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Comment by bradgessler | Hacker News Reader

You should add that you cap founder salaries at $250-$300k/year (if I remember your terms correctly)

If you’re a founder looking at TinySeed, what this means is that if your business reaches a level of success you can pay yourself over $250k-$300k through your W-2, you’ll either have to cap it there or pay the rest through dividends.

That said, this isn’t really a terrible setup if you plan to go down this route. The IRS takes issue when tightly held C-corps pay themselves large amounts via W-2’s because they would want to reclassify those as dividends. They won’t say what the “large amount” is, but I’ve been advised that its around $250k-$300k if you don’t have disinterested stockholders or board members voting on your comp.

As always, consulting with your accountant before making tax and/or fundraising decisions.

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Salaries and benefits need to be capped, otherwise founders can choose to pay themselves instead of paying dividends.

Honest founders often love the status that comes with big salaries and expensive perks, so investors need some way to cap that behaviour or otherwise investors get shafted.

It is perfectly fair: dividends do not overly cause taxation imbalance.

Micro-optimising for success before you are successful is a loser’s game. It is, of course, critical to configure your business so that you do indeed reap your rewards if you are successful (watch out for VC’s who have asymmetric information about the end-game and they can optimise for that against you).

If you are successful, then don’t sweat the micro-optimisations you missed out on. When founding, it is often easier to make the business 5% more profitable, rather than lose time pre-optimising for potential 5% gains.

bradgessler, you have that completely backwards (might want to edit your post so others don't get confused). Dividend income is almost always taxed lower than w-2 income on several levels. The IRS goes after C corps for distributing dividends without a fair-wage w-2-- it triggers an automatic inquiry which, if you're not paying a fair wage, leads to an audit.

> IRS takes issue when tightly held C-corps pay themselves large amounts via W-2’s because they would want to reclassify those as dividends

Isn’t dividend income taxed less than W-2 income?

Yes and no. It depends on what bracket you’re at on your income tax. It also depends on whether or not you’re factoring in corporate income tax too, which is paid before dividend distributions are made. For tightly held C-corps, you’d probably factor in the corp income tax since the concern would be about tax efficiency from revenue to dollars in your pocket.

That's correct. More info here on the full TinySeed terms can be found here: https://tinyseed.com/faq

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