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We're Shutting Down and I'm Scared

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Re: We're Shutting Down and I'm Scared

#101

Post by tunesmith »

tptacek wrote: post #87
tunesmith wrote: post #58

Earlier quoted context omitted.

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…

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…

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. :-)

Re: We're Shutting Down and I'm Scared

#102

Post by theli0nheart »

poulsbohemian wrote: post #46
JoshTriplett wrote: post #31

Earlier quoted context omitted.

> 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…

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.

Re: We're Shutting Down and I'm Scared

#103

Post by dclara »

fredgrott wrote: post #25

What I am interested in is the thought process involved in balancing things like fund raising, paying one cofounder and not others to stretch it, when to pull back, etc. Obviously, investors want the dev cofounder paid to get product out the door.. But I am more interested in the decision process... Let me clarify.. certain small business industries have these accounting/financial tools to help determine decision tre…

I don't know about his kind of tools, but I agree with you that doing business has rules to follow.

Cofounders should be paid if the company has received external investment already. Employees should be paid even if the company is not making money.

Looks like OP is very young, all he and his cofound concerned is about the product and market, etc., not including how to run a business. In business, cash flow is always the no. 1 concern. If there is not enough fund, don't hire, no lease. Based on my previous job experience, $1M cannot afford a team in office. $3M can only have 1 years expense. Startup's burn rate is super high. Founders need to have plan B in place. It is said, "Failed to plan is plan to fail".

Emotionally, it's hard to accept the pitfall from owing $1m to negative. But how about if you never had that $1m, was that going to feel better? It's all about expectation and planning.

So the most important thing is to learn what can be avoided from this lesson. A lot of people are helping him to get rid of fear on the emotional side. It's sad that I didn't see much help on the business side to help other failed companies as well. Emotion is temporarily. Closing out process is a must to go. But how to prevent the 90% of the failed companies to avoid the pain is more important.

A lot of people care about it, but I didn't see any experts helping outside the YC meetings, although here is YC extension forum.

Re: We're Shutting Down and I'm Scared

#104

Post by walden42 »

dchuk wrote: post #12

If you can run a startup, you're employable as a consultant to at least enough people to make ends meet. Reach out to your personal networks and try and stem the tide a bit. We've all been there at some point in our life, there's nothing shameful about working for others to make ends meet. And even though most of us hate the idea of working for other people, at some points in life you have to put your ego and pride a…

> Reach out to your personal networks and try and stem the tide a bit.

I'm not in OP's position at all, but I'm wondering what you mean by this. Would you just call/email people you know and ask if they need help with their business?

Re: We're Shutting Down and I'm Scared

#105

Post by dclara »

adambenayoun wrote: post #88
ThomPete wrote: post #66

Earlier quoted context omitted.

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.

Re: We're Shutting Down and I'm Scared

#106

Post by avenger123 »

laureny wrote: post #52

> But, I can’t imagine working for somebody else. I wish my wife understood that. She's understood it long enough to let you pursue the dream of your life at great costs for her, maybe now it's time for you to do some sacrifice for her and go work for someone? You're not the first one to have to do that and, you know, survive. Seriously.

Thank you. This was my sentiment but didn't comment on it. There are very few things in life that are only "one time only".

Build the cash reserves, get back on a stable financial ground and go ahead and try again.

Sometimes the myopic tendencies of these stories really drives the point of how self-absorbed one can get with this. Working for someone else likely means a nice office, nice chair, nice desk, nice computer and monitors and the ability to sit down for 8-9 hours a day and use your mind and likely a decent salary.

I think for the vast majority of people in the workforce that do don't software development, that's not surviving but thriving.

Re: We're Shutting Down and I'm Scared

#107

Post by windexh8er »

tptacek wrote: post #99
patio11 wrote: post #34

Earlier quoted context omitted.

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…

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 ch…

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.

Re: We're Shutting Down and I'm Scared

#108

Post by dclara »

Swizec wrote: post #98
patio11 wrote: post #34

Earlier quoted context omitted.

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…

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.

Re: We're Shutting Down and I'm Scared

#109

Post by jeremyjh »

ThomPete wrote: post #66
patio11 wrote: post #34

Earlier quoted context omitted.

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…

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.

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?

Re: We're Shutting Down and I'm Scared

#110

Post by chimeracoder »

tunesmith wrote: post #58
JoshTriplett wrote: post #31

Earlier quoted context omitted.

> 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?

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…

> (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.)

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