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Comment by tptacek | Hacker News Reader

Been there.

* If your payables and debts are all in the company's name, nobody is coming for your house. The likelihood that your business was going to die before you could pay all your debts was priced into your contracts. If you have employees, pay them and get them off your books first; employee wages are, depending on the state you're in, the one likely exception to that rule.

* If they were in your name, well, that sucks, but still nobody is coming for your house. Your credit rating will probably absorb all the damage. I've had shitty credit all my life, so much so that it used to make it hard to get checking accounts (I'm not a deadbeat, I just don't have revolving credit, and do have billing disputes that I don't have time to resolve). Shitty credit is not that big of a deal. Just don't use credit.

* It sounds like your wife is right. The existence of startups isn't a guarantee that you'll never need to work for someone else again. The normal life cycle of a startup founder is, (1) work for someone else, (2) start company, (3) run company into ground, (4) goto 1. Think of it this way: had your company been successful, it almost certainly would have left you in a state where you'd be working for someone else for a couple years during your earnout. "Not working for someone else" was never really on the table.

* Getting a company funded and then running it is a resume plus. You won't have more trouble getting another job than you did getting the one you left to start this company.

* Your investors expected you to fail. The odds were always overwhelmingly that you would. The whole startup investment model is, put money into 10 companies, hope 1 succeeds. Your investors are professionals. Let their problems remain their problems.

* Are you going to get ridiculed for failing? Obviously, you're not an HN reader. You'd have gotten ridiculed for succeeding. Ridicule is the air we breathe. Why do you care?

* Most small companies start from nothing. That's good news, because "nothing" is an easy state to achieve. Give yourself a couple years, and then try again.

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In addition to Thomas being right about employee wages being able to "pierce the veil" in many states, they're the people most at risk in this situation, so you owe it to them to make sure they're taken care of. It's the one circumstance where I would backstop a company problem with personal funds. (If your company was also behind on e.g. rent or hosting, on the other hand, that risk was priced into contractual terms, like Thomas said. I'd generally prefer to make vendors whole where possible but I wouldn't lose sleep over it.)

With regards to your own situation: you're in the best hiring market in the history of ever. Reach out to your incubator's network and you'll have attractive job offers starting as early as you can accept them. That isn't the whole of the solution set: Big Daddy G and the rest of the tech industry are hiring like mad, too, and they are also throwing around signing bonuses large enough to cover your last few months of salary nonpayment.

P.S. to other HNers: "And then we didn't pay ourselves salary" strikes me as something I hear from a lot of failed funded startups which magnifies the personal financial risk of doing them significantly without meaningfully increasing the chance you'll pull things through. I'd strongly consider not doing that, again, unless the alternative is missing payroll for your other employees.

Agree.

Not paying yourself is fooling yourself into believing you have a sustainable business.

What you have is a source of revenue (not income) and it should be mentally in the "side projects" category. I.e. you should probably have a job and do this on the side.

The stories about people who didn't pay themselves but finally made it are far between and is not recommended IMHO.

Not paying yourself is bad since it constantly makes you worry - which in turn is really bad for your company. Figure out a fair and low salary you can pay yourself and be 100% emotionally invested in your company without worrying.

Agreed. I guess you mean "worrying about family" at the end.

With investment equity in place, why the cofounders and employees are not paid? How to calculate? They must be paid and reload as owner's paid-in later if the company is running out of fund. If they don't like to follow business rules, then how can we help? Just like there is a wall, you'd like to hit it by not walking around it.

Isn't not paying yourself simply an amortized investment of your own money into the business? As long as you are getting a good equity deal on that, and you could make that same investment at the outset, but don't HAVE to - why not?

You're not making the same investment at the outset: you're doubling down after the business has already demonstrated "I'm failing quickly, unlike the median funded startup, which is failing marginally less quickly." [+] In return for assuming that extra risk, you get no marginal gain in equity.

If you absolutely must shoot your own foot, clean the wound after doing so, because gangrene sucks even more than gunshots (though that is not an argument for gunshots). Continue taking a salary. Loan your take home pay back to the company. Get a written IOU. In the unlikely event that the company goes on to thrive, the company can repay that IOU like it repays any other debt.

