The Bank of America payroll system we used was automatically withholding the payroll taxes from all of our paychecks every two weeks. It then just left that money in our company's bank account instead of sending it to the government because I never discovered the "submit tax" button.
Taxes! It is never too early to setup something like xero.com and bring outside expertise.
Knowing how much money you really have is the most important thing to know when you run a business.
At ConferenceBadge.com I spent a few days automating our accounting process with Xero API and brought some help from Xenaccounting.com (Montreal firm) to manage our books. It really helped us bootstrap the company and manage or tight budget month to month.
Accounting dept (not knowing where you are) is really dangerous and stressful.
> In the early days I would often let potential customers think we already had a feature they wanted
What. How is this even remotely acceptable? If discovered it destroys your credibility. Among your employees it destroys your credibility. If I was an employee and found out that this was happening, I'd be extremely upset. I wouldn't trust a thing you say. If you'll lie to customers, you'll lie to me.
This is incredibly common behaviour amongst sales people. Or what is also common is 'oh, funny you should mention that, we have a team working on that feature as we speak'.
90% of the time it is fine, contracts tend to be organised for several months in advance, long enough for you to get a feature in place.
As a developer, I've been on the receiving end of "we promised the client we could do this, and they've already paid us, so get to it" more times than I can count... it's my least favorite salesman trait, by far.
While I'm not defending the practice of vaporware, it's not the root of the problem here. The root of the problem is that if you have a policy of working unpaid overtime, unless you are lucky in finding only wise or scrupulous employers, your life is going to be trashed.
To you, it is completely irrelevant whether the reason your employer ordered you to trash your life was because the salesman sold vaporware, or because of the phase of the moon; the outcome for you is the same regardless of the reason the order was given. You have to change your policy of obeying such orders.
its even worse when you're in the meeting with the client when the sales people say you've already got this feature and you're thinking "no, no we don't dear go this is going to take a massive database change and....."
That's not even remotely my least favorite, as at least salespeople who overpromise too much tend to get caught out.
My least favorite is salespeople who give product away for free (including the support thereof), hurting the bottom line, since their commission is on gross.
We do this all the time for features on our roadmap, if a high level client wants to "sign up" and basically pay for the new feature we move it up in the roadmap.
What. How is this even remotely acceptable? If discovered it destroys your credibility. Among your employees it destroys your credibility. If I was an employee and found out that this was happening, I'd be extremely upset. I wouldn't trust a thing you say. If you'll lie to customers, you'll lie to me.
Your optimism is endearing, but the vast majority of companies I've done business with do this. Often companies I've worked for have, too – sales people are very happy to overstate the available features and capabilities of any product. From their perspective, a shoddy, rushed implementation to an unhappy client is still better than having them walk away from the purchase entirely.
From my experience, big enterprise product company representatives like to do this:
Question: Does your application has x, y and z feature and can be integrated in our process easily?
Answer: Sure, all there. Just have to tweak a few settings in the GUI.
Truth: We have a bare-bone product and a semi-documented API. Feel free to implement all the features you want and adapt it to your process. We can provide you professional services (for a price, of course).
This cannot be overstated. If you give the sales team any room or freedom, they will make your life hell trying to keep up with "features" that outdo everyone else just so they can get their commission check. They don't have to deal with anything beyond signing of the purchase, so they don't care that it sinks everyone else to get that purchase.
I agree. But just because something should happen, doesn't mean that it will.
I don't work with a startup, or even in the tech industry, but this is an issue that takes up ~25% of my time. I have to keep pushing back on sales to make sure that they're not selling something that's physically impossible, or just plain stupid (but sounds good).
This is something that cuts across business in America in general, I think.
That would result in mass unemployment in some sectors of industry.
The problem is that as long as your competitor says 'yes' and you say 'no' the competitor will get the customer.
Customers should be firing companies that provide false information during the lead-up to a sale. Then the sales people can stay employed and everybody comes out ahead.
Companies who did this would be systemically outcompeted by companies who choose to look the other way when their salespeople overpromise. And you will find that in general, they are not saying "we have feature X as an available feature as of today" -- they say things like "feature X is under development" and work to upsell it/et cetera. It can be an extremely effective tactic for a lean company to explore the market without overinvesting in development, and it can be destructive behavior by salespeople to advance themselves at the cost of the company.
Like so many things, it's a balance, not an opposition.
This is just how things work in a lot of industries.
You promise the world to make a sale, then once you've signed, work frantically to make the vision you sold a reality. If you were open and honest, you wouldn't sell a thing.
The only people who lose out are those who take salespeople on their word and don't get everything agreed in writing. Never take a salesperson on their word.
You (not you the person I'm replying to, 'you' the company/sales person) that are taking money from somebody based on an untruth. It's outrageous, regardless of how often it happens. I have the right to know what I'm getting for my money. Don't lie to me, ever.
Since you are competing against people who will tell you that the feature they want already exists, people who are too honest in this area will quickly get filtered out of the marketplace.
It sucks, but there are lots of markets where the customer says "please lie to me" and gives their business to the person with the most reassuring lie.
This philosophy seems to imply that trust and relationships are worthless in business. If you perpetually promise features that don't exist, you'll eventually promise something that either can't be implemented at all or has to be implemented sloppily to deliver.
How can you possibly sustain a long-term business when you're so willing to damage business relationships?
However, the startup that (wins a big contract with a big promise && delivers on its promise) certainly has a larger chance to become a long-term business than the ones that short circuit themselves out by not winning contracts.
I don't think that's true. In my experience, the very best companies all refuse to do this. If you leak an upcoming Google feature or promise something to a customer that doesn't exist, you get fired. Same at Facebook and Apple, or Blizzard.
I do think it's much more common in highly competitive markets with no barriers to entry. Google/Facebook/Apple have pretty strong moats and large diverse markets, and can afford to release products "when they're done" and not talk about them until then. People in very competitive, low-margin markets often need the sale now. But then, people in the latter type of markets quickly get filtered out of the marketplace regardless of what they do.
Google and Blizzard are selling mass-market products. When selling enterprise software, you can find yourself facing checklists of "product must do X." (Even if the customer will never ever ever use X.)
It also puts employees under constant pressure, since every feature is already "late" as soon as implementation begins, and extraordinary effort is required on an ongoing basis just to keep the company from embarrassing itself.
At the company I work for, executives and sales people frequently make "commitments" to our customers for features that don't yet exist. People who make commitments on my behalf without even mentioning them to me beforehand (let alone asking me if what they're promising is even possible to deliver) don't get my full respect.
I worked for a founder who did this all the time and it's incredibly stressful as an employee. It would be fine in the limited case where the features are fast and easy to implement: say two days' work at most. I enjoy my paychecks clearing every other week, and losing a sale over small amounts of effort is dumb, particularly since sales where relatively large (low hundreds of thousands of dollars). But this founder didn't know and frankly didn't care about that; he talked about features we'd just begun to do basic research on as if they existed.
I'm being intentionally somewhat vague here, so it's hard to really relate the details, but in one case he discussed a feature (having to do with distributed markov chains) that not only didn't exist but, afaik, nobody in the world even understands how to do and is the subject of active research. Needless to say, not something that could be implemented in a couple days. Worse, we where talking to some phds who fucking understood the above, and they immediately started asking me how the fuck we did it!
And yes, it often made us look like complete assholes in front of customers.
I worked for a guy that did this too. Instead of me losing sleep over it, I put my job on the line (because if this was standard operating procedure then I would rather be unemployed...) and told him he needed to come clean with who he sold admitting he was at fault and not the developers/etc. If a sales person has to eat crow they quickly learn to avoid future crow eating. Things were much better after that.
I'm guessing you mean distributed Markov Chain Monte Carlo ?
Sounds like an interesting problem, I'd really like to hear more about that.
I'm really interested in "difficult" problems with significant commercial applications. (My contact info is in my profile if you don't want to post publicly).
1. In my limited experience with pitching/salesing when you say "Yeah I think we can probably build that" the customer/client will take it as "We already have this". There is no amount of rational talking and explaining you can put in place to prevent this. If they ask for something, and your answer is anything but an unequivocal "No." they will think you already have it.
2. Isn't the whole concept of MVP and lean basically going out to people and saying "We have this" then seeing if somebody pays, and if they do, making it?
My understanding of MVP is that you essentially sell a lack of features. Make something that does as little as possible that someone will buy, not selling something and then figuring out how to do it.
1: "Yeah, we can build that. It will cost $TIME and will add an extra $$$ MEGABUCKS to the total cost".
One basic technique is to keep track of the life time cost of sales, development, delivery and support/maintenance for all projects, and then measure the performance of salespeople based on both income and cost (as opposed to just income) makes them a lot more motivated to sell good solutions.
as someone who headed the dev team in a startup where the ceo did this repeatedly, i have to say it's a huge mistake. it was very demoralising to the entire engineering side of the company; we felt that we were never given a chance to deliver a properly working product because we were always working round the clock and frantically adding half-baked features that had been used to close a sale.
It's called vaperware and it's part of a lean strategy (that way you only build what people actually want). It's extremely common, in fact I believe New Relic was founded using this type of strategy. Take this with a grain of salt because this is an old passing memory of mine, but I believe Lew Cirne called up business owners and sold a bunch of them on the original new relic product before even developing it.
I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying), if it is some sort of technology that you aren't sure is possible or not that is certainly different.
