I read these reports from Patrick with interest, but feel like he inhabits a different universe than I do.
Pinboard made $256K last year, so I operate in at least the same financial ballpark. But I do my taxes on TurboTax and have never spoken to an accountant or lawyer. My business is a sole proprietorship.
From my perspective, Patrick overcomplicates everything he undertakes with business processes and overhead. From his perspective, I'm probably a irresponsible slacker.
The upshot is that there are as many ways to run an online business as there are people, and how you do it depends as much on your personality as on objective factors. Big props to him for writing about his experience so openly, and in a way that so many people clearly find helpful.
There are three primary differences between your situation and Patrick's situation:
1. Patrick is a US citizen who lives and operates his businesses in Japan, which automatically makes accounting and filing taxes several orders of magnitude more difficult than filing taxes for a business that operates in the US.
2. Appointment Reminder, as an entity, operates in regulated industries, most notably medical care. That requires HIPPA compliance, which carries legal and financial risks if compliance is not accurately implemented, maintained, and insured. Patrick's conscientiousness in terms of business process is very much to his credit, and the consequences of Appointment Reminder going down, losing customer information, being hacked, etc are much higher vs. comparable issues with Pinboard.
3. Patrick engages with large companies as a consultant on a somewhat regular basis, with contract values that are substantial, and with counterparties that have legal departments that are also substantial. The level of legal and process overhead required to close these deals, execute on the project, and collect payment is comparably substantial.
In summary: you and Patrick have very different lives and run very different types of businesses. He's not "overcomplicating" his business operations - he's being smart and diligent in ways that benefit him greatly in terms of both revenue and risk mitigation.
Also, for what it's worth: I would highly recommend against operating as a sole proprietor. LLCs are inexpensive, easy to set up, easy to maintain, and mitigate significant personal legal/financial risks.
Insurance would also likely benefit you - a basic computer systems / PII policy would mitigate your (generally small) risk in this area: without insurance, getting sued by anyone even moderately persistent would likely put you out of business.
Think of it as the business equivalent of earthquake insurance: you can save a bit of time/effort/money by going without it, but as soon as an adverse event occurs, you REALLY wish you had it.
Likewise for accounting - we probably have similar businesses in terms of overall complexity (that is, not much), but Bench + my accountant save me so much time and effort it's silly to do accounting and bookkeeping myself any more.
>LLCs are inexpensive, easy to set up, easy to maintain, and mitigate significant personal legal/financial risks.
Not sure what it's like in the US, but in Canada this isn't some magical easy way to escape liability. The accounting, tax burden and how you draw a salary changes significantly when you incorporate. Not to say it isn't worth it, but it isn't as simple as "do it".
An LLC (Limited Liability Company) isn't a corporation. It is a vehicle with limited liability. An LLC may be taxed by the IRS as a C Corp or a partnership/S Corp (same thing for tax purposes). If the LLC has only a single owner ("member"), then it may be taxed as a "disregarded entity" (ie: sole proprietorship) so its income and losses pass throuh directly to its owners' tax return.
A corporation is a whole other mess of tax and accounting regardless of which side of the border you're on. Weirdly enough, a few provinces have ULCs - Unlimited Liability Corporations - which have useful tax propertes for American corporations looking to expand their operations northward.
It's not that you escape liability, it's to limit liability to just the company without extending to your other personal assets. However it's not that simple in the US either and there are many ways for someone to pierce the liability protection shield offered by an LLC, especially a single member LLC, and even more so in situations where you aren't very diligent in maintaining a strict separation between your company and personal finances.
I'd like to see some proof of this. Because the court says it's not bullet proof. If you do something reckless (like dodging taxes on your LLC and naming your wife as the CEO), you'll be facing jail.
So an example of cases on how the LLC is useful in protecting you is needed.
I've had an accountant do my taxes since I was 19, and feel like I've probably saved a pretty substantial amount of money --- not by doing elaborate things to structure my income (there are accounting tricks that do that, and I agree with you that exploiting them feels skeezy), but simply by ensuring I'm doing them correctly and, more importantly, on time.
Legal expenses are, as you say, a question of personality and risk tolerance. After we sold Matasano, I talked to people who'd been operating other large consultancies, and was shocked to learn that there are big firms that just sign every contract their clients give them. We got every contract reviewed, one by one, at significant expense. They just signed and started working. Our outcomes were comparable!