This is a really stupid lending decision by any objective measure. You're loaning money at a ridiculously below-market interest rate to a company which you know to be failing and where you know that you have zero ability to meaningfully collect from the principals (because moving money from your left pocket to your right pocket doesn't help you). You are not getting additional equity for this loan, like e.g. a convertible note would entitle you to. ("Why not make it a convertible note?" Because your existing investors will go apeshit if you self-deal. Founder equity only ever goes down, never up. That's as close to an iron law as the Valley has.) But it's less stupid than simply forgoing your salary for a while, because there's less downside with the taxman (whether the company succeeds or fails) and the possibility of you being made whole again if the company succeeds.

[+] Not making fun of anybody here. You care about your burn rate and cash on hand for a reason. Cash on hand divided by burn rate equals how many months you have until the business fails, absent an injection of extra capital.

I still don't get why it's a bad idea to forgo salary in a venture where you retain majority ownership. It sure seems like there are loads and loads of people who spun up successful businesses on sweat equity. Way more than have ever taken funding.

If it's not a capital intensive business and your cost of living is low, why on earth wouldn't you minimize investors to the extent possible? If you've got $300k in savings and cheap digs, your percentage ownership of the upside is the concern, not getting a check for $3k every month.

There were a lot of "ifs" in that comment. Unlikely he has 300k in savings, if he did he wouldn't be scared. Also unlikely his cost of living is low if he lives anywhere near the valley and has a wife and/or kids.

If you have tons of money in the bank and have a really low cost of living, and your business isn't capital intensive, sure you can skip a few paychecks. Even then, the small salary you are taking likely isn't meaningfully impacting the startups runway. Maybe extend it just slightly. And as you are doing it you are lowering your own savings and personal "runway".

We're talking past each other, I think. I don't have any problem with bootstrapping (as my biography probably makes pretty clear) and understand that, under many business models, bootstrappers will go cash-flow negative early on. Not a problem.

At a funded startup, though, you've already committed to "We either grow big or fail ingloriously." If your personal paycheck is the difference between solvency and insolvency, you've already failed ingloriously. That's fine and expected, but don't put your family's financial situation at further risk by deferring the paycheck for the final few months.

I ran my first startup as a "We don't pay ourselves" kind of thing. Actually mostly me, the other founder was side-jobbing as a freelancer.

I'm not sure how big a factor it was, but being dirt poor did not help that startup. And it just hurt all that much more when it all came tumbling down.

I think your problem is not because you don't have a side job. It's all about how to deal with partnership type of business.

If you don't have external funding, cofounders may choose to bootstrap the company, but you must have written down contracts about how the partnership will go, and register it with city/county or the State of Secretory. If you don't, you may hurt all of you no matter you all have income or even if you are rich. And the partnership cannot last long without such kind of contract and agreement. Some startups failed even before the fund pending because the partners cannot agree on the equity distribution.

The dumbest thing I've ever done in my career was to start a "founders don't take salary" company after earning a windfall from the sale of the last company I'd been at. Most companies fail. That company was no exception. The personal cost was spectacular.

Most HN'ers seem to be in their mid-20s. Something you'll learn when you cross 30 is that time is more valuable than money. You'll never get the years you spend chasing a doomed idea back. If forgoing a salary seems to be a make-break issue for your idea, pick a better idea.

This.

I've been on the fence for years about a few ideas. As time marches on and more risk acrues I feel in an exponential trap of not having the time to make a mistake. In lieu of this I've set myself up to break financial headwind and offer up the position at my, estimated, last opportunity in time (at least for now).

Thanks for the insight. Always appreciate your comments and insight. Although, the credit piece, has to be a royal PitA at times. Luckily I have no issues there at present time.

Yup, if only someone had been there to stop me from doing the same. I poured everything into a failing company because I couldn't bear the thought of failure or working for someone else.

I even put in the money I'd set aside for the IRS, telling myself I'd get it back as soon as a big contract we were working on came through. And then it didn't.

Failure is always an option. The aftermath just keeps getting worse the longer you stave it off.

I'm not a huge fan of Rich Dad Poor Dad and the cult of Kiyosaki, but that was the first place I heard about the adage "pay yourself first".

