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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

#51

Post by saalweachter »

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?

Expected value is the key phrase.

So 0.00006% of the time you start a billion dollar company and take home $300MM. 67% of the time you fail and take home $0. The rest of the time you fall somewhere in between, and so your expected value is $300,000. Divide that into an average of 4 years and your expected value is $75,000.

So if you're perfectly rational, you should be willing to work as an employee with no equity for an extra $80,000 over whatever you'd pay yourself as a startup founder, because your expected value is higher.

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

#52

Post by dvanduzer »

ryandrake wrote: post #24
mayank wrote: post #3

Not sure an unbounded 6% annual salary increase is plausible, especially over a 35-year period. That makes the "get a job" numbers quite inflated. I think its clear that the potential payoff from being an entrepreneur is very significantly higher than being an employee; it's a question of when someone's willingness to accept a higher risk matches their circumstances (luck, market, idea, etc.)

Definitely. Average wage growth [1] from 2010 to 2012 has been about 4.7%, varying heavily on region (and likely profession). And this is the average (across all levels of experience). If you're not senior management, you're hitting a wage ceiling after about 10 years, where your pay won't be going up year after year even if you job hop. A more realistic model would assume your wage growth starts at, say 8-10% your f…

At a glance, that suggests the optimal time to start a startup is when you have 10 years of career behind you.

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

#53

Post by gamblor956 »

sportanova wrote: post #46
jakejake wrote: post #37

Earlier quoted context omitted.

(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?

What was described above was basically tax evasion, especially the bit about charging your own company rent to operate out of your house. No form of entity works like that in the U.S.

You get a choice: you can either have a pass-through entity (owners are taxed as if they received the income directly...even if they never actually receive it) or a deferral entity like a corporation (corporation is taxed, but its owner are not taxed until/unless they receive a dividend).

Moreover, even if you choose a pass-through entity like an S-Corp or LLC, the IRS places certain threshold requirements on the amount of income you must pay yourself, and on the self-employment taxes (FICA) you must pay.

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

#54

Post by dragonwriter »

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

Normal corporations pay federal corporate income taxes directly -- and, as employers, they pay the employer share of federal payroll taxes as well.

It is true that there are kinds of corporations whose income is passed through to someone else and assessed against that person (notably S Corps, and T Corps in certain circumstances.)

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

#55

Post by rdl »

kyleblarson wrote: post #50
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?

As the extreme high water mark of success, not really.

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

#56

Post by wslh »

rdl wrote: post #49
wslh wrote: post #22

Earlier quoted context omitted.

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". :(

No, look at this:

References to:

- http://www.law.cornell.edu/uscode/text/26/861

- http://www.law.cornell.edu/cfr/text/26/1.1441-1

- http://www.irs.gov/pub/irs-pdf/i1042s.pdf

NAME_OF_COMPANY LLC is a single member LLC, and as such disregarded for federal tax purposes as a separate entity from its owner, FULLNAME, a resident of COUNTRY and a nonresident alien for US tax purposes. According to Section 1.1441-1 of Treasury Regulations (page 3 of the attachment) , payments made to a whole owned domestic entity that is disregarded for federal tax purposes and whose single owner is a foreign person, shall be treated as payments made to the owner of the entity. This means that payments made to NAME_OF_COMPANY LLC for federal tax purposes are considered to have been made to FULLNAME. The Regs go on to explain that the single owner of the US disregarded entity must furnish a From W-8 with his name and address to the US payor . An ITIN is required only to claim a reduced rate of withholding under treaty, but since in this case the payments were made for income from sources WITHOUT the United States, no withholding is required to begin with, so there is no need to claim any treaty benefits at all and provide an ITIN as a result.

If you want I can contact you with an specific accountant and you can discuss the details with her.

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

#58

Post by rdl »

wslh wrote: post #56
rdl wrote: post #49

Earlier quoted context omitted.

Look up "Controlled Foreign Corporation". :(

No, look at this: References to: - http://www.law.cornell.edu/uscode/text/26/861 - http://www.law.cornell.edu/cfr/text/26/1.1441-1 - http://www.irs.gov/pub/irs-pdf/i1042s.pdf NAME_OF_COMPANY LLC is a single member LLC, and as such disregarded for federal tax purposes as a separate entity from its owner, FULLNAME, a resident of COUNTRY and a nonresident alien for US tax purposes. According to Section 1.1441-1 of Treas…

Are you talking about a non citizen doing this, or a citizen/permanent resident?

A noncitizen actually can use the USA as a tax haven in ways similar to this (I'm not sure of the specifics of this particular situation). IMO there isn't a whole lot special about non US people not owning US taxes when outside the US.

A US citizen or permanent resident is taxed on global income (you do get around your first 95k/yr deducted if you are out of the country enough, which is why I went diving for 4 months at the end of a contract and net made more money than returning to the US that year). A corporate entity being treated as disregarded just exposes that income the us person's global us tax liability.

(Again, I am absolutely not a lawyer; this is not tax advice)

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

#59

Post by gamblor956 »

rdl wrote: post #49
wslh wrote: post #22

Earlier quoted context omitted.

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". :(

It's not a CFC. He's described an NRA residing in a foreign country selling software to US customers from a location outside the US. This is foreign-source income that is generally not taxed in the US unless you have citizenship or tax residency (i.e., a green card, or a company that is incorporated or physically does business in the U.S.).

In fact, what he's described works even better without the LLC, as the organizing an LLC in a state gives that state jurisdiction to tax sales to customers in that state! (State tax laws work differently than federal tax laws and are generally not affected by tax treaties.)

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

#60

Post by rdl »

gamblor956 wrote: post #59
rdl wrote: post #49

Earlier quoted context omitted.

Look up "Controlled Foreign Corporation". :(

It's not a CFC. He's described an NRA residing in a foreign country selling software to US customers from a location outside the US. This is foreign-source income that is generally not taxed in the US unless you have citizenship or tax residency (i.e., a green card, or a company that is incorporated or physically does business in the U.S.). In fact, what he's described works even better without the LLC, as the organi…

Ah, the NRA part wasn't explicit or something I assumed.
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