We still get everything reviewed at the new company. It costs money, but not so much that it changes the economics of the work, and I've had enough close calls over 20 years of working that it's worth it just not to worry. But reasonable people disagree about this all the time.
I do think you're wrong about the sole proprietorship thing, though. An LLC is extremely cheap (you don't even need a lawyer) and protects your personal assets from business liabilities. On the other hand, your legal strategy probably just involves fleeing the country to hide amongst the penguins along the 70th parallel.
> I've had an accountant do my taxes since I was 19, and
> feel like I've probably saved a pretty substantial amount
> of money...simply by ensuring I'm doing them correctly
> and, more importantly, on time.
Can you give one specific example of something you wouldn't have been able to do correctly and on time yourself, that has at least $1000 in value to you? I've been doing my own taxes (with a six figure tax bill and often 15+ 1099s) for ten years; I'm pretty confident I've not made any meaningful errors other than typos or transposing labels on the odd stock entry, a mistake that would cost me $0 even if audited.
I--at least for a W2 worker who is a US citizen living in the US--have a uniquely bad tax situation, and I'm pretty confident that I'm not missing any major tax breaks, short of doing absurd accountancy.
The first time I used an accountant, they immediately found that I had not been taking advantage on a SEP-IRA. Which immediately saved me several thousand dollars in taxes that year. While it's not something I couldn't do myself the next year, it was admittedly something I never knew about beforehand.
I'm not a lawyer or anything, but I suspect that the other companies' positions are something like: We don't really care what the contracts say, we'll just do whatever we normally do anyways. If they don't like it, they can try to sue us, but they probably won't accomplish much, because we're a consulting company that sends all of our revenue right back out the door as salaries, so we have no fixed assets to go after. If a lawsuit even looks difficult to defend against, we'll just dissolve the company and start up a new one instead. Their lawyers know this and so probably won't bother, but they will happily charge their clients to drum up some scary-sounding contracts to make them feel better, and just quietly ignore them being basically unenforceable.
Yes, that's what I assume the logic is as well. But the things you find in contracts when you have them reviewed include novel new ways for you to be sued; for instance: standard IP language can be read in ways that impute ownership of your technical methodologies to your clients, and IP claims survive transfers between companies.
Another common clause is non-competition, which is binding between companies even in California. And, yes, you could just tear down the company and boot up a new one in order to deliver work for a client's competitor, but the risk/reward equation is reversed in that situation: your consulting firm is more likely to drop a client than to endure a lawsuit.
In my previous devshop, we had a similar situation RE: contracts. At first we had a lawyer on retainer to handle the relatively complex contracts that we signed with companies.
Eventually, we moved to a format of having a 2-page "contract" which basically specified our rates, gave a few short sentences on the most important topics (rates, billing policy, IP licensing, liability), and used this both as a "price proposal" as well as a final "contract".
This worked very well for 85% of customers. Another 15% were either specific situations, in which legal counsel was required, or were (usually large) companies that had a fixed contract which we could either accept or not.
My experience with Matasano was that for our median contract (mid 5-figures), companies routinely expect to close their deal on their own paper, and will balk at using ours as a starting point.
Partick lives in Japan, and mostly does business with US companies. Complying with international tax regulations is probably complex.
Are you incorporated? Do you have any type of business insurance? You can probably get away without much of that stuff if you're running a social bookmarking site, as your customers are very unlikely to ever sue you. If you're handling appointments for medical institutions in the US, being sued is a very real possibility, as is running afoul of legal regulations, and you'd better structure your business properly to handle it. Meaning both knowing exactly what the rules are to stay in compliance with them, and being incorporated and having the right kinds of insurance so that any mistakes or accidents don't bankrupt you personally.
Partick also sold his businesses. If you ever did, it would probably go a lot better to have well-organized finances and tax info set up by a proper accountant. I'm guessing you have no desire to ever do so right now, so it makes sense for you to not bother, just another reason for some of the differences.
What are your expense categories like? I was running my business without external accounting help.
But I grew my business in the last year, and had a wider variety of expenses as a result. Keeping track of it all was eating too much time and mental space, so I'm handing off bookkeeping to a local cloud accounting firm.