I think a lot about that, not just in financial terms, but emotional as well. If you can't take care of yourself, you won't be able to sustain taking care of other things, no matter whether those other things are businesses, employees, personal bills, or loved ones.

That philosophy is also in The Richest Man in Babylon and every single book written on finances ever. If you can't pay yourself first, you will never save anything.

I'm trying to understand the context and limits of your advice, in light of the chicken-and-egg problem of getting people to invest in or buy your product before proving it out, which usually requires building something to show it's possible, which usually requires quitting your previous employer so they don't own it. Are you suggesting that forgoing salary shouldn't be a substitute for thinking about your revenue model, which I'd probably agree with? That thinking "I have money in the bank, I'm fine for now" makes you less hungry and less likely to take the actions you need to succeed? That one should know when to quit and should never let dreams get in the way of facts?

Or are you saying that forgoing salary is always a bad idea? If you are, how else are we supposed to start a product company? It seems like it's a worse idea to take investment without having done some minimal homework and prototyping to prove out the market, which usually requires at least building something you can show to customers. It's a very bad idea from a legal standpoint to do that work while you're still employed by somebody else. Consulting -> product conversions can work, but it's often really hard to make time for product development while consulting.

From my own perspective - I started a "founders don't take salary" company when I was 2 years out of college. It failed miserably, predictably - it was a terrible idea to begin with, and I folded it up once I realized I was in over my head. But I think starting it was one of the best decisions I made in my lifetime, because the skills and perspective I gained from it got me a job that paid enough that I made back that year after about a year of employment. I'm now in a position where I have a bunch saved up, and I'm trying to weigh my options rationally. I'd like to avoid making stupid mistakes, but I'm also mindful of how the #1 regret of most elderly people, on their deathbeds, is that they wish they'd taken more risks.

The idea that you should preserve investor's cash is a good notion, but not at the cost of forgoing fair compensation to yourself and the early founding team. In the long run, everyone is better off from this approach.

(1) Good investors run (on average) profitable portfolios, and they are not going to be made or broken by pennies on the dollar from the disposition of the firm's assets in a bakruptcy.

(2) Good founders should have enough 'skin in the game' that the signalling behaviour forgone by avoiding this strategy should not be the make-or-break between succusseful outside investment (or not).

(3) Following up, if (1) and (2) are in place, everyone is best served by having the founding team fully solvent. Preferably before and after the company succeeds or fails. All of the principal founders, investors, and employees want each other to be thinking clearly, rationally, and open-mindedly...with well-understood motives.

I can easily see paying yourself living expenses, once you've taken investment (or have paying customers), as a good thing. That's basically "ramen profitability", and getting to there as fast as possible is important.

I'm wondering about the part before taking investment - when you don't have any money coming in, are still building out a product (or even a prototype), and have cash in your personal bank but none in the corporate bank. Is it appropriate to pay yourself nothing then? Should you make this phase as short as possible? (Well, obviously yes, but in practice this means a lot of different trade-offs, like picking a less ambitious project that you can complete more quickly, or doing consulting to bootstrap the business, or pivoting to a business that focuses on profit more than userbase, or not doing a startup at all. At what point should you be willing to sacrifice future possible gains to ensure that you have money coming in to cover your living expenses?)

I'm sorry I might have misunderstood you. But if you have money in your personal bank and none in the corporate bank, why would you pay yourself (and be taxed on it) rather than just use the money (your money) to cover the living expenses?

That's what I'm trying to understand from tptacek's post. Some hypotheses that come to mind:

1.) Putting money into the corporate bank and then taking it out as a nominal salary keeps you really honest with yourself. You can't say "There's money in my bank account, there's not much need for urgency", instead you see the corporate bank account dribbling dry just as if it were someone else you were paying.

2.) It reduces personal risk in case the startup goes bankrupt.

3.) It makes accounting & record-keeping easier for when the startup actually does start making money, since you already have systems setup.

4.) Minimum wage laws require it. I talked to a (Massachusetts-based) lawyer once that suggested this may be an issue. But then, if it is, how does that square with all the tech company CEOs that take $1 salaries?

5.) It lets you take advantage of certain personal financial products that are only available if you have earned income in a year, eg. Roth IRAs.

