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The ROI on being an entrepreneur vs. an employee

marcbarros.com

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Re: The ROI on being an entrepreneur vs. an employee

#41

Post by timr »

rdl wrote: post #19

A VC funded company, assuming you are capable of raising a seed round, can generally pay sfba founders 50-120k for full time work pretty soon after (founding, or people going full-time). Those same people are generally forgoing 100-200k jobs. The equity value of a founder's shares is an order of magnitude higher than an early hire, or two orders higher than a late A or B round hire, and 3-4 orders higher than a pre I…

These days, being an employee at at a profitable series B+ company may not make you rich, but it's a nice balance of risk and reward: you'll almost certainly walk away with the equivalent of a few hundred thousand per year, with a pretty cushy lifestyle on top of that. I know plenty of people who have jumped from one big valley name to another at mid-growth stage, and they're not hurting financially (plus, it makes you supremely marketable -- recruiters/investors/press go irrationally nuts over people who have big names on their resumes).

Entrepreneurship has never been an economically rational decision. You do it because you have to do it, or because you can't force yourself to work for someone else anymore. If you just want to gamble, go to Vegas.

Re: The ROI on being an entrepreneur vs. an employee

#42

Post by [deleted] »

shutupalready wrote: post #8

There's not a single mention of taxes in the article. I don't think that the average employee is aware that an entrepreneur/founder/self-employed person can save a lot of tax if they structure it right and are meticulous about it. A self-employed person earning $70K a year can be better off than an employee earning $100K.

[deleted]

Re: The ROI on being an entrepreneur vs. an employee

#43

Post by hluska »

jakejake wrote: post #37
jdreaver wrote: post #9

Earlier quoted context omitted.

Can you expand upon that? I am always looking to reduce my taxes. I got killed with my 1099s this year.

(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corpo…

> Corporations do not pay income tax as such - they do have some filing fee type of taxes, but basically the taxes you pay come out of your payroll.

Are you sure that is correct? I am neither an accountant, nor even American, but IRS.gov says:

"The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation."

(source - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...)

For the 2011 tax year, Wikipedia pegs the US federal income tax rate at between 15% and 35% (depending on income level).

(source - http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_Sta...)

I think that only applies to C corporations, though I'm curious now about US tax law. Do tax shelters like you propose exist? Do you have any more information??

Re: The ROI on being an entrepreneur vs. an employee

#44

Post by larrykubin »

shutupalready wrote: post #8

There's not a single mention of taxes in the article. I don't think that the average employee is aware that an entrepreneur/founder/self-employed person can save a lot of tax if they structure it right and are meticulous about it. A self-employed person earning $70K a year can be better off than an employee earning $100K.

I disagree and think this is completely wrong. I've paid a ton of self-employment tax and the write-offs for a web developer have never made me better off than someone who makes 100K and doesn't pay self employment tax. An employee making 100K and paying regular taxes and low state income tax probably has over 70K left over after taxes. How can someone making 70K pre-tax that has to pay self-employment tax do better than someone who gets > 70K after tax?

Re: The ROI on being an entrepreneur vs. an employee

#45

Post by czbond »

sopooneo wrote: post #23

A little over halfway through the author mentions a billion dollar sale netting each of three founders only $300,000. Am I misunderstanding, or is that a mistake?

That line threw me off as well. I think he was switching thoughts between sentences. He mentions Billion dollar companies,and then I believe he's saying "for any company exit [not Billion exit] - your average gain is $300k"

Re: The ROI on being an entrepreneur vs. an employee

#46

Post by sportanova »

jakejake wrote: post #37
jdreaver wrote: post #9

Earlier quoted context omitted.

Can you expand upon that? I am always looking to reduce my taxes. I got killed with my 1099s this year.

(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corpo…

Is this for an S-Corp / LLC? Because C-Corps pay income tax with a top rate of 35%. And is that how pass-through-taxation works? You only pay it once you withdraw it?

Re: The ROI on being an entrepreneur vs. an employee

#47

Post by curveship »

jakejake wrote: post #37
jdreaver wrote: post #9

Earlier quoted context omitted.

Can you expand upon that? I am always looking to reduce my taxes. I got killed with my 1099s this year.

(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corpo…

The IRS requires that you pay yourself a defensible fair market salary. If you're paying yourself only $15k, you will quite likely get audited, and unless you can defend the idea that your work is truly minimum-wage level work, you will owe quite a lot in fines. If this is advice from your accountant, I think you need a second opinion.

Edit to add citation. Also, I'm assuming you're talking about an S-Corp, since it would make not sense for a C-Corp. From http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ... :

"If most of the gross receipts and profits are associated with the shareholder's personal services [i.e. not from other employees or capital], then most of the profit distribution should be allocated as compensation."

If you're only paying yourself $15k of the %80k your company brings in, and that $80k comes from payment by clients for work that you personally did, then you are definitely on the wrong side of the tax code.

Re: The ROI on being an entrepreneur vs. an employee

#48

Post by rdl »

jakejake wrote: post #37
jdreaver wrote: post #9

Earlier quoted context omitted.

Can you expand upon that? I am always looking to reduce my taxes. I got killed with my 1099s this year.

(Sorry in advance for this long, rambling response) This applies to the US and forgive me if you have already done some of this. The first step is to get your corporation set up (use an online service or an accountant). It's a bit of paperwork but you can do it for around $400. Once you do that you can open a corporate bank account. At that point you bill your clients as a corporation and provide them with your corpo…

Corporations pay tax as a separate person by default. What you describe is a Subchapter S corporation, or an LLC.

In general the deductibility of expenses to the corporation is a huge advantage (of a C, S, or LLC), if you're a "professional" with a lot of expenses. OTOH, going from "dollar earned by C corp" to "salary paid by C corp, with both sides of the various withholdings, UI, etc." to "personal income" to "personal income with taxes paid" is MORE of a tax hit than just regular wage income. S/LLC give you the passthrough tax advantage but still have higher filing costs. It only really becomes worthwhile around $20-30k in side income for purely tax reasons.

There are plenty of non-tax advantages to incorporating, of course -- some level of asset/liability protection (most debts are firewalled at the corporation as long as you correctly treat corporate assets and liabilities as distinct from your own), the ability to take outside financing or do collaborations with other people, etc.

(I am not a lawyer; I am particularly not your lawyer.)

Re: The ROI on being an entrepreneur vs. an employee

#49

Post by rdl »

wslh wrote: post #22
gk1 wrote: post #15

Earlier quoted context omitted.

I'm not even remotely close to being a lawyer, but I thought in the US a single-member LLC is taxed the same as a sole proprietor.

There is another trick not mentioned here. If you live outside US and have an LLC with only one person you don't pay taxes in US. This works assuming your work is done outside US. So, say you live in a very relaxed tax environment, you can incorporate your LLC, sell software services to US companies and pay small taxes in your country.

Look up "Controlled Foreign Corporation". :(

Re: The ROI on being an entrepreneur vs. an employee

#50

Post by kyleblarson »

rdl wrote: post #19

A VC funded company, assuming you are capable of raising a seed round, can generally pay sfba founders 50-120k for full time work pretty soon after (founding, or people going full-time). Those same people are generally forgoing 100-200k jobs. The equity value of a founder's shares is an order of magnitude higher than an early hire, or two orders higher than a late A or B round hire, and 3-4 orders higher than a pre I…

10-15mm isn't rich?
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