Startup Economics 101, or, How Long Until We’re Dead?

I'm not saying they don't; Especially on the upside, tax rates matter a lot, and the potential upside effects how much investment a startup gets, at all stages.

I'm just saying, when you are still trying to scramble up to profitability, complex tax laws are a big deal. Certainly under $10K/year profit (and probably for a while further) you are going to be spending more on tax related accounting and planning than you will pay in taxes. You can't just ignore it because you aren't making any money.

It's not just paying the accountant at the end of the year; Especially in lower-margin businesses, how something is taxed can make the difference between profit and loss. You've got to run all your ideas by the tax expert. This is expensive, as both I and the tax expert have deep domain specific experience that needs to be at least partially shared to figure out if a particular idea can work or not.

Yeah, once you've got two million in profit a year, the cost of that tax person is probably a good bit less than what you are paying in taxes, and I imagine you care a lot more about the rate. I'm talking about those of us who are still in the red or only a little in the black.

I think that the Death Clock article is complementary, rather than an alternative.

The OP post is essentially a laundry list of expenses that startups can expect to face. This is useful because it is easy to overlook something that will blow a hole in your cash.

The Smart Bear post is a higher level look at tools for managing cashflow. Instead of checking the cashflow balance once per month, you can see almost immediately what's going on. Short feeback loops are the core of agility.

The only danger I can see with the SB approach is a risk of overcorrecting to noise. The use of least-squares fitting helps, but mindfulness pays.

This is my first post on Hacker News. Glad to join you guys and see that you're talking about finances. I'm an accountant who is also a tax and business lawyer, specializing in micro businesses and creative projects. Hopefully I can contribute to the discussion.

This community is full of people who know how to hack code. I'd like to introduce the idea that it's possible to be equally creative with business entity design. Business laws and tax codes are just other types of codes, waiting to be hacked.

Corporations are one way to organize and that structure is well-suited to mature businesses. But it's far from the best format for beginning creative enterprises. It seems to be widely accepted that start-ups need to be corporations to make the transitions smoother as more investors are added down the line. It's time to reconsider that.

Start-ups have completely different needs than mature businesses and should not be strangled by all the baggage that comes with a corporation, in the name of 'making a smoother transition.'

It is fairly simple to start with an organization that is NOT a corporation and, thereby, avoid payroll taxes. Possibly ALL taxes, depending on the structure and the source of cash. This is particularly true if you are going to give equity anyway.

Do some research on entity choice. Examples might be a Limited Liability Company, Limited Liability Partnership (in some jurisdictions), Limited Partnership, Limited Liability Limited Partnership (also only in some jurisdictions), even go naked as as simple Partnership or Joint Venture.

By the time you're big enough to go public, you'll be able to afford the lawyers you need to reorganize. And that will be the least of your concerns. In the meantime, pick a business structure that is well-suited to your current needs, and can even help with some of your current headaches, like salaries, taxes, and cash flow.

So, yes, a good accountant will pay for themselves many times over. So will a good lawyer. Finding a good one is the real challenge.

According to the IRS (I am a tax attorney/accountant) any officer of a corporation is a "statutory" employee. Anything of value that the corporation gives to that person is construed as wages -- subject to SS tax, medicare tax, federal unemployment, and all the rest of the employee/employer law. (which varies by jurisdiction, but is almost always expensive and onerous). In fact, anything of value that goes to a person related to that officer is wages to the officer. Stock, par or no par, usually has some value. Those are wages.

Just as note to add dark humor to the subject -- note that in the law the employer/employee relationship is called "Master-Servant."