

Ask HN/YC/PG: Dealing with tax and accounting - markbao

(Focusing on the US) So, how do you deal with tax (and on a side note, accounting?) If I remember correctly, YC companies are incorporated as C corps (which means both double taxation and a bit of hassle with IRS forms and such.)<p>More specifically, what does your company do with the profits at your company that are distributed to the founders? In other words, do you keep all the cash inside the company accounts and pay out a small living salary? Do you pay dividends based on the equity table of the startup (and thus dividend tax comes in?) Do you have an accounting firm or just do it all yourself and throw it in EFTPS?<p>PG, if you're reading this: what do the YC companies do in terms of tax? Does YC have accounting firm connections, or do YC companies manage it by themselves?<p>Why am I asking this? Albeit being really important for startups that are incorporated to consider, I don't hear much about tax talked about here, for something that takes a minimum of 15% of your cash to the FDA^W IRS.
======
pg
As a rule, technology startups don't distribute profits till they approach
senescence and investors no longer trust them to invest their profits in their
own expansion. E.g. Microsoft, which was founded in 1975, didn't pay dividends
till 2003.

YC companies usually hire accountants when they raise enough money to. Before
that the founders keep track of finances themselves using Quickbooks (or a
shoebox full of receipts).

~~~
j_baker
This is going to sound dumb, but why do you use the word senescence here
rather than maturity? They both seem to mean the same thing. Does it have some
specific business meaning, or is it just another way of saying the same thing?

~~~
pg
Senescence implies decay.

~~~
j_baker
I see. So a difference in connotation.

------
petenixey
If you don't have a significant number of investors then dividends can be a
good way to save on income tax. If you do have investors however you're
throwing company money back to them which is not good for you and not that
good for them.

For smaller companies the vast majority of accounting is not accounting but
just book keeping. This is actually easier than it seems (it took me 4 years
to realise this though) and is much easier if you use www.xero.com than
Quickbooks. I hated all the usual "accounting" packages as they didn't guide
me. Xero does a great job and whilst not perfect is definitely the best of the
bunch and worth the monthly fee.

From having run 3 (small) companies this is what I now focus on:

1\. Making sure I keep a note of everything that I spend and what it was (if
you ignore everything else, _do this_ )

2\. Keep a note of which account I spent it from e.g. petty cash, bank
account, paid directly by me

3\. Making my "list of accounts" (i.e. categories of spending) meaningful to
me and ignoring all the numbers that accountants give to them. Whether it's
"domestic flights", "taxis", "computer hardware" or "web services" - I make
sure it's a category that's meaningful and actionable

4\. Paying my salary taxes when they're due & use a payroll company

5\. (easy if you've done the others well) Filing my tax return on time

It's through getting all of these wrong that I've learned which ones were
right :)

One last thing that I've found _very helpful_ is having a google spreadsheet
form with a link on my iPhone homepage to enter the amont and detail of
purchases as I make them. This makes it much easier when it comes to
remembering what each individual bank transaction was for when you import
them.

~~~
kevinelliott
The only problem is, once you do desire to hire an accountant, they often want
you to use Quickbooks. And, this can often be good because it'll save on how
much time they spend on your file since they can easily open the file in their
own Quickbooks, and thus reduces their fees. However, the front load to learn
and understand Quickbooks costs you a lot of your own time.

~~~
swanhunt
They want you to use Quickbooks (or any other software they request) because
they don't want to have a learning curve. It's your business, so find someone
that is willing to work with you. Besides a few laws in physics, everything is
negotiable.

~~~
kevinelliott
Indeed, but sometimes having flexibility ends up costing real dollars.

------
kevinelliott
If you have put capital into the company, and assuming you did not loan it to
the company but simply provided capital, you can track that in "capital
accounts" in your accounting software, and then as profits are made you can
withdraw that money, without any tax consequences, up to the amount you have
contributed to the company. For any amount above contributions taxes must be
paid. The corporation must pay corporate tax on any of the revenue it
received, with exception to any deductions that match up, etc.

If you have only provided sweat equity and are taking a draw against the
income of the business, you must pay taxes on that income, in addition to the
corporate tax (double taxation as you mentioned).

In most cases, startups seem to be keeping as much money in the business and
taking as small of a draw as possible. This is for a variety of reasons:
avoiding double taxation while the business is young, having more capital
available for growing the business, having more money available for investing
than would be available if you drew the cash and took the tax hit, etc.

But remember, people have to eat, and need a roof over their heads. Unhappy
miserable people probably lend to lower productivity; some people would
probably say the opposite, that uncomfortable unhappy situations make a person
more jazzed up to "get things done" but I don't personally like that form of
motivation.

It makes a lot of sense to hire an accountant, specifically one that
understands startups if possible. Sure, you could figure out all the
technicalities of running the books on your own, and then managing the tax
filings, but it's more complicated than personal taxes, and you're risking
your startup legally. Also, these guys know what they are doing and can knock
it out of the park, letting you focus on what you do best -- building your
startup.

------
swanhunt
The problem is that these questions really should be tailored to the company's
details because that's how the decisions are made. YC sets up C corps so they
can easily issue shares to VC. They would probably retain the cash as a part
of the agreements with the VC to spend on growing the business. If that's not
your plan, then alternative organization might make sense and will eliminate
some of your tax fears. Also, if you have more of a lifestyle type business,
then distributions would make sense. Do you start to see how the intent and
details change the advice? Talking to someone when you are setting something
new up or having a major change makes sense. That said, don't worry too much
about the taxes. If you are so worried about not giving the government a cut
that you don't make money, then you lost the point. What is it specifically
that you want to know here? Details are what you need to give to get the
advice you are looking for.

------
speby
It just depends. If the profit towards the end of the year isn't too bad, it's
possible to pay as much of that out as possible as a bonus to founders and/or
employees. Obviously, the company pays taxes on the wages
(state/federal/medicare/etc) and you personally pay income taxes, too. In some
cases, this may be a lower, overall tax hit than paying the same amount out to
founders as dividends only. It certainly depends on the total amount in
question, too.

It is possible to also retain most, or all, of the profits at the end of the
year within the company. As was stated, though, corporate income taxes must be
paid on that. Up to about $75,000, the tax rate is pretty low and not a huge
deal but after that, corporate income taxes are pretty steep and as a young
business, it's definitely good practice not to give Uncle Sam a dime more than
you have to so if you have a huge windfall of profits, you might reconsider
whether to retain it all or not.

Another option is to report as much expense as possible so as to have
deductions against the corporation's income. Naturally, this means spending
actual money and giving it to someone else but it also means avoiding tax. So
if you can do this with things the business needs (or even paying for some
things way in advance and up-front), the loss in the time value of $ is still
far less than the tax consequence that otherwise would have been incurred
(example: pay for all of your hosting needs 6 months in advance before Dec
31st, provided you are on a cash accounting basis and a calendar fiscal year)

