need to file formation paperwork with the Secretary of State (or equivalent) in your chosen state. 

For example, for a Delaware C-corp, you’d file a Certificate of Incorporation (sometimes called Articles of Incorporation) with the Delaware Secretary of State. 

Get an Employer Identification Number (EIN) from the IRS

This is like a Social Security Number for your business – it’s how the IRS tracks your company for tax purposes. You’ll need an EIN to open a business bank account, hire employees, and file taxes. 

You can apply for one on the IRS website.

Keep up with annual state filings

Most states require businesses to file some kind of report every year or every second year. You’ll also need to pay a fee to stay in good standing. For example, for a Delaware C-corp you’ll need to file a franchise tax report (and make a payment) every year. 

Missing these filings can result in late fees, penalties, or even the state revoking your company’s right to do business.

Register in any other states where you’re “doing business” (known as foreign qualification)

“Doing business” generally means having an office, employees, or a significant physical presence in another state. 

For example, if you incorporate a C-corp in Delaware but run your operations from California, you’ll need to file a Delaware franchise tax filing and a California Statement of Information, plus pay any California state taxes due.

Each state has its own rules and fees, so it’s worth checking before hiring or opening an office in a new state.

Step 2: Set up your finance systems

Solid financial foundations will save you headaches at tax time. Plus, it will make fundraising much easier later. 

Here are some of the essential steps you should take.

Open a separate business bank account

Never mix personal and business money. A dedicated account makes it clear which expenses belong to the company, which is important for taxes, protecting yourself from personal liability, and credibility with investors. 

Most banks will ask for your incorporation documents and EIN to open the account – we covered those in Step 1 above.

Use accounting software to track income and expenses

Don’t rely on spreadsheets – you’ll outgrow them fast. 

Modern accounting tools (like QuickBooks, Xero, or Wave) automatically sync with your bank and credit card accounts, making it easier to categorize transactions and generate reports.

This also reduces the amount you’ll spend on accountants.

Prepare regular financial statements

At a minimum, you’ll want to generate:

1. an income statement (profit and loss) showing revenue and expenses over a period, and
2. a balance sheet showing assets, liabilities, and equity at a point in time.

If you’ve got your accounting software set up, you can do this in just a few clicks.

These reports aren’t just for tax filings – investors (and lenders) will want to see them too.

Even if you’re pre-revenue, creating these reports builds financial discipline and helps you understand your company’s burn rate.

Step 3: Establish all your tax obligations

As a founder, you’ll have to navigate a mix of taxes.

Federal and state income tax

C-corps file their own corporate tax returns and pay tax directly on the profits they make. LLCs and S-corps are “pass-through” entities. This means the profits made through them are reported on the owners’ personal tax returns.

On top of federal tax, almost every state (and some cities) levy their own income tax, with their own filing rules.

Payroll taxes (if you employ staff)

As an employer you must withhold federal and state income tax, plus Social Security and Medicare (FICA), from employee paychecks. 

Then you’ll need to remit those amounts to the IRS and your state tax authority. You’ll also pay the employer share of FICA and unemployment taxes.

Self-employment tax (if you’re a sole proprietor or in a partnership)

Founders who pay themselves directly (rather than through a company payroll) must pay self-employment tax, which covers both the employer and employee portions of Social Security and Medicare.

Sales tax

If you sell products or taxable services, you may need to charge sales tax to customers and send it to the state. 

The rules differ by state – and in many places, you might owe sales tax even if you don’t have an office there. If you exceed a certain revenue or transaction threshold in that state, that could be enough to trigger it.

Just making enough sales or having enough customers in that state.

If you sell goods or provide taxable services, you may need to collect sales tax from your customers and remit this to the state. The rules for this are varied – and in many states, “economic nexus” applies, meaning you can be liable even without a physical office, if you exceed a certain revenue or transaction threshold in that state.

Local taxes

Some cities and counties impose additional levies, such as gross receipts tax (on revenue) or personal property tax (on business assets like computers and furniture).