"...I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying)"
So the salesperson/founder needs to have a good enough model of how the software works so that they know if a feature is relatively easy to provide, or if as another poster commented, it would require say a major change in a database design.
I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying)
When I was being sold to, I developed a good ear for phrases like 'in development' or 'that is just a custom report'. We used put it all in writing &c.
As somebody who has been on the developer side of that, I'd say that it depends on the feature, and on the available time. If you are sure that it's viable (as I'm assuming the author was), why not?
I'd still prefer to frame it as "that's on our roadmap, and will be done by the time we close the contract", but then, there's little practical difference.
You are referring to a phenomenon known as vaporware [0]. Microsoft was notorious for using this strategy of pre-announcing features in order to kill smaller competitors from developing them, afraid that they won't be able to compete with the 800-pound gorilla [1]. Lots of other companies starting copying this tactic, so much so that tech industry publications like Wired started bringing out annual lists of vaporware [2]. Eventually the Justice Department filed lawsuit against Microsoft [3]. Amicus is just following a long, time-honored tradition.
Wow - "Oops, we forgot to pay payroll taxes for three years" isn't good. How does nobody notice that?
But lessons learned and all that. I can't stress enough (at least from having run a small business) that accounting is the number one thing to get correct from the get-go. It saves such an immense amount of time, money and stress later on.
It's rather surprising that the IRS wasn't dramatically more aggressive about this. Every year they had people submitting tax returns claiming taxes paid that weren't paid, for years. I would have expected the IRS to have searched the Earth for this company.
I understand that they sent some mailings, but at some point...months in, or even years in...you would expect an investigator to be tasked with hunting this company down. That ultimately is not a difficult task (aside from obvious and trivial web searches, contacting one of the employees who claimed to have paid tax, the government getting none of it). This seems like the sort of oversight that in most cases would leave the government holding the bag.
The way the tax office works is simple: the biggest holes get plugged first, the smaller ones can wait until they've become either big holes or until they've been resolved.
Usually they are resolved. By the time a small company has developed a big enough hole for the tax company to start tasking people with plugging the hole you're in very very hot water.
It's a resource allocation problem like any other.
As advertised, it's not a self-aggrandizing "mistakes" post that points you at the end to the author's next venture. It's full of the kinds of things that keep me up at night.
It reminds me of something similar that happened to me: I was running Adwords for the first time. The dashboard wasn't showing that any of my ads had run, and it kept telling me to up my bid amount. I kept upping it and upping it, and I wasn't seeing any ads running. I said screw it and forgot about it.
When I happened to look at the dashboard 3 weeks later, I had blown $6k on Google ads. I had to get my team together and tell them what happened and apologize. ($6k was a lot of money to us.) Like Seth, this hurt a lot because I paid myself less than anyone in the company to save money.
Seth, if you're around the iDoneThis office at Great Jones and Bowery, hit me up. I'd love to buy you a drink.
On the way, my co-founder and our CTO stopped me and said “I’m resigning. And I’m going to tell the team why.” He then told me that he had lost trust in me as a CEO and as a person.
This right here is the actual value that YC derives from the existence of HN -- they can correlate these "anonymous" logins with other logins from the same IP space/etc and figure out who's mudslinging against whom.
The way I read the post, Seth mentioned a number of readers why he lost their trust.
Specifically:
- Poorly defined co-founder relationships
- Not being explicit about hacks
- Telling a half-truth
You're free to disagree about whether these are the important reasons why Seth lost their trust, but to say that he didn't address the reasons why is just untrue.
You appear to have a personal stake in this story. Rather than sling mud from behind the wall of a 6 minute-old throwaway, why not address your issues in the open? Better yet, why not address them with the author?
Trust, and the reasons behind it, are subjective. If you have different perspectives or additional facts, perhaps it would be more constructive to just state them rather than posting vague hints.
This thing about not noticing that you weren't paying payroll taxes wasn't a "mistake." It was pure head-in-assery.
How can you "miss" the fact that you weren't being subtracted for payroll taxes? One quarterly / annual review after another, for 3 years? It's like running a personal budget, and "missing" the fact that you aren't paying rent.
Making sure your bills are paid is the responsibility of any adult. If you're running a business, messing up your taxes should be one of your deepest fears.
The general sense I got from the story was: We were young and stupid, but instead of doing drugs, we convinced VCs to give us $3.8 million, which made us believe that we knew what we were doing.
I agree completely! I was only speaking to the point of "how long until it's impossible to miss this", and how the comparison to rent doesn't work because it's much shorter.
Except that if you do your books, you'll say "I should have $X in the bank" and then you look at your account and you have 1.5$X so you know something's wrong.
Rent, sure, but many other personal responsibilities are not so kind - especially from vendors who can legally tack on cumulative late fees.
Try not paying your Comcast or Verizon bill on time for a month or two and see what happens. The envelope only starts coming in red after quite a few fees are tacked on.
Screwing up your personal taxes in a consulting business is a debacle but also a rite of passage for consultants. It happens to everyone.
Screwing up payroll tax withholding for employees is financial catastrophe. You've taken money from your employees on behalf of the government, but then kept it. Your liability in that case can be criminal, maybe even if you didn't deliberately defraud the government.
It happens to a lot of people but certainly not to everybody.
As a rule of thumb in the first two years you simply want to reserve 50% of your gross until you get a better handle on what your deductibles are and what it is that you exactly owe and then you can slowly home in on the correct amount to reserve. Too many variables to get closer but 50% should cover all but the most extreme cases.
Simply open a savings account and park that 50% there right after you invoice. If you're invoicing with GST/VAT/whatever it is called where you live then you get to subtract out the VAT first, then do the 50%, then add all the VAT back in and save that.
That's a good rule of thumb, but a better rule is probably to just get an accountant on day one. For 1099 consulting businesses, doing your own taxes is probably a false economy.
I think a lot of people assume they can put off getting an accountant until they're sure the business is serious. Which is probably why so many of the stories I've heard (and, to add to that, my own story) are about the tax screwup consequences of those first couple gigs you do before you formalize the company.
Sure you should get an accountant. But you should still reserve that much money.
Getting an accountant is your first major purchase as a new business owner.
And getting a good one is not all that easy. I lucked out, the one I ended up with (after trying two others) was a CFO of a large company that decided he had enough of the pressure and joined his wife's fledgling accounting company.
So instead of just having an accountant I ended up with a mentor to boot, all for the price of one.
It boils down to not having a handle on the general ledger, which if not suicide is at least reckless self-endangerment. But I think it is plausible for someone who is administrativaphobic. But there is a reason this is mistake #1.
Or on another, much deeper level it boils down to:
"OMG look we're so HAWT, we're co-founders after all, not gutless employees, and we're only in our 20s, doing all these amazing things, and we have this cool office and all these smart, hip people working for us.. and umm, budgets? due diligence? CPAs? What are those?"
Isn't that why he was writing this? To explain that his mistakes aren't representative of what he now knows he should do as CEO? I understand what you're saying on a literal level, but it's very possible he's been a good CEO in other areas that he hasn't mentioned here. I would hold off on the judgment.
Founders get bombarded with many corporate taxes they are often unfamiliar with. As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks.
>> As a founder, it's not inconceivable to think all the proper taxes are being paid when one slips through the cracks.
In any company, someone's responsible for the books (whether it's the CEO, some other employee, or an outsourced accountant), and you would think that the bank statements would be reconciled with the general ledger more than once a year. At the very least, it would have been done with each fiscal year end.
That the unpaid payroll taxes weren't noticed for almost three years is mind boggling to me.
This just means that they were running their business off of their account balance on B of A's site. It's also known as "flying by the seat of your pants."
yeah, but if you google this company and see other articles about them, who their customers were, and how many people they had, it's pretty clear this was a lot mroe than just "slipping through the cracks". I'm sorry, but allowing a company to grow to that point without even the most basic handle on the books is gross negligence, not just incompetence.
Thank you so much for posting this. We all make mistakes, and for each of those, there could be ten thousand HN'ers who would come along behind us and say something like "But how could you do X? That's stupid!"
Everybody wants to read business porn. Nobody wants to sit down and hear the ways they will likely screw up. Guess which one is more effective. We need this.
This took guts to do. It is one of the more useful posts I've read, and it will have a positive impact. Congrats.
Of all the financial mistakes you can possibly make running a company, withholding payroll taxes and then failing to remit them is probably the worst. Be thankful you caught this before the liability exceeded your available funds, because company operators are apparently routinely held personally liable when there's a shortfall, and I'm not sure that debt is even dischargeable in bankruptcy.
What's worse, minor versions of this mistake turn out to be easy to make; I've seen (much smaller, much more easily fixed) incidents in multiple companies with things like state taxes and unemployment insurance. So: you can't assume this is a mistake that won't happen to you.
Without making any value judgements about the operations of this particular company, one valuable lesson from the post is: do not ever use the Bank of America Payroll feature.
Unremitted payroll taxes can come with a one hundred percent penalty, and you can be liable for that penalty even if you had no knowledge of the failure to remit. Payroll tax screwups are the scary story big startups tell to baby startups at bedtime. Shudder.
We've had issues with our state taxes because we changed from an LLC to a C-corp and even though our lawyers took care of everything at the Delaware and Federal level (as far as new tax IDs go), they completely forgot to do this in California where we operate. They're not large liabilities thankfully but it's been a persistent headache for going on two years.
You can even get in trouble when you don't owe anything.
