Bookkeeping for startups: what to set up in your first year

Week one: open business accounts and stop mixing money

IRS Publication 583 says you should keep your business account separate from your personal checking account and deposit all business receipts into it. For a startup, that means a business checking account, a business card for software and travel, and a rule that nothing personal touches either one.

If a founder pays a company expense personally, record it as a reimbursement owed to the founder, then pay it back from the company account. Do not quietly skip the record. Every unrecorded expense is a deduction you cannot document and a gap your reconciliation will not explain.

Pick cash or accrual on day one

Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when it is earned and expenses when they are incurred, even if the cash moves later. For example, a $12,000 annual software contract paid in January is $12,000 of cash out in January but only $1,000 of expense each month under accrual.

The IRS says you must use the same accounting method to figure your taxable income and to keep your books. Kruze Consulting, a startup accounting firm, says venture investors typically expect all three financial statements on an accrual basis for board reporting and fundraising. Many startups keep cash books at first and switch when they raise. A tool that keeps both and lets you flip between them saves the later rebuild. Accountable does this, and switching never re-posts anything.

Build a short chart of accounts before the first transaction

The chart of accounts is the list of categories every transaction goes into. A startup needs fewer than most guides suggest, and each one should be something you would want to see on a report.

The guide to categorizing business transactions shows where common startup charges go.

Run the same six steps every month

1. 1

   Step 1: Connect every bank, card, payroll and payment account so transactions arrive on their own instead of by hand.

2. 2

   Step 2: Categorize every transaction and answer the questions the tool cannot. Fix wrong categories this week, not in April.

3. 3

   Step 3: Match transfers between your own accounts so they are not counted as income or spending.

4. 4

   Step 4: Reconcile each account to its statement. The difference must be $0.00.

5. 5

   Step 5: Review the profit and loss, balance sheet and cash flow for anything that looks off, then lock the month so the numbers stop changing.

6. 6

   Step 6: Send the month's report to your co-founder, your CPA or your investors.

The month-end close checklist guide covers the full routine. An AI bookkeeper can do steps 1 to 4 and leave you the review, as explained in how AI bookkeeping works.

Keep a document folder the IRS and investors can follow

Publication 583 lists the supporting documents that back your books: sales slips, paid bills, invoices, receipts, deposit slips and canceled checks. It says to keep them in an orderly fashion and in a safe place. For a startup, add your incorporation papers, EIN letter, bank agreements, customer and vendor contracts, payroll reports and the cap table.

The IRS says to keep records that support an item of income or deduction until the period of limitations for that return runs out, generally 3 years, and to keep employment tax records for at least 4 years after the tax is due or paid. Records for property you depreciate must stay until the limitations period ends for the year you dispose of it. Store them digitally. The IRS says electronic records must be complete, accurate and accessible to the IRS.

Know what comes due in year one

• A Delaware C corporation files its annual report and pays franchise tax by March 1. See Delaware franchise tax for startups for how to pay $400 instead of $85,000.
• Payroll, once you have employees, creates tax deposits and filings that your payroll provider usually handles.
• Payments of $2,000 or more in a year to a contractor for services, made after December 31, 2025, can require a Form 1099-NEC (the IRS lists $600 for earlier years), so collect a W-9 before the first payment.
• The federal return for your corporation is yours to file with your CPA after year end.

Check the current deadline and form rules on IRS.gov each year, because thresholds change.