Withholding tax on payments to non-US contractors or licensors

If you pay someone outside the US (for example, a foreign consultant or an overseas licensing agreement), you may be required to withhold US tax and remit it to the IRS.

However, there could be a tax treaty which reduces or eliminates this.

Cross-border and transfer pricing issues

If your company has entities in other countries, the IRS expects you to set prices between them as if they were independent businesses – also called “arm’s length” pricing. In practice, it means you can’t just shift profits or costs between your US company and a foreign subsidiary to lower your tax bill.

This usually only becomes an issue once you set up subsidiaries abroad, but it’s smart to keep in mind early if you’re planning to expand internationally.

Let’s run through an example…

Let’s say your startup is incorporated as a C-corp in Delaware with employees in Texas and you make sales to customers in New York.

At the minimum, you’ll probably need to:

1. File a Delaware franchise tax and annual report. This is the state’s way of charging companies that are incorporated there.
2. File Texas employer payroll tax returns. Since you have employees in Texas, you’re responsible for withholding and paying over payroll taxes to the state.
3. Collect and remit New York sales tax once you hit the state’s threshold. Even without an office in New York, crossing the revenue or customer threshold can create a tax obligation.
4. File a federal corporate income tax return. Every corporation must file one each year with the IRS, regardless of state filings.

Step 4: See if you can benefit from any deductions or credits

Startups can often reduce their tax bill through deductions and credits.

But you’ll first need to know about them – and sometimes you need to claim them proactively. 

Here are the main ones to watch.

Ordinary business expenses

Most everyday costs of running your company are deductible, meaning they reduce your taxable profit. 

This can include:

• Office rent or coworking space
• Software subscriptions (e.g. AWS, Slack, QuickBooks)
• Travel costs for business trips
• Professional services (lawyers, accountants, consultants)
• Marketing and advertising

For example, if you spend $20,000 on software and professional services in your first year, those costs can reduce your taxable income by $20,000.

Startup cost deduction

In your first year, you can deduct up to $5,000 of startup expenses – the costs you paid to get your business off the ground before it officially began operating. 

This can include things like market research, travel to meet potential partners, legal and accounting fees, and your incorporation costs. 

Once your business has started trading, later expenses are treated as ordinary business deductions instead.

R&D tax credit

If you’re developing new products, technology, or processes, you may qualify for a research and development credit. 

The big benefit is that even if you’re not profitable yet, you can apply the credit to offset payroll taxes, which saves cash right away.

For example, let’s say a pre-revenue software startup spends $150,000 on engineers building its product. It may qualify for between $10,000 and $20,000 in annual payroll tax savings under the R&D credit.

Work Opportunity Tax Credit (WOTC)

This credit is available if you hire employees from certain targeted groups, such as veterans, people who’ve been unemployed long-term, or people receiving government assistance.

The value of the credit depends on the group and how many hours the employee works, but it’s typically up to $2,400 per eligible employee. In some cases (for example, hiring certain veterans), it can be worth significantly more.

Green energy credits

If your company invests in renewable energy (like installing solar panels at your office), you may be eligible for some federal or state green energy incentives.

Step 5: Track your filing deadlines

Tax deadlines arrive earlier and more often than most founders expect. Missing them can mean penalties and interest, even if you didn’t owe much tax in the first place. 

So, keep an eye out for these.

Quarterly estimated tax payments

If you expect your business will owe tax for the year, you may need to make estimated payments instead of waiting until year-end. 

For C-corps, the threshold is owing $500 or more in federal tax. For individuals (including LLCs or S-corps taxed as pass-throughs), it’s $1,000 or more.

Payments are typically due four times a year: April, June, September, and January. Some states also have their own quarterly payment requirements too.

Annual tax returns

If you’re set up as a C-corp, you’ll usually file Form 1120 with the IRS each year. LLCs and S-corps file different forms, depending on their tax election.

Also, each state will have their own returns, deadlines, and extensions – these often don’t line up exactly with federal dates.

