Tax and Accounting Help for Startups and Founders

A startup makes tax decisions earlier than most owners expect, often before the first customer. The choice of entity, how founders receive stock, whether investors can get special tax treatment, and how early costs and research are handled can all be hard to change later. This page outlines the decisions we see founders face, whether they are building a software company in Naperville, a medical device in the western suburbs or a U.S. subsidiary for a business started in India.

Picking an entity

Venture investors and most stock-based compensation plans point to a C corporation, often a Delaware corporation qualified to do business in Illinois. An LLC taxed as a partnership passes profits and losses to members on Schedules K-1, which suits a bootstrapped company but can complicate outside investment and employee equity. An S corporation cannot generally have a nonresident alien shareholder, so it rarely works for foreign founders or venture-backed companies. Read our entity selection guide, and see C corporation taxes and business formation.

Founder stock and the 83(b) election

If a founder's shares vest over time, the IRS treats each vesting as pay unless the founder files a Section 83(b) election to be taxed on the value when the stock is issued, usually a very small amount in a new company. The election must be filed with the IRS no later than 30 days after the property is transferred; Rev. Proc. 2012-29 explains the filing and gives sample language. Miss it, and later vesting at a higher value can create ordinary income with no cash to pay the tax. Keep proof of timely delivery. See the Section 83(b) guide.

Qualified small business stock

QSBS can allow shareholders to exclude part or all of the gain when they sell stock of a qualifying C corporation after a long holding period. For stock acquired after July 4, 2025, the per-issuer cap on excluded gain rises to $15,000,000 (up from $10,000,000), and holding the stock at least five years can allow up to a 100 percent exclusion. Other holding-period rules and conditions apply. The company must meet size and business tests when it issues the stock, so the planning starts at formation. Keep records of issue dates, asset values and what each share cost. See the QSBS guide.

Start-up costs, research and credits

Costs before opening, such as market research, legal fees and training, are start-up costs. You can elect to deduct a limited amount in the year the business begins, and the rest is amortized over 180 months starting when the business begins (Form 4562 instructions). Domestic research and experimental costs, which can include software development, are deductible when paid for tax years beginning after 2024, while foreign research must be amortized over 15 years. A qualified small business can elect to use the research credit against the employer share of Social Security tax, up to $500,000 a year, if it has gross receipts under $5 million and no gross receipts in the years before the five-year period ending with the current year. The election is made by the due date of the return, including extensions, and the credit is claimed with Form 8974 on the payroll return. See startup costs and research expenses and the research credit.

Foreign founders and Indian-American founders

A U.S. corporation that is at least 25 percent foreign owned, and a U.S. disregarded entity wholly owned by a foreign person, are reporting corporations for Form 5472. The form reports transactions with related parties, such as capital contributions, loans and payments to the owner. A foreign-owned LLC with no other filing files a pro forma Form 1120 with the Form 5472 attached, and that filing cannot be sent electronically. The penalty for not filing is $25,000, with more for continued failure. See Form 5472 penalties.

Beneficial ownership information reports are no longer required for U.S. companies under FinCEN's final rule effective August 2026, though foreign entities registered to do business here must still report. Founders who also run a company in India face reporting for foreign ownership; see Indian business ownership forms. Check your immigration status before accepting salary or equity.

First hires and equity

Hiring triggers payroll registration, quarterly returns and workers' compensation. Option grants need a valuation and written plan, and employees with ISOs, NSOs or RSUs have different tax outcomes. See stock options, ISOs and RSUs and equity planning and management.

Records and mistakes

Use a business bank account from day one. Document whether founder money is a loan or capital. Keep board consents, stock ledgers, the cap table and the date every share was issued. Typical mistakes include missing the 83(b) deadline, paying founders as contractors without a plan, mixing personal costs, and forgetting Illinois registrations.

How we can help

We help founders choose entities, prepare 83(b) filings and Form 5472, set up books and payroll, and plan equity. See bookkeeping, virtual CFO and advisory and working capital and bank loans. This page is general information, not advice for your situation. Legal questions belong with your attorney.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.