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Ask HN: How do I manage the profit of a successful website?

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Re: Ask HN: How do I manage the profit of a successful website?

#91
I ran a business with similar or better numbers for 20 years with the same attitude. I have a number of disabled family members to care for permanently so my use of profits was very different. Also I was raised in skakey circumstances so I’m insecure.

Bearing those things in mind it was enormously helpful for me to pay off my mortgage ASAP.

The next step is certainly overkill for most. I also bought a farm nearby with cash in case of... more global problems, which have concerned me since my childhood in the turbulent 70s.

The farm is surpassingly tranquil and beautiful. It has made my life much better and has coincidentally extended my working life enough to launch a third career in my 7th decade.

I made all of these choices out of insecurity but we had consciously chosen an economically diverse enough place to live (Seattle area) that they also turned out to be sound investments.

Re: Ask HN: How do I manage the profit of a successful website?

#92
10 You need to talk to a good CPA, immediately. 20 You need to talk to a good CPA with experience in startups, immediately. 30 You need to talk to a good CPA and tax attny w/experience in small biz, immediately.

Here's the rough picture from my experience as part or full owner of several corps in my career, "S", "C", and/or LLCs (I'm not a lawyer or tax attny, so this is just experience to give a rough idea, not advice):

My experience has been that the profits from LLCs and "S"-Corporations go to your personal bottom line. If you are the sole owner, there's essentially no difference for tax purposes between you being a sole proprietor. So, it doesn't matter where you keep the money (biz acct or yours) or for purposes of the amount of tax you'll owe that year.

To retain earnings in the corp, you'll likely need a "C" corp, and then pay taxes at the corp level. This is often sub-optimal, as you'll pay taxes on a corporate level, and then to yourself as dividends when you later take money out of the corp.

You definitely need to GoTo Line 10,20 and 30. Things will definitely differ depending on what stare you are in, and with your particular situation. There may be many optimizations that are available to you. In your situation, it would be good to talk to several and interview them.

Also, if you continue to do that well, start talking to good trust & estate attnys, especially if you have a family. When I say good, I mean good - seek out the top in the industry. The top ones are fundamentally better than the typical local T&E shops (these will give you a far better plan than nothing, but...).

Congratulations on your good skill and fortune, and I hope you do well!

Re: Ask HN: How do I manage the profit of a successful website?

#93
I'll add to the advice you have received regarding getting a good accountant by suggesting you might want to use a good accounting firm rather than a single accountant.

Depending on where you live, you might be able to get a sense of whether or not there's a dominant firm that is handling financial matters for local businesses. I switched from using a single guy someone recommended to a real accounting firm years ago. The guy was good, no question about it, however, the accounting firm has far more depth. They also have a deeper/wider network through their client base that has come in very handy at times.

Don't pay more taxes than you are legally obligated to. Don't pay less either. Many people confuse tax optimization strategies with greed or some other derogatory term. When you order a pizza or buy a laptop you optimize for obtaining the computer you want at the lowest possible cost. Taxes are no different from this, the laws (federal and state) establish a procedure through which you calculate how much you owe. These laws are so complex that most people and lots of businesses pay more than they should. That is wrong.

A good accounting firm, and, perhaps, a tax attorney, can guide you on how to apply federal and state tax codes to determine how much you owe. Pay what you owe, no more, no less.

While you run a web-based service, you can still take advantage of Section 179 deductions. Make sure to discuss this with your accountant and understand how to use this valuable tool.

As someone else mentioned, don't assume this will last forever. Do not give away piles of cash recklessly only to find yourself in trouble years from now. I am of the idea that what philanthropic billionaires do is the right approach. Accumulate wealth over time. Maximize this for as long as you can. Use the time to learn and understand where you might be able to have the most impact if you put a non-trivial amount of money on the table. Then, once secure in your convictions and with your financial future on a solid footing, became the person who supports the worthy causes you identified and studied while you put money aside.

You can't create a great building without a large and solid foundation. Build that foundation first. Don't be in a hurry to burn money just because you don't currently know enough to know what to do with it. And please, pretty please, with sugar on top, do not give a dime to politicians --of any political party-- they are all a waste of time and money. What to support is a personal decision that will likely benefit from reflection and learning over time. Imagine a day, several decades from now, when you might be able to support a worthy cause with millions of dollars. That would be something, wouldn't it?

