tax laws

How the New Tax Laws Might Affect Your Startup’s Financing

Many entrepreneurs in the U.S. have been keeping up with the recent changes to the tax law, passed at the end of 2017 and championed as a boon for small business. However, if you were planning on launching a new business this year, you might wonder how these new tax laws might affect the financing of your business. Creating a business from the ground up can be a stressful time, and worrying about financing is likely the biggest item on your proverbial plate.

While you may not experience direct effects from the tax law until your business is profitably established, taxes will still be involved, depending on many different factors.

So how will your startup’s financing be affected by the new tax laws? There are several ways, many of which may be beneficial in the long run, or may change the way your business is structured:

Business structure

New businesses can structure themselves in several different ways (and existing businesses can restructure) according to tax law, all of which are taxed differently.

Below are the current business structures as defined by the IRS:

For all of these categories, the tax rate has been lowered as the government makes strides toward a more pro-business tax structure, which is expected to create more jobs and portray the U.S. on the world stage as a desirable location for businesses to base themselves.

Your startup’s structure will be the biggest factor in acquiring financing. Certain investors are looking for specific investment opportunities, and your tax structure could open up a new world of investors to you.

For example, some investment or private equity firms may only want to acquire or invest in LLCs, while others may prefer to do business with an S-Corporation.

Another change to look out for: before tax reform, many businesses did not qualify to register as C-Corporations. However, under the new changes, they will be able to do so. That means lower tax rates for thousands of businesses. Check with the IRS to see if your startup qualifies, as it could save you a sizable amount in tax payments.

Depending on which type of startup you plan to launch, taxes will inevitably play a role. However, if you haven’t gotten any financing previously, you won’t notice much of a change from last year to this year, especially for a self-funded business.

Recruiting investors

If you plan to recruit investors, whether in the form of venture capital, crowdfunding, private equity firm or from any type of corporation, you may be pleasantly surprised at how much more funding is now available to your startup. The hope is that lower tax rates will motivate investors to look at different potentially-profitable ventures, which can be mutually beneficial.

Profitability is a factor when acquiring funding for a startup. Investors want to make sure that they’re hitching their financial wagons to a stable horse (your business). When proving that the future looks good for your company, taxation will certainly be a factor, since the bigger your profit margin, the happier your investors will be. A lower tax rate goes a long way toward stretching your bottom line and increasing profit margins, allowing you to continue investing in your startup, or even being able to finally pay yourself.

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Repayment of loans

For some businesses, there may be tax deductions available for interest paid on business loans or lines of credit, subject to certain limitations. Corporations in particular may be able to take advantage of this deduction, but be warned that corporations can likely not accept funding from venture capitalists, which are a major source of startup financing.

For small startups that don’t intend to grow very large in a short period of time (though this is impossible to determine due to the nature of startups and business in general), personal financing through a bank may be a good option since these loan payments are tax deductible.

However, before making any major decisions about your startup, the structure, or financing of any kind, it’s a good idea to consult with a certified public accountant (CPA) to determine the best path forward for your business.

In short, the new tax bill may not affect your current day-to-day operations, and brand-new startups may not see an immediate change in funding or taxes. But, being prepared for changes is an important part of running a business, so it’s important to keep up with legislative changes at the local, state and federal level.

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