I want to have a startup, and I'm still in the idea phase. I 'm not planning to incorporate until I 'm done with the MVP or pretty close . My questions are - - How can I report the money paid for this, like domain names, lawyer fees, graphic designers, software developers ..etc that was made before incorporation, as expenses for tax purpose? - After incorporation, can I keep moving money FROM my personal account to the company business account, to cover more expenses and provide liquidity? - If the initial deposit was not enough, and the revenues were delayed or not enough?
The tax rules will vary depending on what country you want to incorporate and where you will operate your business. The type of entity you select will also impact this answer. If you are looking to form a corporation in the United States, then startup costs incurred prior to forming the corporation can be deducted to a certain extent, but are generally capitalized and amortized over 180 months. It's usually best to form the corporation early in the process to avoid having to amortize a lot of these expenditures. After incorporating the company, if you are not generating sufficient revenue to cover operating costs, you can certainly contribute additional funds to the corporation from your personal bank account. When shareholders contribute cash to the corporation, the contributions are classified as contributed capital. Alternatively, you could structure the contributions as a shareholder loan rather than an equity contribution. I would recommend consulting with a tax advisor to discuss your unique facts and circumstances in more detail.
In addition to the elaborate answer that Jason gave before me, I strongly advise that you make sure that all the Intellectual Property (IP) that you and/or your team are creating is assigned to the future company and that all involved have signed an IP waiver. If not, there are 2 main (and major) risks:
1. when you eventually do setup the company and transfer the IP to it, this will be considered as a tax event, which you might have to pay taxes for later on when you eventually sell the company to an investor (example: every time you get your salary, you pay taxes, because you are getting something of value - the salary. When you transfer the IP to the company - which is a separate legal entity - you are giving it something of value, like the salary, which creates a tax event).
2. If one of your team members leave, they are leaving with the IP rights to whatever they created.
I am happy to explain to you how you can and should avoid these two outcomes. The solution isn't complicated nor too costly.
If you are in the US, the simplest approach is to form a pass-through entity such an an LLC, or a C-Corp with a Sub-S election (a variation on the pass through), where all the losses (and profits) end up on your tax filings. The challenge is that, with the current tax environment in the US (where you have a "standard" deductions) unless these are significant, they will not make much tax difference. If you approach it this way, and pass through the losses, you will not have the benefit of them in the future.
Remember though, once you incorporate, if you have other shareholders, if you are the only person adding cash, it will benefit them all if you are not careful with the accounting. As you add capital to either entity, it increases your cost basis in the shares if you approach the Sub-S version or you can use shareholder "loans" for the LLC that would be repaid from future cash flow.
This is not difficult but you should get an accountant involved early. A corporate lawyer will be valuable in helping you choose the right entity. And keep great records.
You are lucky to get the relevant wisdom from the professionals as Jason Knott, Assaf Ben-David and Dane Madsen on the subject.
I personally feel that for any startup, profitability must be the prime focus. Though there are many points to focus on but I will share the two most relevant ones.
The first part is to develop and invest your professional expertise and the required time in 100% so that you don't need a major capital investment. And the second is to develop your product/service as unique and valuable so that the people who need you don't have to focus on the price.
To know more on the subject please visit www.ProfitMentoring.com
In regards to your first question make sure you have photocopies of all cleared checks and credit statements. That should be sufficient when reporting statements to the IRS. For question 2, yes you can. Make sure you keep track of your personal deposits in your business.