Re: 4, my understanding has been that the owner of a company does not have to necessarily be treated like an employee of the company, and that salary issues may be different for them. Also, most of those $1/year CEOs are usually earning many, many dollars in options, which I think count for the compensation rules.

FYI minimum wage laws do not apply to execs: http://www.dol.gov/compliance/guide/minwage.htm#who Massachusetts is similar: https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Ch... "This section shall not be applicable to any employee who is employed...as a bona fide executive, or administrative or professional person or qualified trainee for such position earning more than eighty dollars per week.."

It's (1). It does more than keep you honest with yourself; it also protects the value of your time.

if you take someone else's money, you work for them. and if you work for free, you're a fucking fool.

The only time a founder should forego salary is before anyone else has invested a dime. And in that case, the paperwork should specify that you are earning a salary but it is deferred, ie you are lending that money back to the company.

Once a real investor enters the picture, if you can't pay yourself even a reduced salary (say 60% market rate), you're not raising enough money and/or you have a sucky investor. Add to the 60% salary with some of that back pay you are owed, or convert the back pay into equity at a favorable (to you) valuation.

I haven't seen anyone negotiate for unpaid back salary in a situation like that. Have you?

Typically, investors don't like it, and it tends not to be paid out in cash. However, I believe setting your books up that way gives you a better negotiating position when it comes to how low your salary will be, and possibly in relation to equity issues. It's a matter of having that sacrifice (no salary for X months) on paper so it can be respected as a real contribution with a concrete value, rather than just a giveaway that is somehow expected of a founder.

100% true that you never get those years back. You owe it to yourself to see something out of them.

Indeed.

If you ever watch Shark Tank (which has become remarkably redundant), you'll note that each shark has a certain style (no doubt born of his/her own experience/personality).

Cuban is always harping about sacrifice, breathing the dream, not taking a salary, etc. The story goes that if you want it bad enough, you'll make the sacrifices. This has become a common belief that is propagated about entrepreneurship.

I've come to believe that it's absolute nonsense. Engaging in self-destructive behavior does not have to be a core tenant of entrepreneurship nor some proof of passion or dedication. And, at what point is the entrepreneur just a slave to the investor? Some will say, "well, the investor is risking her money". Sure, but she is only doing so because, presumably, she can afford it. In other words, it is a discretionary "luxury" for the investor to invest, whereas it can be a subsistence-level sacrifice for the entrepreneur to go without a salary.

Whether it's a failing bootstrapped company or funded venture wherein investors require an unreasonably small salary or none at all, this is not good. And, for people who go the entrepreneurship route for "freedom", the effect can be the opposite. Not having an income introduces stresses and risks that represent anything but freedom.

I'm surprised that both you and tptacek seem to think it's much less of a deal to pay back vendors. Say the vendor is a startup or otherwise small company who's survival is hinged on getting paid what you owe. It's okay to stiff them, because we can get away with it legally?

I think it's downright dishonorable to leave vendors hanging like that.

Terminate your venture in time, before you can't afford to pay what you owe. There shouldn't be any difference whether it's an employee or a vendor.

I'm in favor of paying one's debts, have a credit record which would do a Lannister proud, and would not incur any obligation which I did not have the good faith intention to repay as agreed. It's just that I feel an extra special obligation to employees, on account of their unique relationship to their employer, their (presumed) degree of dependence on that relationship, and a heritage as both a Catholic and a Japanese salaryman which suggests that not paying an employee their due wages is a crime which cries out to heaven for vengeance. (For those folks in the peanut gallery who aren't Catholic or Japanese salarymen: that's a thing for both, and it is a thing called exactly that by Catholics. I'm aware many HNers don't necessarily believe in it, but that doesn't make me believe in it less.)

Vendors do not enjoy this status, although I'd make all reasonable efforts to have a business which I control pay them as agreed. Reasonable efforts includes things like cash flow juggling, taking out debts in the name of the business, or reducing the size of my distributions. They do not include my family experiencing hardship on your business' account.

Vendors are not assumed to be as vulnerable as employees. They typically have far less concentration of income and far higher savvy with regards to the necessity of, e.g., keeping a cushion against the risk of receivables going sour.

I run a small company. I work with lots of other ones. Of the entire set of them, nobody is one invoice from death. If we were, we'd be dead, because we're well aware that individual invoices go missing all the damn time. That's baked into running a business with businesses as clients.