Moving in and out of W-2/Corp-to-corp status many years ago, we set some consultants up on W-2. Then we changed up the mix, went back to just me, and I went on W-2 with another consulting firm for a while.
Got a letter from the state tax guys. Even though nothing was owed, we were supposed to file forms with all zeroes on them. There was a fine, yadda yadda.
Unfortunately, logic, reason, and common sense are not a reliable guide here.
> You can even get in trouble when you don't owe anything.
Yep. I recently got a Texas sales tax certificate for my unincorporated side business. Even though I am not doing anything yet, because I have the certificate every quarter I have to log in to a state website and check a box that says I had no sales. Not doing to on time will cost me $500 per incident (I think).
As a former transactional/commercial litigation attorney I too would see this issue regularly.
One interesting "hack" I would see clients do regularly as owner/employees, they would minimize their own salary to avoid payroll taxes, maximizing their distributions (distributions are not subject to payroll taxes). Unfortunately for them the IRS accounts for this hack, and if an IRS audit finds the salary isn't reasonable then those amounts will be subject to payroll, social security, medicare, potentially higher income tax, and moving forward affordable care act taxes plus penalties and interest. I personally hate this because there is no bright line rule as to what a reasonable salary is subjecting all business owners to the mercy of the IRS.
I am surprised this would happen to a YC company, not that YC is in anyway responsible, but I figured YC would be in a position to offer various business services (payroll, legal, tax, insurance, ect...) at extremely low cost. For example, I personally solicited YC and offered to provide Delaware incorporation/registered agent/annual compliance services to any YC companies at a discount which without the discount is already cheaper than legalzoom.
It's a hack, and it's also unfair. S-corp company owners get to inhabit a very small part of the economy that, due to a loophole, gets a dial that turns some of their liquid compensation from "salary" to "investment income". That's baloney. I'm glad it's an audit flag.
It's not much of a problem in the UK. A great many of our clients (and ourselves) use the standard dividends + minimum wage method of paying themselves - that is, the ones who own their businesses, i.e. have not taken funding. HMRC accepts this method as a way for business owners to minimise their taxes. As I recall, the argument is something along the lines of "I am paying myself a salary for the basic director duties but effectively working for free on the company day to day, and collecting parts of the earnings as an owner."
It works fine and is very common for small businesses in the UK. I guess this goes to show how contextual accounting advice can be.
On that note, I'll add that I'm ever so glad that in all my interactions with them HMRC have been polite, friendly, supportive, helpful and nothing like the abusive business murderers that the IRS appear to aim to be - even when I fucked something up that was obviously my fault. I don't understand why the IRS feels that they need to be such assholes about everything. They should see their job as what it is: an essential part of the infrastructure that supports the economy and, indirectly, supports businesses. Their role should be to make business easier, not harder.
I've never had an unpleasant interaction with the IRS. Unlike virtually any other creditor I've ever dealt with, the people I've talked to who actually work for the IRS have been courteous and helpful. I'm not the only person who's said this. The IRS has acquired a personalized reputation for being jerks, not unlike that of Customs, but which totally doesn't square with how the agency actually acts.
I say this as someone who once had a pretty decent unexpected 5-figure liability that I had to work out with them.
I also don't feel like zealous enforcement of unremitted payroll tax is particularly abusive, since that's essentially describing companies stealing from their employees.
Well, that's good to hear! This reputation the IRS has makes me worried about the idea of some day operating in the US. It's good to know that they actually employ human beings rather than attack dogs.
From what you describe, they sound much like HMRC.
And yes, withholding payroll tax (or VAT) and not passing it on to the government is pretty crappy. HMRC is typically understanding if this is a few months or even a year down the line and they think the business will be able to pay up - they frequently agree payment plans for such things - but three years without noticing kinda takes the piss.
I get the impression (and I could be woefully wrong) that the IRS, kind of like the USPS, has an awful reputation that was justified some decades ago, has turned it around because of that awful reputation, but inertia means the reputation persists long after the underlying reasons have been remedied.
I think I'm a bit older than you. They were "jerks" back when I started in business. But things have changed as you've pointed out.
I had a run in with the labor department at my first company. I wouldn't exactly call them jerks (or nice) but I was able to get them to cut in half a 5 figure amount they assessed me (a lawsuit was filed) by having a personal meeting with the local office head. Without an attorney. After I cut the deal I then said "oh one more thing can I have 5 years to pay this back?". And he agreed (I didn't need the 5 years, it wasn't a large amount, but I thought why not?)
Actually as an S-Corp owner all the corporate income is taxed as REGULAR INCOME. It doesn't become a capital gains tax -- which is what I assume you mean by investment income.
However the US government wants you to also pay Social Security and Medicare tax, which you only pay on employment income. Therefore they force you to take a "reasonable"[1] salary from the company. Everything else left in the company's account at the end of the year is your non-employment income.
It avoids double taxation. It doesn't put you in a lower tax bracket.
It's taxed as regular income, but the premise under which it's exempt from the payroll taxes every other worker has to pay is that it's not normal income, but rather the return from an investment in the company.
For people in our industry, it's hard to see a definition of "reasonable" that would be financially beneficial. You start a tech company. You pull $100k out every year, putting you right smack in the middle of the income distribution for experienced tech people. But because of a loophole, you get to reclassify $50k of that $100k as a distribution, and not pay FICA on it. To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient.
People obviously do it and get away with it. I'm glad it's an audit flag.
lol @ you forgetting that other businesses exist that operate in the margins of this kind of expense. That sorry scam may be the difference between a local hardware store, mechanic, coffee shop staying open and closing. Even owner/operators don't want to work for reduced wages.
It's even more sorry to sit around on HN and forget that there are many more businesses that are as important or more important than a mobile app service for checking on and generating QR codes for sales at local restaurants.
The IRS gets theirs, don't worry about that. It's just too bad that the spending side of the function is broke, not the revenue.
Sure, but you just mentioned an unreasonable salary. If the median is $100k, then that's reasonable, and the person only gets to avoid SS and medicare on any additional profit.
I operate as an s-corp and pay myself a reasonable salary, matching that of the salary I could get in the current job market in the area I live in. Anything I clear above this is only taxed with my regular taxes.
If I was running a C-Corp instead of an S-Corp, I'd get my $100k salary, and any extra would have been taxed at the 30% corporate rate when it was taken in, then the 20% capital gains when it's distributed to me as profit.
Is your "dream job" one where you are paid a pittance while the company owner makes a tidy profit from your endeavours?
Many people will take a pay cut for their dream job, but very few are willing to be exploited in the process.
If a company owner is taking a very low salary in order to maximise company profit (and minimise tax) then they (as an employer) are exploiting themselves (as an employee) to do so.
I might take a $50,000 salary to fly gliders all day. But no matter how nice of a job it is, I'm not going to take a $50,000 salary to program computers all day, because I can get a job in that field that's only marginally less nice and pays way more.
How is $1 salary justified to IRS? There are a bunch of executives who have $1 salary [0], including Mark Zuckerberg. I really doubt it's considered reasonable.
What they report to the IRS and what they show on financials could be 2 totally different things. Entirely possible that they are paying taxes on a higher salary.
Base Salary is just a tiny component of an executive's salary. It is a PR move. Executive salary is made up of Cash component (which includes Base Salary & Bonuses), & Equity.
Equity constitutes towards almost 99 percent of an exec's salary. There are short term equity plans and long term equity plans. The equity payouts are generally in millions.
Companies have to release a DEF14A (30-40 pages) each year to show Shareholder's how much the Top5 Execs were paid each year.
You don't have to justify low salaries to the IRS conceptually, you just can't use them to avoid paying payroll taxes.
I would assume that companies like Apple and Facebook have competent tax teams that make sure their obligations are fulfilled, even if that means paying payroll taxes on a portion of the stock-based compensation to their executives.
"Unfortunately for them the IRS accounts for this hack, and if an IRS audit finds the salary isn't reasonable then those amounts will be subject to payroll, social security, medicare, potentially higher income tax, and moving forward affordable care act taxes plus penalties and interest. "
My experience over time with many business people has shown that since we are not talking about a criminal action but an action that will result in only penalties, interest etc. it is probably a chance worth taking.
This is a frequent occurrence in business in other areas. You have to take your chances and you determine the chances that you take by looking at your comfort level (which is different for everyone) with the potential downside and probability of that downside happening.
In NL we actually do have such a 'bright line', a very reasonable amount that anybody in the hot seat is required to pay out of their business on an annual basis as a salary.
If the business is not doing well you can negotiate that down to ridiculously low levels provided you do not borrow from the company at the same time. That last bit is the bit that bites, many business owners already have a line of credit with their company from the founding days and they'd have to pay that back before they can reduce their salary.
On the whole that arrangement works well though, and the one time that I needed it I found that the tax people were very much understanding of the situation and offered a few suggestions that helped making things easier.
If all government institutions were as reasonable as the tax office in my dealings with them this would be a much better country.
So people doing high value software type consulting are probably playing games if they take that much compensation but oops on fully paying those particular taxes.
"In NL we actually do have such a 'bright line', a very reasonable amount that anybody in the hot seat is required to pay out of their business on an annual basis as a salary."
That is the floor, it's not a 'bright line'. If the field of that particular business the 'usual salary' is higher, you have to pay yourself that, and you're at the mercy of the tax office in the same way, because they decide what is the 'usual salary'. Also, a director is not allowed to pay themselves less than their employees, for example.
