Don't obsess over tax and legal structures
emeaentrepreneurs.com
emeaentrepreneurs.com
After the fallout cleared it turned out we, the other founders, had done nothing wrong. Not even non-standard, just advanced. But now the lawyers had all the money and the company failed.
Perhaps it would have been more efficient to not optimize taxes and instead optimize founder alignment.
Keep the parts of the business that are not directly on the critical path to success completely normal and standard.
Best I could tell Delaware is still best state to incorporate. I’m extremely interested in contrary opinions and their basis.
There are at least 54 other jurisdictions within the US alone that have incorporation statutes. Those legislatures and courts haven’t all sat still for the last 30 years, they compete directly with Delaware, other countries and each other.
Delaware’s Court of Chancery, a business court, is replicated is some other states, Wyoming has one. Whether a jurisdiction has that or not, a huuuge benefit is that outside of Delaware you can relitigate cases and argue for the exact opposite outcome as to whatever case law Delaware judges are bound by.
Back to the “for who” question, some things benefit your investors more than you.
Its all a reading comprehension problem.
Currently I like South Dakota for Trusts, Wyoming for LLCs, I still like Delaware for C-Corps, and Delaware for non-profit corporations
I form LLCs the most
> I still like Delaware for C-Corps
I’m thinking the readership of this thread doesn’t realize that using Delaware for capital means using a C-Corp
I’ve seen lots of lazy/broke/small entrepreneurs go with LLCs anywhere, but LLC anywhere isn’t using Delaware for what Delaware offers
No other jurisdiction really competes with Delaware. It's got a robust body of case law and everyone knows what to expect.
How come this is a benefit? Unless you know ahead of time what conflict you are going to be in court about this seems 50/50 whether it will benefit you or the person suing you/being sued by you.
Your ability to plan it out most likely it won’t be on your first venture
Is that really common for people to do in EMEA? I thought that was a US thingy they teach you at startup schools/incubators. AFAIK, EMEA founders setup their company in their respective countries.
Startups don’t fail because they chose to not innovate when setting up their corporate structure. They fail when they can’t build a product worth money to other people.
Having an innovative or non-standard corporate structure (basically anything other than Delaware c-corp) will cause headaches and even once you’re successful, will make a lot of things more difficult. Harder (more expensive) to find lawyers, harder (more expensive) to find accountants, and it will be an issue if you are getting acquired or raising money.
I don’t disagree there might be viable alternatives. But most founders shouldn’t be trailblazing a new path with an innovative corporate set up. Just do what everyone else does and put your focus where it matters.
I’m curious why anyone wouldn’t default to Delaware c-corp for the typical startup raising capital. What’s the gain?
Your mileage will vary depending on jurisdiction and governments in many jurisdictions have been making changes to tax law to reduce the use of trusts in this manner. But the advantage still remains in many places.
But for anyone building a lifestyle business, starting with a wrong legal or tax framework is much more likely to be a major pain and potentially doom the business altogether. My 2c.
This is a fantastic point. People tend to check-out and glaze over when they have to deal with accounting and tax matters, and that's a really efficient way to variably either run your business into the ground, artificially hamper it, or screw yourself later.
When my colleagues and I opened our business we had a few concise discussions on corporate structure. We went with a C Corporation because at the time we all had major financial changes on the horizon in our personal lives and we didn't want our personal and business taxes to be interrelated.
Still works for us to this day, and was a wise choice give our respective personal tax situations.
Likewise, early advice I'd give anyone is to invest in an accounting solution that fits your business model.
Part of that is saving you time by getting a book keeper and accountant who will walk you through minor additions to this stuff. I see folks spend time on weirder ideas like Trusts, and they are time sucks away from what they should be doing, and if/when M&A hits, a lot of nonsense to unwind. I rather spend that time getting an extra $50k-$100k customer that raises the valuation $500k-$1M.
The one shift I've seen is QSBS hijinks at state levels have led to founders leaving SF/NYC/etc as their co's hit Series B+ and and they care less about local VC + tech ecosystem proximity. Less true of unprofitable companies reliant on the next round for keeping the lights on.
In the U.S., it’s fairly easy too if you use quickbooks or similar, but the IRS is much harder to deal with than HMRC, and is much more of a punitive organisation.
However, having an accountant to talk to can give reassurance that you’re not going about things extremely stupidly.