That's also part of the reason why, when I do business with companies as a vendor and not as an employee, I charge a significant premium to what I'd earn as an employee. The possibility of your business going belly up prior to paying my invoice exists. I already priced it into my weekly rate (or your monthly rate for services or whatever). If one of my clients was unable to pay due to their business ceasing to be a going concern, as a responsible businessman, when apprised of that I'd say "Wow, sorry. OK." and write off the debt. It happens. My accountant could probably tell you how much it cost us last year.

If the business owner said "I'd really feel better paying you out of my own pocket for this." I'd literally refuse their money. It's not their family's responsibility to backstop my business' cash flow management. That's my job, and part of the reason why I "earn the big bucks", for values of big which are pretty modest.

(Prudentially speaking I'd probably treat a solo freelancer on a long term contract as an employee for the purpose of "Should I reimburse this guy out of my own pocket?", but as a former consultant, I'd advise any of my freelancing friends to structure their affairs such that they don't depend on payment of every invoice.)

A big question in this is what constitutes a vendor.

People who are experienced enough to price the risk into contracts, manage cashflow and not put all eggs into one basket won't get burned from a customers' insolvency.

But that comes from experience. Young people or the typical specialist such as a carpenter or electrician, are not necessarily this experienced in business.

In my view there's no line between such a vendor, and an individual who happens to be on the payroll. There might be legally, but they are equally entitled to payment for their work.

I'm sure neither you nor Thomas are ones to screw people over. But I think there's too much self-absolution of responsibility in startup circles, and your posts initially seemed to talk that point of view.

It boils down to being a decent person and stopping a venture before puting other people in financial jeopardy. Don't cry over the venture capitalists losses. But do make whole the people who have worked hard for you, whether employed or not.

If you didn't mislead the vendors, there's no dishonor in failure.

We all take risks... you shouldn't do what some retailers often do (load up on inventory, then go bankrupt) but at the end of the day, your obligation is to pay the employees and the government their due. Everyone else gets pennies on the dollar.

The risk that you might not be around to pay a vendor in full is priced into your contracts with that vendor.

Patrick and I both agree with you. Don't leave vendors hanging. But don't pay vendors out of your own personal bank account, either.

At the top of your payment priority list: Remit to the U.S. Treasury the required withholding for employees' federal income-tax and Social Security / Medicare tax. The IRS will come for your house if you don't.

I wrote a comment here about how the IRS is actually not that unreasonable when it comes to owing more than you can pay (been there, too!), but then reread DC's comment and saw that he's talking about withholdings for employees. Yeah, don't fuck around with that.

2nd that - my parents lost their business. Before they did, their idiotic "accountant" lied to my dad about having paid withholdings. They went into receivership actually owing a great deal in taxes that they could have paid (they paid other creditors first). My parents lost everything and are still in deep trouble w/ the IRS. Pay your taxes before anything else.

I hope they sued the accountant for damages?

> * Are you going to get ridiculed for failing? Obviously, you're not an HN reader. You'd have gotten ridiculed for succeeding. Ridicule is the air we breathe. Why do you care?

Haha, so true. Failure is lauded; success is criticized and mocked mercilessly.

THANK YOU! I came in here to write something similar, but you said it much clearer. I was lucky - when my first Startup Free.TV died, the company did not go bankrupt, but it did kill my credit. I was also worried about what I would tell my wife - the great news is is was VERY hard, but she stood by me and we are still married ten years later. I have eventually gotten the courage to start another startup, but now is that I now know how the system works and will not sell equity for peanuts anymore. This does hold me back - I would not say I am scared, just more careful. There IS life afterwards. If you want to talk, email me HACKER at Free dot TV

"Shitty credit is not that big of a deal."

You realize that your credit record effects more than just your ability to get credit and other financial services right? Insurance companies will sometimes deny coverage based on information in your credit record. ie: health insurance.

[0] http://www.consumer.ftc.gov/articles/0152-how-credit-scores-...

Health insurance companies can no longer deny coverage based on credit scores, although apparently credit scores can impact your rates. Like I said: I have a very crappy credit score, and it's had no impact on my life (including the times I've tried to buy private health insurance, which was a nightmare for reasons having nothing to do with credit and everything to do with the fact that the ACA hadn't passed yet). Other than, yknow, to keep me out of the market for credit. A good thing.