That said, it is true that it is fairly easy to get into contact with an inspector and get advice on how to proceed.
The logic here appears to be that since the employee is deemed to have paid the government on the day that an employee receives his or her paycheck, the employer is holding those funds in a trust for the government, to be remitted quarterly. The government appears to believe in Monteiro's strategy: "Fuck you, pay me." So you -- as an officer, an employee who pays bills, possibly a board member, or possibly other related parties -- can be personally liable if, for example, you used money from that presumptive trust to pay any other bill.
Although Internal Revenue Code Section 6672 includes officers, partners, and
employees, it does not exclude other individuals or firms that that can be
held liable. The IRS will first try to recover payment from the responsible
persons with the most liquid assets, but will also concurrently hold as many
people as possible liable, each with joint and several liability for this
100% penalty. There is no presumption of innocence in trust fund tax
situations. In Skouras v. United States, the court determined the assessment
on a responsible party is presumptively correct and issues relating to
willfulness could be resolved at the summary judgment level. The individual
has the burden of disproving by a preponderance of the evidence, the
existence of one or both of the elements that is willfulness or
responsibility. [1]
here [1] are some interesting horror stories:
Aside from the persons normally thought of as being responsible for these
taxes (CEO, CFO, President, Secretary, Treasurer, partner), the courts have
given fairly wide latitude as to which entities or individuals the IRS can
assign responsibility to. In 1987, the United States Supreme Court held that
the third party liability for trust fund taxes was affirmed against a lender
who paid employees’ wages with the knowledge the firm did not intend or
would not be able to make timely deposits of the trust fund taxes. In 1985
the courts found that a lawyer, who had power of attorney from the owner to
operate a car dealership, was found liable for the 100% penalty. In another
case the IRS determined that workers were incorrectly classified as
independent contractors and assessed the 100% penalty to the principals of
the firm. In a 1984 Revenue Ruling, the IRS stated that a volunteer member
of a board of trustees for a charitable organization can be held liable for
the 6672 penalty. In 1978 the United States Ninth Circuit Court of Appeals
determined that a general contractor was responsible for the trust fund
taxes not remitted by a subcontractor. An accounting firm was held liable as
a responsible party because it had failed to remit a client’s trust fund
taxes and paid creditors other than the Internal Revenue Service. The IRS
deemed the friend of a business owner responsible because he paid some
utility bills for the company, extended loans or pledged collateral on loans
to the company.
Imagine the shock when the IRS levied the Individual Retirement Account
(“IRA”) account of an officer of an S corporation and then included the
proceeds of the levied funds in the taxpayer’s Adjusted Gross Income for the
purpose of determining his earned income. The IRS used the constructive
receipt doctrine to conclude the amount levied from an IRA was a
disbursement – it had to be included as income. The taxpayer was further
refrained from deducting it as a pass through loss or a necessary business
expense. This is just a sampling of the many cases involving withholding tax
liability and the long arm reach of the IRS’ “responsible party” strategy. [1]
Like I said -- you can pretty fairly characterize this as, "Fuck you, pay me." Where I to own a business, I would strongly consider creating segregated accounts to hold the funds owed to the government. In fact, it would be ...
This is why you use a payroll company that takes all the money for you for each paycheck and handles the quarterly filing for you -- no "extra cash" hanging around. I think this is called "Full Service Payroll" and can even include insurance against tax liability. I assume they make money on the float, but I'm not sure.
Yes, my company has used SurePayroll and it works exactly like this. They charge fees, as well as presumably making some money on the float.
The fee is around $40 per month (per employee, I suspect) and it is money well spent. There are pains associated with the service - the reporting is not entirely transparent, and when things go wrong with the automated systems I have gotten odd letters from my tax authorities which needed to be turned into support tickets (which were then handled promptly). But I would never use anything less than a payroll service. If my payroll gets more complex I might upgrade to a bookkeeper with well-documented payroll experience (at a cost which would, I suspect, be considerably higher than $40 a month), but I'd never try to do payroll myself, for reasons which are amply attested in this thread.
That's very dangerous, no matter what the reputation of the firm.
The thing to do is to use separate accounts for reserves like these and to pay directly into the coffers of the tax man, lest the party that you do business with unexpectedly goes bust (they do) and you end up being liable again for the same amount of tax that you already paid to the payroll company. Don't for one second think that you're off the hook because you paid the payroll taxes to some other company.
The best arrangement is where they tell you exactly what is to be reserved and when it is due and you do the payments. That's how I've been doing it and it works flawless, never a problem (so far!).
As an extra bonus, you get to check the amount against the last couple of payments you made and you'll spot any big fluctuations before things get out of hand.
This may be good advice in NL, but it's sort of diametrically the opposite of best common practice in the US. Payroll being handled by payroll firms is the norm in the US, and the stories about terrible payroll withholding screwups hurting companies are, as far as I can tell, invariably the result of people trying to handle this themselves, paying "directly into the coffers of the tax man".
Does the American system have any provision for payroll companies that fail to fulfill their obligations?
(segregated accounts per client, accounts only usable for remittance of the salaries or taxes with the payroll company then taking out its slice when everything else has been done?)
I remember the Accupay affair and that took a lot of employers by surprise, and even though 'best common practice in the US' may be that payroll firms are the norm, at least in that particular case the culprit was definitely the payroll company and not any one of their multitude of clients. And there were strong indications that Accupay was not the only company that pulled that particular stunt.
All of the companies affected were held liable and had to pay (again).
You remember the affair of a tiny payroll processing company in Baltimore? Is there some news source about them that isn't in the local Baltimore media that I missed? I had to give Google News a custom search range just to find those local hits.
If that's the kind of firm you're talking about, I agree. Don't use tiny fly-by-night payroll firms. Just use SurePayroll or someone like them.
I'm serious: that's a good point you have. When I said "the norm is to use a payroll firm", I should have said "big payroll firm". There are a lot of little firms out there, and I wouldn't feel safe using them either.
I remember the Accupay name because a friends business got caught up in that and unfortunately his company did not survive.
Having a ton of friends in the US means that sometimes I get requests if I can help someone out on short notice, in that particular case there wasn't anything I could do. (I was relatively short on cash at the time but even if that had not been the case I probably would not have stepped in.)
In Finland the tax office creates a "tax account" for each company. You can transfer money into the account for withheld payroll taxes, social security payments, value-added tax, etc.
It works just like a bank account (except you can't withdraw money from it). They have an online service where you can check the tax account's status and activity, so it's easy to keep it in balance.
This eliminates the need to retain any money that is actually owed to the government. When you pay an employee, you can pay the withheld tax and social security fees at the same time into the tax account.
It's totally understandable how these companies get themselves into this situation. Your employee gets a paycheck of $1000 and in addition to that you send off $700 in payroll tax. Well, if your bank account is low you can pay the employee his/her regular amount but delay paying the tax. Your employee doesn't know as long as you manage to pay the withholdings before the end of the quarter (or worse case end of the tax year).
This is known as "borrowing against payroll tax" and is pretty much universally known as a terrible idea! It does happen, though and a business might be dangerously low on cash, but has big amount coming in (from a consulting job, investment, etc). It's just very risky because if you get yourself into a position where you can't pay the bill, then you will be screwed just like one of those companies you mention.
But - if you just simply use a payroll service and always pay the withholdings without fail then you won't have that temptation and won't get yourself into trouble. No need to try to hide your money or something so the IRS can't get it.
You've just described a company willfully failing to remit payroll taxes. That's not just a terrible idea; it's (often) a crime, and it's easy to see why: you aren't really "borrowing", so much as you are "stealing" money that doesn't belong to you and hoping you can pay it back before anyone notices.
As long as you pay the taxes when they are due, it doesn't matter if you collected them with each paycheck or pay a lump sum at the end of your tax period. Smaller businesses are allowed to file (and pay) quarterly.
The smart thing to do is just withhold the tax with each paycheck. But, if you're a small business you do have until the end of the quarter to come up with the money. As I said, it's risky and generally a terrible idea. I was just explaining how companies come to find themselves in this position.
Early on in the days of the Internet, I would actually call up spammers and try to help them understand why they should stop. 80% of the people were confused small businesspeople who were glad somebody gave them the straight scoop. 20% were weasels who would say or do anything as long as it got them what they wanted.
After a few decades of bullshit excuses from irredeemable idiots, I would also end up in the "fuck you, pay me" category. Because nothing short of being as inevitable as death would be enough to get inveterate weasels to actually pay, and nobody wants to be jerked around by weasels.
It sucks for the rest of us, though, because it turns reasonable mistakes like this into land mines.
I can't see how failing to pay hundreds of thousands of dollars in taxes because you can't be arsed to make the basic comparison of "what am I paying" with "what am I supposed to be paying" can be described as a "reasonable mistake".
Do you believe this person was literally unable to reason? Or acting from fraudulent intent? Is this perhaps a mistake that no other person has ever made?
If you're not saying yes to one of those, then I'm not seeing what category applies other than "reasonable mistake". I agree it's a noob mistake, but a lot of businesses are started by noobs.
I merely believe that he was not reasoning when making this mistake. That's all "unreasonable" means.
Given the rest of the story and his replies, I'm also inclined to believe that the mistake was ultimately due to lying to himself about the importance of bookkeeping and how fast funds should have been spent. But even absent that, "unreasonable" is a totally reasonable word for this.