Form 1099s and W-2s

If you pay independent contractors, you must issue them a Form 1099-NEC by 31 January each year.

Employees get a Form W-2, also due to them and the IRS by 31 January.

Missing these deadlines creates penalties based on each form missed, which can add up quickly if you have a big team.

Withholding reports on payments to non-US persons

If you pay a foreign contractor or licensor, US tax may need to be withheld from those payments. You’re responsible for depositing that tax with the IRS and filing the required annual forms. 

These are Form 1042-S to report the payment to the foreign person, and Form 1042 to summarise all the payments for the year.

Annual state filings

Each state has its own requirements for you to “keep in good standing”. These are often separate from tax returns. 

For example, Delaware requires a franchise tax report and payment, typically due 1 March. And California requires an annual Statement of Information and minimum franchise tax.

Let’s run through an example…

If you run a Delaware-incorporated C-corp with contractors in New York, you might face:

• Delaware franchise tax and report (1 March)
• Federal corporate return (15 April)
• State income tax returns (dates vary)
• 1099s for New York contractors (31 January)

Missing any one of these filings, even if no tax is due, can result in penalties, interest, and unnecessary admin to fix your company’s standing.

Step 6: Understand how equity impacts your tax position

Equity decisions affect more than just ownership – they can also have big tax consequences for you and your team. 

Here are some areas founders should know about.

83(b) election (critical for founders and early employees)

If you receive restricted stock that vests over time (but not options), you must file an 83(b) election with the IRS within 30 days of the grant. This lets you pay tax on the shares’ current value (often close to $0) rather than on their future, higher value as the company grows.

For example, if you get founder shares worth $0.001 each and file the 83(b) election straight away, you pay almost no tax today. If you don’t file and those shares are later worth $1 each when they vest, you’ll owe tax on the $1 per share – even though you haven’t sold them.

We’ve written a full guide on 83(b) elections and when you need them.

Cap table management

A cap table shows who owns what percentage of your company. It’s your company’s “source of truth” for share ownership, and it’s vital for both compliance and fundraising. If your records are messy, you could run into problems with IRS audits, state filings, or investor reporting.

Founders often start with spreadsheets but quickly outgrow them. Dedicated platforms like SeedLegals’ cap table tool make it easy to keep everything accurate and automatically up to date.

Check out our guide to what cap tables are (and how to set one up).

SAFE notes and convertible debt

These are common fundraising tools, but they have tax implications. 

For example, depending on how they’re structured, there may be withholding or reporting obligations when they convert into equity. 

The rules vary, so flag these early with your accountant to avoid any tax surprises down the line.

Qualified Small Business Stock (QSBS)

If your startup is a C-corp and meets certain conditions, your shares may qualify as QSBS.

This could allow you to sell them without paying any capital gains tax (up to $10 million in gains) after holding them for five years.

But you must meet the IRS requirements from day one, so don’t leave this unchecked. We’ve got a QSBS guide for founders, so make sure you check that out.

Step 7: Get expert help and plan ahead

Taxes and reporting can get complicated fast. Even experienced founders set up strong foundations early and lean on expert help to get it right.

Here’s what that looks like in practice.

Get the basics right early

Open your business bank account, set up accounting software, and keep your cap table up to date. These are the building blocks that make tax filings and investor reporting easier down the road.

Hire a tax advisor who understands startups

US tax rules are complex, and the wrong setup can be expensive to unwind. An advisor who regularly works with startups can help you stay compliant and spot opportunities like R&D credits or QSBS eligibility.

If you’re looking for support, reach out to CLA – they’re an accounting firm with a lot of startup experience.

Plan ahead for deadlines

Don’t leave filings to the last minute. 

Create a compliance calendar of key dates, like tax returns, payroll filings, franchise taxes, and W-2 deadlines. Make sure you review this each quarter.

Focus on building, not paperwork

Your accountant can help with your taxes. But for legal documents, fundraising and cap table management, SeedLegals has you covered.

Book a call below, or start your 7-day free trial today.