I haven't incorporated, but past a certain income threshold, I would, as that would save taxes and let me make investments pre personal tax within the corporation. I've also spoken to a lawyer for a visa related to the business, and about a copyright issue.
Is pinboard mostly "finished", and you just have to maintain it? I imagine that would greatly simplify accounting and overhead. If so, that's a great situation!
I pay about $1.5k/month for colocation and the amortized cost of hardware, and that's the major expense.
The site isn't finished so much as frozen. I.e., I have a lot of stuff I plan to do, but it's been a suspiciously long time since I've done anything at all.
Probably simpler accounting then. I have a lot of individual invoices to keep track of + multiple revenue streams, some of which have sales taxes, some don't.
(You have been keeping invoices, right? You need those in case of audit, which will almost certainly happen at some point).
I'm assuming you are declaring all expenses which are business expenses. If you're doing that and the number of invoices is small, then you probably have a fundamentally simpler business than most businesses.
Might still be worth a one off conversation with a good tax lawyer or accountant to see if you're making any business-101 level errors. If you've never had that sort of conversation, it's somewhat likely.
Example: in Canada, most entrepreneurs I know have no idea that health insurance is a business deduction, and that they can get group health insurance through a chamber of commerce. This usually pays for itself due to the tax deduction plus reimbursements. So there may be similar no brainer, no maintenance changed you could make, once.
I found the whole procurement process to be really frustrating, as someone new to the world. You have to talk to salespeople (even for what is a commodity service) and pricing is very opaque. Moreover, there are pitfalls like the fact that a rack never comes with enough power to run more than 1/3 full, and everyone treats this as normal.
Yeah. I have experience procuring space for clients, but even so it's tough to get a reasonable deal on the west coast. In Dallas, I can routinely pickup a full rack with dual 20amp circuits, dual ethernet drops, and 200-400mbps unmetered for $700 a month. That's what I'm paying for racks in two separate Dallas datacenters currently.
If you're willing to go north a little bit, ViaWest might give you basically the same deal in one of their Oregon datacenters.
This is such a great comment. I found myself thinking something similar while writing up a business plan recently: "This is actually just another act of design." You design how you want the business to function and what risks you want to take and which resources you want to leverage. The only thing businesses definitely share is that money flows through them, as such, financial statements are at their core. Everything else is taken up as necessary.
Patrick is a business consultant who also builds software; you are a writer and social critic who operates a site that lets you do the other things you want to do.
It's two different approaches to life and business and it affects all of your decision-making.
I imagine your taxes are fairly straightforward as a result. Have you considered spending $X,000 on an accountant to see if there are ways of structuring your income to minimize taxes?
Structuring income to avoid taxes seems like a jerk move to me. But a bigger reason is that as long as my income is over some threshold, I'm happy. Dealing with business minutia reduces my happiness, so I avoid doing it.
1. Personal experience: businesses and products don't always last. Your product that is pulling in great money might last, or it might not. You could be down to $100k next year, or 50k, or $0. Tech moves fast. You are almost certainly overpaying taxes significantly, say, $50k+ a year.
I've had a product that pulled in $100k a year for many years on autopilot, and it just died one year.
2. $50k a year could be invested and compounded annually for many many years. Life isn't about income, it's about net worth. Having a higher net worth is like borrowing years from the future. You don't need to (just) build income, you need to build up net worth and income from different sources.
That will allow you to build a new product, or just keep enjoying life once your income stream shuts down.
Maybe I'm a jerk for minimising my taxes, but I'd prefer more money in the bank now vs later.
Assuming he's deducting expenses, I'd love to hear the magic method that will save him $50k on taxes. Solo 401k is likely the biggest potential savings and that would save (defer actually) less than half that. At his income level, the S-corp salary/distributions split is either risky or not very big. Might save $5k-10k. Any more than that and you're really just asking for an audit.
I was basing that assumption off of what he wrote in a post above: "I pay about $1.5k/month for colocation and the amortized cost of hardware, and that's the major expense.". He's probably not claiming every deduction he can.
I'm not US based, but given he does everything himself there's no reason to assume he has everything optimised. Every country is different, but most tend to have similar tax concepts to some extent. I'm based in Belgium, and if I wouldn't optimise anything on $200k income, I'd be paying close to 50% tax. If you do, you can comfortably get away with legally only paying a fraction of that, say, 15-20%, if not less.