The moment you start doing business in multiple jurisdictions (in the U.S., this includes multiple states), it starts to get a lot more complicated and using a professional makes sense. International tax is a huge pain, especially where the U.S. is involved.
I do think the general idea that it’s much better to try and run a straightforward business without complicated tax structures when you’re young really rings true. It’s better to focus on generating revenue than trying to squeeze out every penny of tax optimisation.
The accountant itself is also a deductable expense.
E.g., when is a simple accountant worthwhile? How about one specializing in business taxes? When (if at all) should you switch to a full blown accounting firm? When should you hire a CFO to optimize these choices for you?
These all cost money, so I assume there's some break-even point on the investment. And other pros/cons for a company owner delegating this part of the business.
Useless article. Get an accountant they are better than you at this.
I would rephrase that as “don’t rush to create a new legal entity until there’s an event that forces you to.” Events such as:
- raising money from outside investors - forming a partnership - hiring an employee - so profitable that the plaintiffs/lawyers are circling
Forming a new legal entity takes time and money and distracts from getting the business off the ground. If the business doesn’t get off the ground it’s time and money to close down the entity.
(Someone will respond to this by declaring that you need limited liability protection for your personal assets, which is a level of paranoia I don’t subscribe to mainly because your personal assets are already at risk even before you start a company. Sane people/customers aren’t hunting for lawsuits, they have lives to live and businesses to run.)
I’ve been a founder and know dozens of founders. Tax has never come up as a topic of conversation.
Primarily because companies are only taxed on profits. Most startups aren’t profitable and therefore pay no taxes (other than payroll taxes).
This is true even for public companies. 40%+ of S&P 500 companies are unprofitable.
Folks building products to solve problems for people are far more likely to do what they’re told is “normal/best practice”. At the other end of the spectrum 10% who do nothing and expect it to be “fine”.
That reads a bit cynical, but it isn’t intended to be — people choose different paths and how and if they work out is hugely varied. Each path has benefits and risks, and appeal and ugliness.
Of course the profit reported to investors could be different from the profit reported to the IRS.
At the extreme, no Hollywood production ever makes a profit, and they aren’t taxed. The tax people aren’t stupid, and the total tax paid is actually reasonable, but it is not paid by the entity that makes the movie, but rather by actors, marketing, filmmakers, etc. They get to minimize their tax to the absolute legal minimum, while at the same time advance their business goals (primarily, shaft whoever isn’t aware of these schemes - mostly newcomers to the business)
For example, I relocated to Puerto Rico several years ago and am taking advantage of a 50% transferrable R&D tax credit. Because it's transferrable I can sell the tax credit to people that have a tax liability even if I don't.
After fees, this means I get roughly 40% cash back on my R&D expense. This is a big deal to me and my company.
If you don't do your home work you can potentially miss out on some great opportunities. That said, you do still need to build a good business, or the best tax structure in the world won't save you.
Taxes are very real cost. They mean years of your working life, risks you could take, choice you can make, life quality you can afford, close ones you could help etc.
My experience with tax optimization is that, after the first year, the auditor included suboptimal tax settings as an audit finding and also provided concrete recommendations on how to implement the change. So, really, don't think about it, you will get the advice anyway.
here in the USA it is the opposite.. the IRS will never tell you a better way to do anything.. and in common case will try to charge you more tax and not tell you how to improve your structure
The IRS does not have knowledge of everything you do. They can figure out shit that makes no goddamn sense on your taxes, but they won't bother to optimize stuff FOR you.
Why do people complain that the government doesn't have omnipotent knowledge of your finances? Why do they also complain that the government won't spend tax dollars doing shit for you?
I am pretty sure I wouldn't get that here in Serbia either.
But if you’re already familiar with how to optimize, implement that obsessively
"almost-facts".
I did a Google search for this term and I didn't find many results, and none of them seemed to be using this combination of two words as its own term...
In other words, the author of this article -- may have coined a catchy new two-word phrase here...
"Almost-facts".
As a phrase, I love it!
That term is going into my 2024 lexicon! :-)
It might find some application alongside such recent terms as "Fake News"...
For example, to use this new term in a sentence:
"The Fake News reports Almost-Facts..."
:-)
Anyway, interesting article!
Maybe this is the disconnect: you use a tax lawyer to set up your legal entities to minimize the tax you need to pay. An accountant files your taxes every year. I'm not advocating you pay a tax lawyer to do your taxes every year. That would indeed be overkill and expensive.