Six Key Tax Considerations that Will Make or Break a Startup

For startups, tax matters might not be the most enthralling topic, but the right strategies can have a huge impact on financial health and ultimately, whether a startup thrives—or even survives.

The US is experiencing a sort of renaissance for startup investments. Startup funding jumped 75.6% year-over-year in the first half of 2025, reaching $162.8 billion and marking the strongest performance since the same period in 2021 (the previous historical peak for venture capital activity). In 2024, US entrepreneurship surged, with an average of 430,000 new business applications filed per month, 50% more than in 2019. These new businesses are huge contributors to our national economy, creating more than 70% of net new jobs since 2019. That is a huge impact from a relatively small slice of companies.

Some of today’s most iconic brands like Apple, Microsoft, and Amazon were once scrappy startups. In today’s tech and AI boom, startup culture is thriving, but it is not without hurdles. Founders face constant pressures around cash flow, market fit, scaling, and sourcing talent, which requires them to make the right decisions and moves with tax implications top of mind.

As a tax professional, I have seen how these decisions play out, both in positive and negative ways. Here are six key tax considerations that can make or break a startup:

1. Structuring the Business

When forming a new venture, one of the biggest decisions is how to structure it. Common options include an LLC, partnership, S corporation, or a C corporation (with Qualified Small Business Stock). Each has advantages and drawbacks, and choosing the wrong one for a business at the outset can create headaches later. The key is to match the structure to a company’s goals, funding plans, and long-term strategy.

One of the most common errors we see is a founder making an Selection while planning to raise capital and build a more complex capitalization table. While an S election can offer strong tax benefits for small businesses in the near-term, it comes with strict ownership rules that can create significant challenges for companies seeking outside investors.

It is essential to consider what kind of structure is best suited to each individual company and get the structuring right from the start. For a fast-growing startup with plans to raise significant capital and a potential exit strategy in five or more years, a C corp with QSBS eligibility is a highly attractive alternative. QSBS offers shareholders the potential to exclude a substantial portion of capital gains upon the sale of the stock. However, a C corp comes with some trade-offs: To qualify as QSBS, the stock must be held for a minimum period of three years, after which the benefits are phased in (according to the most recent legislative changes to the tax code under the One Big, Beautiful Bill Act). And a C-corp must pay corporate level taxes and will not benefit from the pass-through treatment associated with an S corp.

Other startups — particularly those that are self-funded or have a limited number of owners and/or don’t anticipate needing significant outside investment early on — may prefer the pass-through tax advantages and liability protections that come from being an S corp.

2. Incentive-Based Compensation

One of the biggest perks of working at a startup is the chance to share in its growth through equity or stock options. When employees have equity in the company, they are more motivated to help the company succeed long-term. Structuring an entity correctly as described in point one is a key factor giving startups much-needed flexibility in the way in which they allocate value amongst early key employees. An S corp, for example, restricts who can own shares and how many classes of stock can be issued, which can make it harder to grant equity to employees or advisors. Generally, issuing equity is much simpler for C corps than S corps or LLCs.

If attracting top talent is part of a company’s growth strategy, the structure should allow the company to easily issue equity and offer other types of incentives, which can include stock options and profit sharing, depending on the entity type. Setting up the right compensation approach is critical for recruiting high-caliber employees when the startup cannot yet compete with large company salaries. Skipping this planning can lead to limited compensation options, struggles finding top talent, and missed future tax advantages.

3. Deferred Tax Strategies

If the startup is profitable early on and growing at a fast rate, it should consider deferred tax strategies to protect as much of its earnings as possible. Many founders overlook retirement plans as a tax tool, but they can be a powerful way to defer income and build personal wealth.

Options include solo §401(k)s, SEP IRAs, and profit-sharing plans. Each has different contribution limits and rules, but all allow owners to set aside much more than traditional retirement accounts. These options can allow owners of high-margin profitable startups to defer much more than the traditional caps in standard §401(k)s and IRAs. Deferred tax strategies are great because owners can postpone paying taxes on certain income and investments, allowing them to potentially reduce their tax burden and reinvest in new opportunities in case they sell the business or retire.

4. Take Full Advantage of R&D Tax Credits

The Research and Development tax credit is one of the most valuable yet underused incentives available to startups, especially in technology, software, manufacturing, and biotech. If a company is creating new products or developing technology, it may qualify. These credits directly reduce the tax bill, and for early-stage companies with little or no income tax liability, can be applied against payroll taxes, providing immediate cash flow relief.

Qualifying activities do not need to be groundbreaking — they just have to be related to developing or improving a product, process, software, formula, technique or invention, which is applicable to a wide range of products and services. Many founders do not realize they are eligible, or they assume the process of claiming R&D credits is too complex to be worth it. Working with a knowledgeable tax professional is a great way to understand and identify qualifying activities, document expenses, and ensure compliance with IRS rules.

Given how cash-strapped startups can be, ignoring R&D credits could mean leaving potentially tens or hundreds of thousands of dollars unclaimed. If innovation is part of your business model, you need to make exploring R&D credits a priority. This is especially true given the recent signing of the OBBBA, which brings significant relief for firms conducting R&D domestically through new provisions allowing these companies to immediately expense full domestic R&D costs.

5. Failing to Make a §83(b) Election

The §83(b) election is a provision that allows individuals who receive restricted stock to be taxed on the stock’s value at the time it is granted rather than having to wait until it vests. This is often years later, at which point the company’s value and the taxable amount could be much higher. Being able to have the stocks taxed at the beginning when the startup’s valuation is lower means these individuals could pay far less in taxes and set them up for long-term capital gains and potential QSBS benefits much earlier.

The §83(b) election may be one of the simplest, highest-return tax moves owners or early employees can make when working in a startup. For example, if they are granted shares worth $0.01 each today, they pay tax on that small amount now. If those shares are worth $10 each in four years when the stock vests, they have already locked in the lower tax cost. However, they only have 30 days from the grant date to make a §83(b) election, and missing this deadline can be a costly mistake. Every founder and early employee granted stock should understand this rule and act quickly.

6. Failing to Make Estimated Tax Payments

If the business is structured as a “passthrough entity” (i.e., a partnership or S corp) and it is profitable very early on (which is not necessarily typical in the startup space, but can happen), the owners are responsible for making estimated tax payments throughout the year. Failing to do so can lead to hefty penalties and interest incurred. Additionally, if a C corp is chosen, entity-level taxes must be paid, and on time to avoid late payment penalties.

Taxes may not be one of the most exciting parts about running a startup but they are one of the most important. Making the right decisions and taking the proper steps early in the areas described above can save a startup thousands of dollars in tax bills while giving a startup the critical financial latitude and flexibility it needs to grow and prosper.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Pablo Martell, CPA, is the founder and CEO of Alpine Mar.

Write for us: Author Guidelines