Either way: the author is worried that someone's going to come for their house because of their startup debts. I don't think it's productive to mine for reasons to be anxious. Bad credit score? Join the club; there are millions and millions of us: we're called "Americans". Nobody is taking the house.

keep me out of the market for credit. A good thing

Have you never wanted to get a mortgage?

For that matter, lots of landlords in Vancouver check credit scores in order to weed out potential bad tenants.

Protip: many landlords in hot property markets like Vancouver are speculators who are using your rent to pay their mortgage. Offer to pay a year's worth of rent up front in return for a discount (I'd ask for 3% - more than you can get from a risk-free investment but less than the landlord's mortgage interest rate).

Obviously this only applies if you have sufficient liquidity that paying $30,000+ upfront isn't going to impact your life in other ways.

Alas, the BC Residential Tenancy Act makes it illegal to have a deposit larger than one month's rent. Not that anyone is going to stop you -- but if you pay 12 months of rent in advance, you can legally demand the next day to have 11 of those months of rent returned to you. Unfortunately the law is very clear that you can't sign away your right to only pay one month of deposit -- even if you want to.

It's this sort of nonsense that makes me lean libertarian

Yes, this seems to me to be a rather absurd overstretch of the "consumer protection" purpose.

Your post is half a day old, but I have to reply to agree fervently. My first tenant paid 4 months rent upfront + security deposit. In cash.

Yeah, he gave me reasons that made sense. I didn't really care: I had cash in hand and absolutely no reason to bother checking his credit.

> Health insurance companies can no longer deny coverage based on credit scores, although apparently credit scores can impact your rates

I don't believe that's the case anymore since they have to provide coverage. Smoking is the only thing I remember that affects your ACA compliant rates. It makes sense otherwise you would be forced to purchase a product that could be much more expensive for the simple act of not having credit history (something that's not so unusual, especially for younger people).

An insurer can also charge up to 3x rates based on age under the ACA. Prior to the ACA limiting the differential the market spread was about 5x from young to old in terms of age.

Smokers only have to pay 50% more so being old will effect your rates more than smoking will under the ACA.

Everyone ages though so that wasn't something I would consider being a penalty like smoking (or previously a credit rating).

"which was a nightmare for reasons having nothing to do with credit"

So that's why I bring this up, I remember you claiming in another thread discussing the ACA that you were perplexed why you couldn't get private health insurance and seemed to think it was some arbitrary conspiracy yet you seem to disregard any number of reasons upon which a rational insurance company might do such a thing. Just pointing out your logic may be flawed.

I know why we were declined coverage. They told us. You can go find the "automatic decline" lists for insurers yourself; they're on the Internet.

agreed, this has changed drastically in the last 25 years. Sucky credit has gone from a minor annoyance to a pretty serious life issue. If you are letting your credit suffer for your company, you are doing it wrong. That sort of risk is precisely what investors are for. Working for a reduced salary, with pretty much zero job assurance, and bad or nonexistent bennies to begin with, and working nights and weekends, letting your personal and social life suffer, is punishment enough. If you get pressure to put more personal financial skin in the game, play good/bad cop with your spouse or life partner (ie use him/her as an ironclad limit on how far you can go towards financial armageddon)

> Think of it this way: had your company been successful, it almost certainly would have left you in a state where you'd be working for someone else for a couple years during your earnout. "Not working for someone else" was never really on the table.

Wow, I'd never really thought about it that way before. You're completely right, of course.

It's just rather depressing. Maybe I'll go re-read Rework.

* Ridicule is the air we breathe. Why do you care?*

I like a lot of your posts - this is one of the best things you've written. Reminds me of Feynman. http://en.wikipedia.org/wiki/What_Do_You_Care_What_Other_Peo...

>Why do you care?

You know, some personality types cannot help but be concerned with how they're perceived by others. They're hardwired that way. It's the classic misunderstanding between extraverts and introverts.

I would argue 99% of people care a great deal, whether they like to admit it or not. We are social creatures. Caring about these things (within some range) also gives a higher chance for reproductive success, so as you said, we are hard-wired to care.