No, the word for "not reasoning" is "unreasoning". "Unreasonable" means something else. In the phrase "reasonable mistake" I mean it in the sense of "ordinary or usual". E.g.: http://legal-dictionary.thefreedictionary.com/reasonable
It is not unusual for new or small businesses to just wing it on accounting for a while and then hire an accountant who has to tidy things up. (If you don't believe me, ask any small business accountant; my pals have story after story like this.) If we take him at his word, him thinking that the payroll service was handling the withholding is also reasonable. And him assuming everything was jake unless somebody was yelling at him is not just reasonable but typical of first-time entrepreneurs. The main unusual thing here is the scope of error and consequences, but startups are all about rapid increase in size, so that's not unusual in context.
Of course, this could also be fraud: he could have known for years that he wasn't paying withholding, hoping to make it up later. It could be that he actively avoided thinking it through or was willfully careless, which would make it negligence. But as he presents it, it's a reasonable mistake. You can see more about exactly what this means if you look in legal sources for "mistake of fact".
That said, I think your skepticism about his story is reasonable. That his partners have both quit after losing confidence in him would make me unsurprised if this turned out to be fraud, not just an honest but titanically stupid mistake.
Ok I'm using the bank of America payroll feature and now I'm scared. :)
However, are you sure that this doesn't work? The B of A system I am using (in California) calculates payroll taxes, and then even lets you submit them electronically. It also nags me constantly for forms I am supposed to submit to both CA and the US IRS.
"Without making any value judgements about the operations of this particular company, one valuable lesson from the post is: do not ever use the Bank of America Payroll feature."
There are actually all sorts of gotchas in business that happen as a result of some assumption that you make as far as a process being carried out that never has happened. Using BofA wasn't the sole problem here it was being asleep at the switch and not checking that something had actually happened that didn't.
When I pay my taxes (various real estate, business, personal etc.) I typically will actually look for and printout the cancelled check from the bank showing that the check actually arrived at the destination and was deposited.
The example I would use is the long standing thought in backups that you need to actually test your backups, [1] and not assume that they will work when you need them.
[1] For a certain Mac that I am backing up I just bought, for example, 2 - 3tb hard disks. One will be offsite, one will be onsite. One will be a disk clone (super duper) one will be done by Apple's time machine. Also, the two different 3tb disk were purchased from two different vendors. One is WD and is Seagate. [2] I will periodically test both backups to make sure I can boot from either if needed. This isn't for super critical data but for a large collection of photos and videos. (And there are more than one clone of the data for that matter).
[2] Theory being that buying 2 of the exact same 3 tb's (at the same exact time) could come from the same batch and be defective.
IMO the biggest problem here was not accurately forecasting liquidity, if they had done that they would have seen within two months that something was badly wrong. Excess cash in a business that can not be explained should be just as worrisome as having too little. The latter is an indication that someone is raiding the till in some creative way, the former that you are not paying someone that you should be paying, which can lead to the sudden demise of your business if the creditor has a long enough arm.
No matter how small your business you should at least have a general ledger and a liquidity forecast running 6 months to a year into the future.
"Excess cash in a business that can not be explained should be just as worrisome"
Really good point. As it happens one day recently I questioned my wife why our personal account had so much money in it.
It turned out that she had transferred her money into it that should have went into another account.
This was after correcting problems where she had payed some personal bills out of our account because the bank bill paying "default" for her was set to our joint account rather than her own account.
So she switched it so default bill payment now = her account. So now I have a different problem. She pays our bills out of her account. Which (in addition to the above mentioned wrong deposit) has created even more havoc.
A couple of months ago, there was an HN discussion about "business friendly places", and if I am not mistaken, your pov was that the US is the most business friendly place; And when I mentioned that the US tax system is worse than most, your response (again, if I recall correctly) was along the lines of "it's just a line item in your expenses, make sure you pay an accountant to take care of it". And you're very consistent... however,
Don't you think the ease with which you can get into this kind of trouble (which may not be dischargeable in bankruptcy, and which may IIRC become a criminal matter) should factor into the "business friendless" score of the US? In every other tax regime I'm familiar with (several European and the Israeli one), everything which is not outright fraud gets you no more than a small fine.
Really uninformative headline. Hmm, what would be better? Maybe "Management Mistakes Founders should never make"
(not all of use are reading this for the startup stuff, believe it or not)
You shouldn't really be able to go through a startup accelerator without someone hooking you up with an accountant... much less raise millions of dollars of investment.
"I’ve come to realize that “technically true” is a terrible ethical measure for a (non-technical) statement. I should have held myself to a higher standard. I’ve also learned the importance of overwhelming honest"
So true. There is an immense amount of pressure within startups to 'bend the rules', and I think this hits the nail on the head.
This is why you pay an accountant the big bucks and pray they don't mess up in turn, very frequently if they do the responsibility is still yours. Running a company comes with a lot of responsibilities that tend to keep you awake until the small hours of morning. Details like these can get you, especially because they are retro-active and hardly anybody is in a position to absorb an instant loss of say 7 years remittances for the 100 employees they have. Be very grateful that it wasn't a huge amount of money, bigger companies have failed over things like this.
Also, if you are conservative you'll have a spreadsheet that models your worst and best cashflow prognosis for the next 6 months to a year out. If you find yourself consistently outperforming the 'best' case in spite of an unchanged business outlook then it's high time to start checking things.
In the eyes of the tax man there are no mistakes. There are only audits and fraud. Better have your stuff in order when that audit rolls around anything more than a few pennies out of line and you'll be looking at months of extra work even if you're a small company. Looking back at a decade or so of your paperwork will turn up a ton more that you'll have serious issues documenting if you didn't take care of it at the time.
That gets expensive in a hurry (tax lawyer, fines, interest, surcharges).
First I'd like to thank sethbannon for writing this valuable article. As someone with two failed startups under his belt (including one through Y Combinator), I think entrepreneurs being more open about the challenges of startups is a good trend.
FedEx, Evernote, Intuit, Zappos, Airbnb – I’m endlessly inspired by those founders who faced near collapse but simply refused to give up.
These stories can be inspiring, but remember that they suffer from survivor bias. The companies that do go under don't get as much attention in the financial press.
Sometimes the reality is that it's time to shut down. Give up on one thing, move on to the next thing.
Kudos, Seth. Really refreshing to see this kind of bare honesty, and takes a lot of courage to know that this post will probably be seen by all friends/family/coworkers. Thank you for writing this.
No matter how smart you are, the only way it makes sense to do your own taxes is if your business is taxes. Otherwise, hire the woman who spent years learning this stuff and devotes her entire cognitive load to the task to do it for you.
On the co-founder thing, being a "co-founder" doesn't mean you're also endowed with as much authority as all the othe co-founders. In most circumstances one of the co-founders should be designated as the one in charge, given the responsibility of making the hard decisions.
Being in charge doesn't mean you get to win every argument, as you don't want your co-founders to quit, but it definitely shouldn't be a thing where all the co-founders have equal decision making capabilities because that may lead to never-ending strife. Most decisions shouldn't be arbitrary anyway, a decision should come with a convincing argument. It's those hard decisions when none of the answers seem perfect where you need someone to win out even though it may not feel right.
The leadership structure should be determined when the founding team forms, so there's no ambiguity later and each person needs to decide then and there if they can live with the setup and thereafter stick to it.
I actually enjoyed this article and it's definitely reassuring in a way to read about other people's struggles. I have to take minor issue with the "entrepreneurs don’t talk about their most difficult moments publicly" part because it seems like there's an abundance of articles lately from founders who write about their stress, depression, failing startup, etc. I feel like I see more of these articles than success stories. Even the success stories I've seen lately are more of the tone "we had to really go through some shit to get here."
I do respect that it's difficult to write about, though. In addition to just wanting to not feel like a failure, you don't generally want your employees and investors to feel like everything is about to go down the toilet. I'm glad to see more people writing about their real, honest experiences.
Can someone clarify why dropping out of Harvard Extension School is a subset of dropping out of Harvard University? I checked out Wikipedia, but it's not very clear about Harvard's system and the different colleges (Harvard College, Radcliff College, Extension School, ...) I've always assumed there was just one "University of Harvard", but apparently it's more complicated...
Harvard Extension School is an adult education program, like night classes. Your teachers may be Harvard faculty (but never were in the 7 classes I took there), and the other students are not Harvard undergrads. Also there is no application: they take anyone with a credit card. (There may be an application if you want to earn a degree rather than just take desultory classes; I don't know.) That's all not to say the classes aren't very good, but it's not the same as "getting into Harvard."
Harvard College is the undergraduate institution. It is one of the most prestigious undergraduate colleges in the US.
However, it is but one of several schools that make up Harvard University, which include graduate schools like Graduate School of Arts and Sciences, and professional schools like Harvard Business School, Harvard Law School, and Harvard School of Medicine.
There is overlap between the different institutions at Harvard; the Faculty of Arts and Sciences teaches undergraduate classes at Harvard College, graduate classes at the Graduate School of Arts and Sciences, and performs research.
Harvard Extension School differs from many of the other schools in that it is not selective; anyone can simply pay to take a class. That means that merely attending Harvard Extension School confers considerably less prestige than attending Harvard College or one of the other schools at Harvard; all it means is that you paid for some courses.
Saying you "dropped out of Harvard" makes it sound like you were really brilliant and had a lot of promise but founding your own company held even more promise than finishing your degree. Saying that you dropped out of Harvard Extension just says that you took a few night classes and never really got around to finishing anything.