If you have a need to help out today, here's one suggestion:

https://www.stjude.org/

Re: Ask HN: How do I manage the profit of a successful website?

#94
So, first, congratulations on the huge success! That's a significant amount of income.

Second, make sure you have your taxes straight. The S-corp thing is a reasonable idea, but only touch that if you have an accountant doing it for you. The IRS is less forgiving with bad S-corp filings than they are with normal schedule C filings. Also, if you've only been paying taxes on what you took home rather than the total profit of the business, get an accountant and a lawyer ASAP and fix the tax situation. (I doubt that's what happened, but one could infer from your original post that it's possible you mistakenly thought that leaving money in the business account means that it's not taxed that year. Even if you didn't think that, there are probably people who do think that and might be reading this thread.)

As far as your actual question, here are some notes: a) Remember that income from a business is fickle. Operate under the assumption that this income could disappear at a moment's notice. b) If you have a spouse, their opinion is as important as yours, and statistically, they relate to money differently than you. (One stereotype that I've seen played out many times in real life is that men tend to think of money as a scoreboard, and women as safety and security. If a husband and wife ignore those differences, it can lead to intense marital strife.) c) Your stage in life makes a difference. At an early stage in your career, it might be acceptable to swing for the fences, strike out, and start from 0. (That is, reinvest all the money in business growth, grow huge, and eventually implode, failing to gain any profit, but knowing that you at least tried to 100x the business.) In other stages of life, that's not an acceptable risk. d) Regardless of life goals, I think keeping huge amounts of money (more than 18 months of salary and expenses) as cash in your business account isn't wise. It's not doing anything there, and inflation is currently high and will likely stay that way, so it's probably better to have excess money in an asset that matches inflation. e) Don't over-fixate on taxes. Be sure to pay as little tax as you are obligated to pay doing what you want to do, but don't let your decisions be steered excessively be taxes. For example, a 401(k) is a fine way to reduce taxes if you aren't planning on using the money until traditional retirement age anyhow, but perhaps you want investments that can throw off current income, not for some time in the future when your bones hurt and all you want to do is sit around and drink martinis. You have enough income that you can take a mild tax penalty to actually do what you want.

So, as far as what I would do, I would probably buy real estate in a growing area with low to moderate real estate taxes and a good ratio of rent to house cost. (So, San Francisco and New York are out because rent is cheap compared to the value of the unit, and Illinois is out because property taxes are so high that vacancies will cause you to burn cash.) Some states that I've been looking at include the Carolinas, Georgia, Florida, Texas, Tennessee. You're throwing off enough cash, that in a few years you can buy enough housing stock with cash to replace your $14K/month salary with rental income (remember to include the cost of management, maintenance, taxes, and insurance when calculating potential rental income!). At that point, you've bought yourself full flexibility, and then you can swing for the fences as hard as you like, and if you strike out, you're already so far ahead that it'll be an annoyance rather than a catastrophe.

Anyhow, the above is what I would do (and am in the process of doing - my business isn't throwing off as much cash as yours is, but it is exceeding my income requirements). Alternatively, you can do the Silicon Valley approach - pour all your excess cash back into growing the business. Ask yourself: what would it take to 10x the business from here? Is it just that customers don't know about your business? Hire a marketing guy and get after it. Are people not converting from trial to paid accounts? Hire a sales person to hold the customers' hands. Is the market fairly well captured already? Think of adjacent markets to expand in (either similar markets in the US, or localize the product and sell abroad). Take the $23K/month that the business is throwing off each month, and spend it as hard and fast as you can. Or better yet, turn yourself into a Delaware C-Corp, write up a pitch deck, go out to investors, and raise $4 million at at $30 million valuation, and devise a plan to spend $200,000/month on growth. Triple, triple, triple, double, double, double! In 6 short years, your business will have $45,000333222=$9,720,000 in monthly revenue. Then go public! Or more likely, watch it crash and go to $0! Dust yourself off and do it again! (This part of the comment may sound snide, but it's not actually intended that way. The venture capital path is the path that was taken by most of the super-successful recent tech businesses. It works for many people and many businesses.)

Best of luck!

Re: Ask HN: How do I manage the profit of a successful website?

#95
post #48

Don't forget to donate to developers of software you use for your website dev and ops!

