Ask HN: Startup investment runway and taxes

https://news.ycombinator.com/item?id=7797932

by princehonest • 12 years ago

10 3 12 years ago

news.ycombinator.com

Let's say you get into YC. You are a new startup with $120K investment, 2 cofounders, each paying themselves a $2K after-tax monthly salary with biz expenses around $1K/month.

What do the taxes look like? How does the investment get taxed before its used? What factors would you use to calculate the startup's runway? How much runway does the startup have?

patio11• 12 years ago

You'll have a professional do the corporate taxes. Briefly, you'll expect that for the first several years of the business, possibly continuing through exit, the business will have negative profits. Accordingly, your income tax bill for the corporation will be $0 every year. You'll expect to continue booking tax losses as an asset on the balance sheet against that day in the future when your business actually has profits. You will likely pay many taxes which are not founded on income, most prominently California franchise tax for YC startups, which has a minimum of about $1k a year or so.

The fact that the corporation received $120k from YC or $10 million from angel investors is immaterial. Those flows of money do not represent revenue/profits. They are not subject to income tax (nor any other tax that I am aware of).

The approximate runway of a company with $120k in the bank and 2 co-founders at ramen wages with $1k a month in OpEx is ~18 months as of the current moment in time. Napkin math: $6k to pay both founders ~$2k salary plus pay direct costs of employing them, $1k in OpEx, divide.

pjungwir• 12 years ago

I'd stress talking with a professional. You'll probably need to pay state+federal unemployment tax and disability insurance, plus you'll need to do FICA withholding on the salaries you're paying yourselves. If you forget that and write yourselves a check for your whole paycheck, you'll wind up with a larger tax bill later.

rpedela• 12 years ago

Investments are not taxed.

You will most likely operate with a loss for the first year so your tax bill will be $0. And then you will be able to carry-over any losses to subsequent years which will reduce or eliminate your corporate tax bill in those years. Get a professional for the carry-over stuff. As patio11 said, there are often minimum state taxes. I believe California is ~$800 and Delaware is ~$200 or more.

You will of course have to pay income tax on wages individually. If you are considered employees then the company also has to pay a portion of the payroll tax. If consultants, then the company does not need to pay payroll tax. Talk to a lawyer about which is appropriate for the founders.

runway (number of months) = (total - one-time expenses) / monthly expenses

Ask HN: Startup investment runway and taxes

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