His easiest way to save on income tax would probably just be to sell his business / product, so that he can book a capital gain. Capital gains are taxed lower than income. But that isn't exactly an optimisation unless the difference is significant enough. Definitely worth doing if you don't see it growing much from this point though, or if you're bored with it. That capital (for a business doing $225k a year in profit, maybe $500-650k after tax?) can then be reinvested tomorrow in other assets generating capital income, i.e. stocks, which is preferred to income taxable at income tax rates.
I'm assuming this is sarcasm, but given you wrote "it's been a suspiciously long time since I've done anything at all" it's not actually horrible advice.
I thought for a while about this comment and I must say, I don't understand why you're so snarky here. The advice is actually not that bad.
The assumption is: A mostly unmaintained business has the risk of becoming obsolete rather quickly.
Better to have cash in the bank now than a potential income over the span of several years. Furthermore, tax-wise, it is cheaper to sell than to keep the business.
The question for every business is probably: Did the business reach its peak (under the current owner) and is it more feasible to sell right now or can it provide your above-a-certain-threshold income for several years to come?
The reduced tax rate for capital gains is merely a side effect, but could favor the decision to sell or not to sell in one direction or another.
Would you care to elaborate why the advice is so bad?
Because your hidden assumption is that business is worth having only if it is keeping you busy or that adding new features might prevent obsolescence.
What he has is something that hasn't been taking a lot of his time with a fairly stable customer base of people like me, who pay for the service because what is does is useful enough for me and not because somebody on the other side is working his ass off.
It is a widespread belief that you should add features to prevent users either getting bored with your service or to diversify into other groups. What is rarely appreciated is that new features are a cost that may drive current users away when they dilute a product. If you solve a problem well for a large enough group of people, it may be sensible to just step away from the keyboard.
Obsolescence is actually not the main problem. The problem is disruption: someone else comes along and offers a better product, or better value for money, or some combination of both.
It was a niche mobile app (one time sales) that plugged into something larger and the market just shifted into a different direction. Even if I would've kept working on it, it would've died.
Looking back, I probably lost $250-300k there that I could've gotten if I would've sold it.
avoiding taxes vs. running your business in a way that is fully legal that allows you to not be penalized for being self employed are two different things. For example, if you paid 30% (self employment tax, roughly) on 250k, you're paying $75k in taxes. If you set yourself up as an LLC filing as an S-corp which brings zero minutia with it beyond the setup, you could pay yourself a salary of, say, $80k, pay your $12k in taxes and the other $170k would be taxed at 15%, saving you roughly $37,000 in taxes. Putting $37k a year into a retirement account and investments wouldn't be so bad.
This is wrong on multiple levels. SE tax is 15.3%, not 30%, and 12.4% of that is social security, which is capped at 118k. Beyond that, you're just paying 2.9% Medicare (plus normal federal and state income taxes).
Assuming that $80k is a reasonable salary for a solopreneur business (which seems iffy to me and probably to the IRS), you're saving 15.3% on $38k (80k to 118k), then 2.9% above that. Your profit distributions are taxed at ordinary income rates, so zero difference there. So on $250k, you'd save about $9k total, in return for higher audit risk and slightly more hassle and expense in maintaining the S-corp. Not crazy to say that's not worth it for some people.
It's also not an option in some locales (NYC doesn't recognize s-corp and taxes them as corporations, negating any benefit).
Fair enough. I'm not an attorney or an accountant and the comparison of tax liability for self employment vs. LLC filing as an s-corp may or may not be significant. It really depends on each person's situation in terms of income, expenses, etc.
I hope you are at least contributing to a tax-deferred retirement account? A solo-401k is a very good option for solo entrepreneurs, and I'd be surprised if anyone considered it a bad thing to take advantage of.
Pinboard made $256K last year, so I operate in at least the same financial ballpark. But I do my taxes on TurboTax and have never spoken to an accountant or lawyer. My business is a sole proprietorship.
From my perspective, Patrick overcomplicates everything he undertakes with business processes and overhead. From his perspective, I'm probably a irresponsible slacker.
The upshot is that there are as many ways to run an online business as there are people, and how you do it depends as much on your personality as on objective factors. Big props to him for writing about his experience so openly, and in a way that so many people clearly find helpful.