Indeed, don't forget the developers of free and open source software that is used for your website, and also share some useful generic code for free.

consider that these donations can probably be deductible.

Re: Ask HN: How do I manage the profit of a successful website?

#96
post #87
post #45

Earlier quoted context omitted.

What you're advising sounds at least borderline fraudulent. Yes, they should absolutely be taking out any halfway reasonable business expenses (discuss with an accountant if it's not obvious). But I'm pretty sure buying a villa for the events that their 2 person company holds isn't in the reasonable expense category.

Dude people buy jets and Teslas as a business expense. super common. Dan bilzerian's ex beverly hills villa is owned by Wish as a business expense and the ceo parties there. cmon. You can twist the villa however you want. It can be an investment through an SPV and you pay rent. To be clear, arguing (and using) something as a business expense or an investment is not fraudulent. I don’t know who in their right mind wou…

> Dude people buy jets and Teslas as a business expense. super common. […] arguing (and using) something as a business expense or an investment is not fraudulent.

This is just bad advice for two reasons: (1) Teslas and jets are terrible investments for someone who’s less than filthy rich. (2) Tax fruad is when you claim business expenses and then use items for personal activity. It’s only not fraud if the things you buy are used exclusively for business reasons. If you start buying lavish things and use them for yourself, it is fraud and you are subject to a Tax audit that could land you fines or jail time. Happens all the time. You shouldn’t listen to stories of people gaming the system and getting away with it.

Re: Ask HN: How do I manage the profit of a successful website?

#97

If you have it as an LLC, any profits will pass through to you through your schedule C, and you will be taxed at regular income tax rates. Your accountant will help. But tax optimization can REALLY matter, and as a small business you have massive opportunities to very legally and ethically optimize your business and tax. Top of mind, what you should really consider is: a) setting up a 401K under the business to shelt…

This is very solid advice. I would only add that you should consider maxing out your Roth IRA contribution every year (6k USD per year), particularly if you are young. You use post tax dollars to fund your Roth IRA, but all of the funds in your Roth IRA, including all gains, are tax free when you retire.

the GP's 14k a month salary would put them above Roth IRA income limits. The only option is a backdoor Roth IRA contribution.

Re: Ask HN: How do I manage the profit of a successful website?

#98

If you have it as an LLC, any profits will pass through to you through your schedule C, and you will be taxed at regular income tax rates. Your accountant will help. But tax optimization can REALLY matter, and as a small business you have massive opportunities to very legally and ethically optimize your business and tax. Top of mind, what you should really consider is: a) setting up a 401K under the business to shelt…

I’m also a solo LLC business owner. Open up a SEP (assuming you plan on having w2 employees) else open a individual 401k (can’t have employees). Allows you to contribute significantly more to a personal retirement account. Quick back of the napkin math with a SEP you should be able to stash away around $31,000 into retirement annually assuming you pay yourself $168,000.

Second, buy yourself work equipment (write offs). Buy that top of the line new MacBoom Pro and ultrawide monitor. These are business expenses and write offs, but still assets.

Finally, open up a health savings account and stash as much as the limit allows (it’s not a lot), but better than nothing. Also tax free in.

Re: Ask HN: How do I manage the profit of a successful website?

#99

If you have it as an LLC, any profits will pass through to you through your schedule C, and you will be taxed at regular income tax rates. Your accountant will help. But tax optimization can REALLY matter, and as a small business you have massive opportunities to very legally and ethically optimize your business and tax. Top of mind, what you should really consider is: a) setting up a 401K under the business to shelt…

This is very solid advice. I would only add that you should consider maxing out your Roth IRA contribution every year (6k USD per year), particularly if you are young. You use post tax dollars to fund your Roth IRA, but all of the funds in your Roth IRA, including all gains, are tax free when you retire.

Thanks to absurd tax laws, they won’t qualify for roth IRA. I’m in the same boat, have to look at backdoor, but does draw some heat and attention of the IRS doing back doors.

Re: Ask HN: How do I manage the profit of a successful website?

#100
post #85

Earlier quoted context omitted.

Super helpful. I didn’t know about individual 401k’s. Thank you!

You in particular should also benefit greatly from a SEP IRA. Expensive to run but lets you sock away much much more.

What's expensive about running a SEP IRA? Are you referring to the fact you have to contribute to an employee's IRA as well as your own?
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