I took a few courses at Harvard Extension in high school. Some of them were really good, some of them not so much. A top notch school tends to offer a much more consistent program than Harvard Extension school. I've also attended another Ivy League school (group of very prestigious, fairly selective schools in the Northeastern US) as a full time student, as well as a flagship state school, and I can say that based on my personal experience, I'd rank Harvard Extension a little below the state school (which also had some really great classes and some mediocre classes), not up with the Ivy League school.
I know this is a minor point of the article, but as someone with a degree from Harvard Extension I need to weigh in on that part of the story. I hate people who make this lie of ommission. Harvard Extension isn't Harvard College or Harvard Business School, but it still provides a very good education with great flexibility at an even better price. However, there is a small minority of people that continuely try to pass off their degree (or in this case a lack of degree, which is an even bigger crime considering that both the admission and graduate rates of the College and Extension School are roughly inverses of each other) as something more than it is. This isn't a fabricated credential on a resume; it is a lie that makes other people guilty by association. Everytime someone confesses or is caught doing this my degree becomes devalued. It establishes a repuation for HES students and alumni as unethical Harvard wannabees that are looking for any way to cut corners. The lesson to learn is not about managing your own reputation for ethics and honesty, but to also remember that you are a member of community. You don't only represent yourself. You represent yourself, your company, your friends, your family, your school, your industry, your hometown, your gender, your race, your sexual preference...
I also took a few Harvard Extension School classes (mostly Greek and Latin, but also Distributed Computing). I didn't earn a degree, just took a few things that interested me. It's on my resume as Harvard Extension School, and I have to actively correct people who think it's more than it is. My jokey way of putting it is that HES "takes anyone with a credit card." What's really embarrassing is when someone introduces me as someone who "went to Harvard." They were great classes, especially the ancient Greek, and I'm very grateful for the opportunity to learn what I did, but it's not like I did my undergrad there. I fact I applied and didn't get in. :-)
People have no idea; once they see the "Harvard", they can hardly see anything else.
The confusion extends even to Harvard grads. Because of the mix at alumni events of Harvard College graduates, MBAs, JDs, MDs, Extension School grads, etc., sometimes the organizers print up name tags with the degree abbreviations on them. It does little good, though: I've had Harvard MBAs ask me what my "A.B." means. (It's an abbreviation for the Latin artium baccalaureus, pretentious Harvard-speak for "bachelor's degree". I.e., it means I "went to Harvard" in the colloquial sense of the phrase.) As far as most of them know, A.B. and A.L.B./A.A. (the Extension School degrees) might as well be the same thing.
I would echo your point about actively correcting people. It is something I find myself doing all the time. The problem is that it often isn't worth going in-depth describing the school, most people simply don't care that much. My jokey explanation is that it is "Harvard's version of community college". Funny thing is some people will come away even more impressed after a comment like this thinking you are incredibly humble. The Harvard brand has a lot of power.
> My jokey way of putting it is that HES "takes anyone with a credit card."
That's nice & humble of you, but it's not precisely true. There are very few requirements for taking a random course or two (or 20) at HES, but to be admitted to a degree program at HES is not so easy. You have to take a certain number of HES courses and earn a high GPA in them to be admitted to a degree program. Then, of course, you have to pass the full slate of courses to earn your Bachelor's degree.
Some people also seem to be under the impression that HES courses aren't as difficult as regular Harvard College courses. If anything, I'd say there's far more grade inflation in Harvard College than in HES, i.e., it's probably easier to make an A in a lot of (though obviously not all) regular Harvard courses than it is in Extension courses.
This is part of what I referred to in my first post and is usually what I mention when someone is truly interested in the school. Harvard College does its credentialing when you apply. A very low percentage of people who apply to the College get in, but almost everyone who does will walk away with a degree. The Extension School moves that credentialing until after the student enrolls in classes. There are virtually no barriers to take classes and the application process isn't hard to get through, but the amount of students who leave the school with a degree is very low. Therefore the school is more of a meritocracy. Almost anyone who is capable and determined enough to earn a degree is able to regardless of their prior educational history. The last time I saw stats on it, the actual percentage of people who apply to Harvard College that earn a degree was very close to the number of people who take a class at Harvard Extension school that earn a degree.
Sure, but a lot of the people taking classes at the Extension School don't want a degree. For example, I had students whose employers were paying for them to take a single course to give them some background knowledge or insight into their jobs. They're not looking to graduate; just to take a class or two that will help them with their careers.
That is a good point and the numbers aren't measuring the exact same thing (on the flip side of your example is the number of applicants to Harvard College who might not attend even if accepted). I didn't intend to reference them as some justification that the two schools are in any way equal. The only reason to really compare the two rates is because they have similar values and highlight the differences between the two schools. The toughest part of the College is getting in, the toughest part of the Extension School is getting out.
As a grad student at Harvard I was involved in teaching several courses at Harvard Extension School. While the students were generally motivated and enthusiastic about the course material, it was a very different academic environment, one that was not as intellectually rigorous.
You are right about grade inflation, but the difference in the level of rigor between the two schools means that not all As are equal.
> > My jokey way of putting it is that HES "takes anyone with a credit card."
> That's nice & humble of you, but it's not precisely true.
Thanks for pointing that out. I meant no disrespect to the folks who sign up to HES for the long haul.
Someone mentioned that HES courses are less rigorous, and I believe that's true. (Although Greek and Latin were still pretty tough!) On the other hand, the students I met were all extremely motivated and hard-working. It changes things a lot when everyone in class is attending voluntarily on their limited free time and out of their own pocket. I'm sure we weren't as smart or intellectually curious as an undergrad Harvard class, but I had way more respect for my peers there than I did in my own undergrad setting.
The second problem, and I think the reason behind the first problem, is that the formal way to list a degree on a resume is not by the school one attended but by the university that grants the degree. That is, an HBS graduate would list their degree as an MBA from Harvard University; an HLS graduate would list their degree as a JD from Harvard University. Harvard's method of identifying the school is that it awards unique degrees according to which school was intended. Thus an MBA will always come from HBS. A JD will always come from HLS. There is no BA or MA from Harvard Extension School, but rather a BLA or MLA. In this way, the correct listing of a BLA from Harvard Extension School is distinguishable from a BA from Harvard College, but of course, only for a person who knows the difference (or doesn't assume the "L" is a typo). This is, in my view, more a problem of poor convention than of anything else.
Yes, there are also people who plainly abuse language to mislead people. They make people like myself ('07 ALMM program) very self-conscious when it comes to talking about my education there. I never brag about the Harvard name. If pressed I refer to my program as "Harvard's night school for working adults" (because let me assure you - nobody knows what the hell "Extension School" mean anyway). It's a shame that there's no clear, accurate way for HES students to talk about their programs without denigrating their own accomplishments or risking being impostors.
Finally, there is one bit of praise I would like to bestow upon HES that cannot be said for any of Harvard's other schools: HES is the most meritocratic academic system I have ever seen. Your success boils down to whether you can do the work and whether you put in the time. It doesn't matter what your grades were in high school. It doesn't matter how much money your family has donated. It doesn't matter if you can throw a football. The requirements for admittance are as black and white as they come. If you show up, do the work, and get good grades, you'll get admitted. If you take three classes and can't consistently get Bs or better, you will be rejected no matter how much money or legacy you waive in front of the school. I hope someday the rest of academia will consider this model.
The funny thing is that this lie would only work outside of Boston - in Boston proper, companies big and small see this all the time, and are very alert for it (in part because of the presence of successful Extension alumni at the firms).
I hadn't encountered this, being across the Atlantic, but the behaviour is not uncommon. I once knew a man who in his younger days was really interested in puppetry, an got into a art-college-type puppet-making and puppetry course in the English town of Oxford. He lost interest after a year and dropped out, and of course tried to chance his arm with 'studied for a year at Oxford' on his CV for a while after.
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[ 3.0 ms ] story [ 318 ms ] threadDon't miss out on it.
The employer's half is what is commonly referred to as "payroll tax."
Knowing how much money you really have is the most important thing to know when you run a business.
At ConferenceBadge.com I spent a few days automating our accounting process with Xero API and brought some help from Xenaccounting.com (Montreal firm) to manage our books. It really helped us bootstrap the company and manage or tight budget month to month.
Accounting dept (not knowing where you are) is really dangerous and stressful.
What. How is this even remotely acceptable? If discovered it destroys your credibility. Among your employees it destroys your credibility. If I was an employee and found out that this was happening, I'd be extremely upset. I wouldn't trust a thing you say. If you'll lie to customers, you'll lie to me.
90% of the time it is fine, contracts tend to be organised for several months in advance, long enough for you to get a feature in place.
To you, it is completely irrelevant whether the reason your employer ordered you to trash your life was because the salesman sold vaporware, or because of the phase of the moon; the outcome for you is the same regardless of the reason the order was given. You have to change your policy of obeying such orders.
My least favorite is salespeople who give product away for free (including the support thereof), hurting the bottom line, since their commission is on gross.
Your optimism is endearing, but the vast majority of companies I've done business with do this. Often companies I've worked for have, too – sales people are very happy to overstate the available features and capabilities of any product. From their perspective, a shoddy, rushed implementation to an unhappy client is still better than having them walk away from the purchase entirely.
Question: Does your application has x, y and z feature and can be integrated in our process easily?
Answer: Sure, all there. Just have to tweak a few settings in the GUI.