People who don't care about other people's opinions aren't that common and aren't called extroverts. They're generally called sociopaths :-)

I'm pretty sure sociopaths care in a sense that other people's opinions is what allows them to climb the social ladder and gain power.

>People who don't care about other people's opinions aren't that common and aren't called extroverts.

Actually the definition of extraversion is deriving gratification from that which is outside the self, so I'd say it's actually introverts who are less likely to care what others think.

Having been through shutting down my previous startup just a few months ago I can say that my experience mirrors this quite closely. Its scary and stressful at the time, but at the end of the day, nothing bad happened and nobody ridiculed us. In fact, everybody (including our investors - some of which are involved with us again) was quite positive and everybody sees it as a positive learning experience. And being able to say that we're on our second startup has been beneficial too.

(1) work for someone else, (2) start company, (3) run company into ground, (4) goto 1.

So true, it hurts.

Good pieces of advice. Thanks for writing.

[deleted, i'm an idiot]

In the US? What's the kind of company you're thinking about that (a) allows for external investment and (b) doesn't have limited liability?

[deleted, i'm an idiot]

S Corps are limited liability corporations. Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S, and (b) it's easier to grant employees equity in an S than an LLC.

(You're not an idiot.)

> Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S

Interesting. Got a pointer to details on that?

See your accountant for advice on this point.

Disclaimer: I am not an accountant, nor is my business set up as an S corp.

The way it works is this: you form an S corp, and as the owner you pay yourself dividends rather than straight income. That way you aren't taxed at normal income tax rates but instead at the capital gains rate. At the same time, because you are now an employee of the S corp you personally only pay half the social security tax, rather than the whole bit as you would as the owner of the LLC paying both the employer and employee portions (of course the corporation is still obligated to pay the employer contribution).

Accountants are of different minds on this, depending on their own taste for risk. The important question in an audit is being able to defend that the business is more than just you, IE: the income is legitimate dividends from the success of the business, and not just regular employment income masquerading as dividends. Again, consult an accountant - they really are worth the cost.

I think this is incorrect in two ways - you do still have to pay yourself salary, and dividends are taxed at normal income rates (due to pass-through) rather than capital gains rates. It's unfortunate that they are called dividends, because stock dividends are taxed at capital gains rates.

Qualified stock dividends are taxed at a special capital gains rate. Unqualified dividends are taxed at the recipient's regular rate. See http://www.dividend.com/dividend-education/qualified-vs-unqu....

Curt - perhaps I could have written out explicitly "you still have to pay yourself a salary" but that was what I was trying to infer with my comment of "...because you are now an employee of the S corp..." I see you are also in Oregon, you might have better local advice for the parent poster. At a minimum, since you are both local to Portland you should meet up for a beer. ;-)

They are technically called distributions, not dividends, for the reasons you mentioned.

I think you're using incorrect terminology here. Dividends comprise capital that is distributed from a C Corp, and have a special taxation structure that is separate from ordinary income.

Josh - I see you are based in Portland (hello "neighbor!" - I'm about a 4 hour drive east from you). You'd probably be just as well off moving over the river to shed the Oregon state income tax (sorry Oregon, I love you but...). Setting up an LLC in either Oregon or Washington is trivial. Setting up an S or C corp in Washington (I've never done it in OR) is also really easy, but does involve more paperwork. Especially in the early days of a business, there are so many advantages to setting up an LLC that I'd be surprised if an accountant advised otherwise. Have a deep-pocketed investor ready to go? That's the only case where I can imagine that setting up a C corp from the beginning makes sense.

It's not as sketchy as it used to be, due to some rules changes in the last few years.

As a one-person S-Corp, you run payroll and you are your own employee. You can set your salary, and you can also pay yourself in distributions. Salary is subject to FICA, distributions are not. Both are subject to income tax.

When you pay yourself salary, your "personal" side pays its half of the FICA, and your "business" side pays the other. This is the same way a regular employer/employee relationship works (and why it "feels" like you are paying double FICA when you're self-employed; it's because you are both the employee and the employer).

It used to be that you could severely limit your salary, and pay yourself the bulk of your income through distributions, and lower your tax bill by having lower FICA costs.

