As your B2B startup moves upmarket, enterprise procurement teams will inevitably ask for your “SOC report.” The confusion usually starts when the client’s security team demands a SOC 2, while their CFO’s office demands a SOC 1.

Understanding the distinction between these two critical AICPA attestation frameworks is essential. Pursuing the wrong audit can cost your startup tens of thousands of dollars and delay enterprise deals by months.

This guide breaks down the core differences between SOC 1 and SOC 2 compliance, and helps founders determine exactly which report their startup needs.

Security and Financial Compliance Requirements

The Core Difference: Financial vs. Security

The easiest way to differentiate the two is to look at who on the client side is asking for the report.

SOC 1: The CFO’s Requirement (Financial Reporting)

A SOC 1 report (previously known as SAS 70 or SSAE 16) is designed strictly for service organizations that impact their clients’ Internal Control over Financial Reporting (ICFR).

If your software calculates payroll taxes, processes credit card payments, or manages cloud invoicing, your clients rely on your math to generate their own financial statements. When your client goes through their annual corporate audit, their auditor will refuse to trust your client’s balance sheet unless they have proof that your software processes data accurately. A SOC 1 report provides that proof to their auditor.

SOC 2: The CISO’s Requirement (Data Security)

A SOC 2 report has nothing to do with financial accuracy. It evaluates an organization’s information systems based on the AICPA’s five Trust Services Criteria: Security, Availability, Processing Integrity, Confidentiality, and Privacy.

If your startup provides a CRM, a marketing automation tool, or project management software, you are storing your clients’ sensitive data. The client’s Chief Information Security Officer (CISO) needs assurance that you won’t get hacked and expose their customer list to the dark web. A SOC 2 provides that security assurance.

Do Startups Need Both?

For 80% of SaaS startups, only a SOC 2 is required. The vast majority of software products do not directly impact a client’s general ledger. If you fall into this category, pushing back on an uneducated procurement officer asking for a SOC 1 is entirely acceptable.

However, if you are a FinTech startup (e.g., Stripe, Gusto, Expensify), you absolutely need both. You need a SOC 2 to prove your databases are secure from hackers, and a SOC 1 to prove your transaction processing algorithms do not accidentally double-charge user accounts.

Report Types: Type I vs. Type II

Whether you need a SOC 1 or a SOC 2, both reports come in two flavors: Type I and Type II. They measure exactly the same controls, but over different time horizons.

  • Type I (Design Snapshot): Tests the design of your controls at a specific point in time (e.g., October 1st). Did you have a password policy in place on that day?
  • Type II (Operational Effectiveness): Tests whether those controls operated effectively over a continuous period (usually 6 to 12 months). Did every employee follow the password policy every single day for the past year?

Startups usually undergo a Type I audit first to quickly satisfy an urgent sales deal, then immediately transition into a Type II observation period to satisfy future enterprise renewals.

The Scope of a SOC 1 Audit

Unlike SOC 2, which has a standardized set of criteria (the Trust Services Criteria), a SOC 1 audit is entirely custom. Management must define the exact control objectives relevant to the services provided.

For example, a payroll startup’s SOC 1 scope might include:

  1. Control Objective 1: Controls provide reasonable assurance that payroll tax calculations are updated within 48 hours of IRS regulation changes.
  2. Control Objective 2: Controls provide reasonable assurance that direct deposit batches perfectly match approved client totals before transmission to the bank.

The auditor then tests the specific engineering and operational procedures supporting those exact objectives.

What About SOC 3?

A SOC 3 report tests the exact same security framework as a SOC 2. The difference is the output.

A SOC 2 report is highly restricted. It is hundreds of pages long and includes detailed descriptions of your firewall configurations and any vulnerabilities the auditor found. It can only be shared with clients under a strict Non-Disclosure Agreement (NDA).

A SOC 3 report strips out all the technical details and exceptions, resulting in a short, high-level summary that simply states, “This company passed the security audit.” Because it lacks sensitive data, a SOC 3 can be freely published as a PDF on your startup’s marketing website.

Conclusion

Before engaging an auditor, clarify exactly what your enterprise prospects need. If their concern is “Will this vendor protect us from a data breach?”—you need a SOC 2. If their concern is “Will this vendor cause a material misstatement on our tax returns?”—you need a SOC 1.

Investing in the correct compliance framework early prevents costly delays when attempting to close your most critical Series A enterprise contracts.

Frequently Asked Questions (FAQ)

What is the main difference between SOC 1 and SOC 2?
SOC 1 focuses strictly on controls that impact your customers’ internal control over financial reporting (ICFR). SOC 2 focuses on controls related to data security, availability, processing integrity, confidentiality, and privacy based on the Trust Services Criteria.

Does a SaaS startup need a SOC 1 or SOC 2?
Most SaaS startups only need a SOC 2. However, if your SaaS product directly processes billions of dollars in payroll, invoices, or handles general ledger data for your clients (like Gusto or Stripe), you will likely need a SOC 1 as well.

Can a SOC 1 report be used for cybersecurity assurance?
No. While a SOC 1 report may touch on basic IT general controls (like who has access to the database), it does not comprehensively evaluate cybersecurity posture. Enterprise procurement teams require a SOC 2 for security assurance.

Why do clients ask for a SOC 1 report?
When your enterprise clients undergo their own annual financial audit, their external CPA firm must verify that any third-party software handling the client’s financial data is accurate. Providing a SOC 1 report proves to your client’s auditor that your system calculates numbers correctly.

What is SSAE 18?
SSAE 18 (Statement on Standards for Attestation Engagements No. 18) is the auditing standard established by the AICPA that dictates how a CPA must perform a SOC 1 audit.

Can you combine a SOC 1 and SOC 2 audit?
Yes. If an organization requires both, they often hire the same CPA firm to conduct the audits simultaneously to save time on evidence collection. However, they are still issued as two completely separate reports.

Are SOC 1 and SOC 2 reports public?
No. Both SOC 1 and SOC 2 reports contain highly sensitive information about a company’s internal infrastructure and control weaknesses. They are only shared with current or prospective clients under a strict Non-Disclosure Agreement (NDA).

What is a SOC 3 report?
A SOC 3 report tests the exact same security criteria as a SOC 2 report, but it removes all the sensitive details about the specific tests performed and any exceptions found. Because it is a generalized summary, a SOC 3 report can be freely published on a company’s website.

Which is more expensive, SOC 1 or SOC 2?
Audit fees for both are comparable (typically between $15k and $40k depending on complexity). However, SOC 1 preparation can sometimes be more expensive for fintech startups because it requires intense scoping of financial calculation logic rather than standard IT security policies.

Do we need a Type I or Type II report?
For both SOC 1 and SOC 2, a Type I report is a ‘point in time’ snapshot showing you designed controls properly. A Type II report spans a period of time (typically 6-12 months) proving you actually followed those controls every day. Enterprise clients ultimately require Type II reports.