Truth: We have a bare-bone product and a semi-documented API. Feel free to implement all the features you want and adapt it to your process. We can provide you professional services (for a price, of course).
I don't work with a startup, or even in the tech industry, but this is an issue that takes up ~25% of my time. I have to keep pushing back on sales to make sure that they're not selling something that's physically impossible, or just plain stupid (but sounds good).
This is something that cuts across business in America in general, I think.
The problem is that as long as your competitor says 'yes' and you say 'no' the competitor will get the customer.
Customers should be firing companies that provide false information during the lead-up to a sale. Then the sales people can stay employed and everybody comes out ahead.
Are you making an implicit suggestion that we should tolerate fraud because it employs people?
Like so many things, it's a balance, not an opposition.
You promise the world to make a sale, then once you've signed, work frantically to make the vision you sold a reality. If you were open and honest, you wouldn't sell a thing.
The only people who lose out are those who take salespeople on their word and don't get everything agreed in writing. Never take a salesperson on their word.
Or you could, you know, make stuff worth buying.
The sales people will go crazy, so don't let them sell anything.
Have the technical people evaluate that.
You (not you the person I'm replying to, 'you' the company/sales person) that are taking money from somebody based on an untruth. It's outrageous, regardless of how often it happens. I have the right to know what I'm getting for my money. Don't lie to me, ever.
It sucks, but there are lots of markets where the customer says "please lie to me" and gives their business to the person with the most reassuring lie.
How can you possibly sustain a long-term business when you're so willing to damage business relationships?
However, the startup that (wins a big contract with a big promise && delivers on its promise) certainly has a larger chance to become a long-term business than the ones that short circuit themselves out by not winning contracts.
There's a lot of cases where you are certain you can build what the customer needs, but you can't spend resources on it until you have a sale in hand.
I do think it's much more common in highly competitive markets with no barriers to entry. Google/Facebook/Apple have pretty strong moats and large diverse markets, and can afford to release products "when they're done" and not talk about them until then. People in very competitive, low-margin markets often need the sale now. But then, people in the latter type of markets quickly get filtered out of the marketplace regardless of what they do.
At the company I work for, executives and sales people frequently make "commitments" to our customers for features that don't yet exist. People who make commitments on my behalf without even mentioning them to me beforehand (let alone asking me if what they're promising is even possible to deliver) don't get my full respect.
I'm being intentionally somewhat vague here, so it's hard to really relate the details, but in one case he discussed a feature (having to do with distributed markov chains) that not only didn't exist but, afaik, nobody in the world even understands how to do and is the subject of active research. Needless to say, not something that could be implemented in a couple days. Worse, we where talking to some phds who fucking understood the above, and they immediately started asking me how the fuck we did it!
And yes, it often made us look like complete assholes in front of customers.
I'm guessing you mean distributed Markov Chain Monte Carlo ?
Sounds like an interesting problem, I'd really like to hear more about that.
I'm really interested in "difficult" problems with significant commercial applications. (My contact info is in my profile if you don't want to post publicly).
Derail aside - I completely agree that lying about features is horrendous and I'd never ever work for a boss that did this on a regular basis.
1. In my limited experience with pitching/salesing when you say "Yeah I think we can probably build that" the customer/client will take it as "We already have this". There is no amount of rational talking and explaining you can put in place to prevent this. If they ask for something, and your answer is anything but an unequivocal "No." they will think you already have it.
2. Isn't the whole concept of MVP and lean basically going out to people and saying "We have this" then seeing if somebody pays, and if they do, making it?
One basic technique is to keep track of the life time cost of sales, development, delivery and support/maintenance for all projects, and then measure the performance of salespeople based on both income and cost (as opposed to just income) makes them a lot more motivated to sell good solutions.
I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying), if it is some sort of technology that you aren't sure is possible or not that is certainly different.
So the salesperson/founder needs to have a good enough model of how the software works so that they know if a feature is relatively easy to provide, or if as another poster commented, it would require say a major change in a database design. I don't think it is necessarily unethical if you know that you can do it (so long as you can deliver before they start paying)
When I was being sold to, I developed a good ear for phrases like 'in development' or 'that is just a custom report'. We used put it all in writing &c.
I'd still prefer to frame it as "that's on our roadmap, and will be done by the time we close the contract", but then, there's little practical difference.
[0] https://en.wikipedia.org/wiki/Vaporware
[1] http://www.nytimes.com/1995/04/24/business/information-techn...
[2] http://archive.wired.com/culture/lifestyle/news/2005/01/6619...
[3] http://www.justice.gov/atr/public/press_releases/1998/1764.h...
But lessons learned and all that. I can't stress enough (at least from having run a small business) that accounting is the number one thing to get correct from the get-go. It saves such an immense amount of time, money and stress later on.
Usually they are resolved. By the time a small company has developed a big enough hole for the tax company to start tasking people with plugging the hole you're in very very hot water.
It's a resource allocation problem like any other.
As advertised, it's not a self-aggrandizing "mistakes" post that points you at the end to the author's next venture. It's full of the kinds of things that keep me up at night.
It reminds me of something similar that happened to me: I was running Adwords for the first time. The dashboard wasn't showing that any of my ads had run, and it kept telling me to up my bid amount. I kept upping it and upping it, and I wasn't seeing any ads running. I said screw it and forgot about it.
When I happened to look at the dashboard 3 weeks later, I had blown $6k on Google ads. I had to get my team together and tell them what happened and apologize. ($6k was a lot of money to us.) Like Seth, this hurt a lot because I paid myself less than anyone in the company to save money.
Seth, if you're around the iDoneThis office at Great Jones and Bowery, hit me up. I'd love to buy you a drink.
On the way, my co-founder and our CTO stopped me and said “I’m resigning. And I’m going to tell the team why.” He then told me that he had lost trust in me as a CEO and as a person.
Specifically:
- Poorly defined co-founder relationships - Not being explicit about hacks - Telling a half-truth
You're free to disagree about whether these are the important reasons why Seth lost their trust, but to say that he didn't address the reasons why is just untrue.
True honesty is rarely rewarded in failure.
This thing about not noticing that you weren't paying payroll taxes wasn't a "mistake." It was pure head-in-assery.
How can you "miss" the fact that you weren't being subtracted for payroll taxes? One quarterly / annual review after another, for 3 years? It's like running a personal budget, and "missing" the fact that you aren't paying rent.
And if you don't have visceral awareness of this fact -- you shouldn't be hiring people, and handing out salaries.
The general sense I got from the story was: We were young and stupid, but instead of doing drugs, we convinced VCs to give us $3.8 million, which made us believe that we knew what we were doing.
At least, you should.
Try not paying your Comcast or Verizon bill on time for a month or two and see what happens. The envelope only starts coming in red after quite a few fees are tacked on.
[EDIT: Don't actually try that :) ]
Hey, it happens, oh ye wise and holy one!
Screwing up payroll tax withholding for employees is financial catastrophe. You've taken money from your employees on behalf of the government, but then kept it. Your liability in that case can be criminal, maybe even if you didn't deliberately defraud the government.
So, those two cases are not comparable.
It happens to a lot of people but certainly not to everybody.
As a rule of thumb in the first two years you simply want to reserve 50% of your gross until you get a better handle on what your deductibles are and what it is that you exactly owe and then you can slowly home in on the correct amount to reserve. Too many variables to get closer but 50% should cover all but the most extreme cases.
Simply open a savings account and park that 50% there right after you invoice. If you're invoicing with GST/VAT/whatever it is called where you live then you get to subtract out the VAT first, then do the 50%, then add all the VAT back in and save that.
I think a lot of people assume they can put off getting an accountant until they're sure the business is serious. Which is probably why so many of the stories I've heard (and, to add to that, my own story) are about the tax screwup consequences of those first couple gigs you do before you formalize the company.
Getting an accountant is your first major purchase as a new business owner.
And getting a good one is not all that easy. I lucked out, the one I ended up with (after trying two others) was a CFO of a large company that decided he had enough of the pressure and joined his wife's fledgling accounting company.
So instead of just having an accountant I ended up with a mentor to boot, all for the price of one.
"OMG look we're so HAWT, we're co-founders after all, not gutless employees, and we're only in our 20s, doing all these amazing things, and we have this cool office and all these smart, hip people working for us.. and umm, budgets? due diligence? CPAs? What are those?"
Okay. But then you shouldn't really call oneself a CEO.
In any company, someone's responsible for the books (whether it's the CEO, some other employee, or an outsourced accountant), and you would think that the bank statements would be reconciled with the general ledger more than once a year. At the very least, it would have been done with each fiscal year end.
That the unpaid payroll taxes weren't noticed for almost three years is mind boggling to me.
Thank you so much for posting this. We all make mistakes, and for each of those, there could be ten thousand HN'ers who would come along behind us and say something like "But how could you do X? That's stupid!"
Everybody wants to read business porn. Nobody wants to sit down and hear the ways they will likely screw up. Guess which one is more effective. We need this.
This took guts to do. It is one of the more useful posts I've read, and it will have a positive impact. Congrats.
What's worse, minor versions of this mistake turn out to be easy to make; I've seen (much smaller, much more easily fixed) incidents in multiple companies with things like state taxes and unemployment insurance. So: you can't assume this is a mistake that won't happen to you.
Without making any value judgements about the operations of this particular company, one valuable lesson from the post is: do not ever use the Bank of America Payroll feature.