These days, it is your responsibility to pay yourself a "reasonable salary", as in something you could reasonably defend during an audit. Once you have paid yourself a reasonable salary (which is subject to FICA), you can give yourself more money (revenue permitting :) ) in distributions.

Also, if your self-employment is part-time, you can pro-rate your salary to reflect that part-time employment.

It's also worth noting that as your business gets successful and long-term, you may want to increase your salary and pay into FICA so you can get a better social security payment when you retire. But still, if you analyze it in a spreadsheet, you'll see that social security, as an annuity, is a "bad deal" when you're paying both sides. (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)

As I understand it, reasonable though your claimed salary might be, if you're making money on the difference between distros and salary (which stops being an issue at around the 100k point), you're filing returns with a big red audit flag on them. The tax savings probably aren't worth the heartache for a lot of people.

Not for nothing, but as an entrepreneur who has been in exactly the situation contemplated by this scheme: avoiding taxes by structuring your income as a "distribution" rather than salary is shady. I think it's unethical. People that don't happen to run S Corps don't get to do it. I'm prepared to lose the argument, so let me concede it in advance and avoid polluting the thread.

Well, as someone that quite likes the idea of things like social security and universal health care, I wholeheartedly agree that it's wrong to falsely deflate one's salary in an effort to avoid paying into FICA. But I guess it has never been argued to me that beyond the reasonable salary, it should be one's responsibility to pay excess profits as salary rather than distributions. I can't really find a good reason to hang my hat on. I think the entire reason S Corps exist are to encourage small businesses since we otherwise take on a lot of risk, no? Too bad that threads get polluted right when discussions get interesting. :-)

> (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)

I agree with everything you say here, except this last sentence.

It would be true if the money were coming from a truly external source, but from an economic perspective, this is no different from a "normal" sales or income tax. As a result, it doesn't matter who is nominally paying it - the "real" payer (the incidence of the tax) depends on the relative elasticity of the supply and demand.

As it turns out, empirically, about 95% of the incidence of FICA (if I remember correctly) falls on the employee. In other words, it doesn't matter if the employer is nominally paying for half - they factored that in already when deciding how much to offer the employee when they hired him or her.

For many people reading this thread, Social Security is a bad deal no matter how you look at it - for many people reading this, it will be literally impossible to earn as much back from Social Security as they have paid in (assuming a vaguely realistic life expectancy).

(This is not a political statement, by the way - whether or not one believes that Social Security is good or bad depends on how much value one places on transferring a bit of wealth in order to guarantee a minimum income for the elderly. I just wanted to point out a part of the Social Security calculus that is easy to overlook.)

I agree with the analysis above, with one addition: a big reason to pay yourself more at any owners only profitable small business is to max out a contribution to a 'individual 401k', sep-ira, or similar. The rules vary, but if your 'salary' is in the $250k ballpark, you can contribute up to $51k in additional money to a tax deferred retirement plan. Just like a 401k, it grows tax free.

Most SS taxes are capped just above $100k, and if you own a tech company it's pretty hard to argue you salary should be below that, so the SS angle is limited. But tax free compounding on $51k/yr is a significant benefit.

I thought part of the problem with LLCs was a state issue?

S Corps aren't necessarily LLCs. A C Corp can elect to be taxed as an S Corp as well.

Respectfully, please don't delete posts. Edit in a warning at the top that you were wrong and realize it or something. People reading these conversations later now have no context, which is frustrating.

I'm mimicing tptacek's question here, but what type of corporation (Assuming this is in the US) wouldn't protect assets?

Even an LLC with just one person operating it (Which the IRS still sees as a sole-proprietorship I believe) still has their personal assets covered.

Eh, sorta?

You have to do a lot of things right to get that protection.

many disregarded entities, don't

http://www.nolo.com/legal-encyclopedia/personal-liability-pi... :

There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.

Oh yeah, definitely. There shouldn't be any mix of assets. You need to keep them separate if you're trying to make the legal case that they're separate.

The only thing we have to fear is fear itself.

It is useful to have around @tptacek when the topic is not NSA-related, he speaks wonders. Good!

http://idioms.thefreedictionary.com/_/dict.aspx?rd=1&word=a+...

Oh didn't knew there was an idiom for that, well true, it's exactly that, couldn't help it :-)

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