Unremitted payroll taxes can come with a one hundred percent penalty, and you can be liable for that penalty even if you had no knowledge of the failure to remit. Payroll tax screwups are the scary story big startups tell to baby startups at bedtime. Shudder.
Moving in and out of W-2/Corp-to-corp status many years ago, we set some consultants up on W-2. Then we changed up the mix, went back to just me, and I went on W-2 with another consulting firm for a while.
Got a letter from the state tax guys. Even though nothing was owed, we were supposed to file forms with all zeroes on them. There was a fine, yadda yadda.
Unfortunately, logic, reason, and common sense are not a reliable guide here.
Yep. I recently got a Texas sales tax certificate for my unincorporated side business. Even though I am not doing anything yet, because I have the certificate every quarter I have to log in to a state website and check a box that says I had no sales. Not doing to on time will cost me $500 per incident (I think).
One interesting "hack" I would see clients do regularly as owner/employees, they would minimize their own salary to avoid payroll taxes, maximizing their distributions (distributions are not subject to payroll taxes). Unfortunately for them the IRS accounts for this hack, and if an IRS audit finds the salary isn't reasonable then those amounts will be subject to payroll, social security, medicare, potentially higher income tax, and moving forward affordable care act taxes plus penalties and interest. I personally hate this because there is no bright line rule as to what a reasonable salary is subjecting all business owners to the mercy of the IRS.
I am surprised this would happen to a YC company, not that YC is in anyway responsible, but I figured YC would be in a position to offer various business services (payroll, legal, tax, insurance, ect...) at extremely low cost. For example, I personally solicited YC and offered to provide Delaware incorporation/registered agent/annual compliance services to any YC companies at a discount which without the discount is already cheaper than legalzoom.
It works fine and is very common for small businesses in the UK. I guess this goes to show how contextual accounting advice can be.
On that note, I'll add that I'm ever so glad that in all my interactions with them HMRC have been polite, friendly, supportive, helpful and nothing like the abusive business murderers that the IRS appear to aim to be - even when I fucked something up that was obviously my fault. I don't understand why the IRS feels that they need to be such assholes about everything. They should see their job as what it is: an essential part of the infrastructure that supports the economy and, indirectly, supports businesses. Their role should be to make business easier, not harder.
I say this as someone who once had a pretty decent unexpected 5-figure liability that I had to work out with them.
I also don't feel like zealous enforcement of unremitted payroll tax is particularly abusive, since that's essentially describing companies stealing from their employees.
From what you describe, they sound much like HMRC.
And yes, withholding payroll tax (or VAT) and not passing it on to the government is pretty crappy. HMRC is typically understanding if this is a few months or even a year down the line and they think the business will be able to pay up - they frequently agree payment plans for such things - but three years without noticing kinda takes the piss.
I had a run in with the labor department at my first company. I wouldn't exactly call them jerks (or nice) but I was able to get them to cut in half a 5 figure amount they assessed me (a lawsuit was filed) by having a personal meeting with the local office head. Without an attorney. After I cut the deal I then said "oh one more thing can I have 5 years to pay this back?". And he agreed (I didn't need the 5 years, it wasn't a large amount, but I thought why not?)
However the US government wants you to also pay Social Security and Medicare tax, which you only pay on employment income. Therefore they force you to take a "reasonable"[1] salary from the company. Everything else left in the company's account at the end of the year is your non-employment income.
It avoids double taxation. It doesn't put you in a lower tax bracket.
1. Reasonable is determined by them.
For people in our industry, it's hard to see a definition of "reasonable" that would be financially beneficial. You start a tech company. You pull $100k out every year, putting you right smack in the middle of the income distribution for experienced tech people. But because of a loophole, you get to reclassify $50k of that $100k as a distribution, and not pay FICA on it. To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient.
People obviously do it and get away with it. I'm glad it's an audit flag.
It's even more sorry to sit around on HN and forget that there are many more businesses that are as important or more important than a mobile app service for checking on and generating QR codes for sales at local restaurants.
The IRS gets theirs, don't worry about that. It's just too bad that the spending side of the function is broke, not the revenue.
I operate as an s-corp and pay myself a reasonable salary, matching that of the salary I could get in the current job market in the area I live in. Anything I clear above this is only taxed with my regular taxes.
If I was running a C-Corp instead of an S-Corp, I'd get my $100k salary, and any extra would have been taxed at the 30% corporate rate when it was taken in, then the 20% capital gains when it's distributed to me as profit.
I don't know. What salary would you take for your honest-to-god dream job?
Many people will take a pay cut for their dream job, but very few are willing to be exploited in the process.
If a company owner is taking a very low salary in order to maximise company profit (and minimise tax) then they (as an employer) are exploiting themselves (as an employee) to do so.
Is there some difference between the type of corporation which makes it acceptable, or could the IRS potentially go after all of those individuals?
[0] http://en.wikipedia.org/wiki/One-dollar_salary
What they report to the IRS and what they show on financials could be 2 totally different things. Entirely possible that they are paying taxes on a higher salary.
Equity constitutes towards almost 99 percent of an exec's salary. There are short term equity plans and long term equity plans. The equity payouts are generally in millions.
Companies have to release a DEF14A (30-40 pages) each year to show Shareholder's how much the Top5 Execs were paid each year.
I would assume that companies like Apple and Facebook have competent tax teams that make sure their obligations are fulfilled, even if that means paying payroll taxes on a portion of the stock-based compensation to their executives.
My experience over time with many business people has shown that since we are not talking about a criminal action but an action that will result in only penalties, interest etc. it is probably a chance worth taking.
This is a frequent occurrence in business in other areas. You have to take your chances and you determine the chances that you take by looking at your comfort level (which is different for everyone) with the potential downside and probability of that downside happening.
If the business is not doing well you can negotiate that down to ridiculously low levels provided you do not borrow from the company at the same time. That last bit is the bit that bites, many business owners already have a line of credit with their company from the founding days and they'd have to pay that back before they can reduce their salary.
On the whole that arrangement works well though, and the one time that I needed it I found that the tax people were very much understanding of the situation and offered a few suggestions that helped making things easier.
If all government institutions were as reasonable as the tax office in my dealings with them this would be a much better country.
http://www.irs.gov/taxtopics/tc751.html
So people doing high value software type consulting are probably playing games if they take that much compensation but oops on fully paying those particular taxes.
That is the floor, it's not a 'bright line'. If the field of that particular business the 'usual salary' is higher, you have to pay yourself that, and you're at the mercy of the tax office in the same way, because they decide what is the 'usual salary'. Also, a director is not allowed to pay themselves less than their employees, for example.
That said, it is true that it is fairly easy to get into contact with an inspector and get advice on how to proceed.
The fee is around $40 per month (per employee, I suspect) and it is money well spent. There are pains associated with the service - the reporting is not entirely transparent, and when things go wrong with the automated systems I have gotten odd letters from my tax authorities which needed to be turned into support tickets (which were then handled promptly). But I would never use anything less than a payroll service. If my payroll gets more complex I might upgrade to a bookkeeper with well-documented payroll experience (at a cost which would, I suspect, be considerably higher than $40 a month), but I'd never try to do payroll myself, for reasons which are amply attested in this thread.
Also, accountants. +1 for accountants.
The thing to do is to use separate accounts for reserves like these and to pay directly into the coffers of the tax man, lest the party that you do business with unexpectedly goes bust (they do) and you end up being liable again for the same amount of tax that you already paid to the payroll company. Don't for one second think that you're off the hook because you paid the payroll taxes to some other company.
The best arrangement is where they tell you exactly what is to be reserved and when it is due and you do the payments. That's how I've been doing it and it works flawless, never a problem (so far!).
As an extra bonus, you get to check the amount against the last couple of payments you made and you'll spot any big fluctuations before things get out of hand.
Yes, dealing with the tax authorities directly is usually more complicated (might be simpler for a sole proprietor/small number of employees)
(segregated accounts per client, accounts only usable for remittance of the salaries or taxes with the payroll company then taking out its slice when everything else has been done?)
I remember the Accupay affair and that took a lot of employers by surprise, and even though 'best common practice in the US' may be that payroll firms are the norm, at least in that particular case the culprit was definitely the payroll company and not any one of their multitude of clients. And there were strong indications that Accupay was not the only company that pulled that particular stunt.
All of the companies affected were held liable and had to pay (again).
If that's the kind of firm you're talking about, I agree. Don't use tiny fly-by-night payroll firms. Just use SurePayroll or someone like them.
I'm serious: that's a good point you have. When I said "the norm is to use a payroll firm", I should have said "big payroll firm". There are a lot of little firms out there, and I wouldn't feel safe using them either.
Having a ton of friends in the US means that sometimes I get requests if I can help someone out on short notice, in that particular case there wasn't anything I could do. (I was relatively short on cash at the time but even if that had not been the case I probably would not have stepped in.)
1. https://en.wikipedia.org/wiki/Arthur_Andersen
It works just like a bank account (except you can't withdraw money from it). They have an online service where you can check the tax account's status and activity, so it's easy to keep it in balance.
This eliminates the need to retain any money that is actually owed to the government. When you pay an employee, you can pay the withheld tax and social security fees at the same time into the tax account.
This is known as "borrowing against payroll tax" and is pretty much universally known as a terrible idea! It does happen, though and a business might be dangerously low on cash, but has big amount coming in (from a consulting job, investment, etc). It's just very risky because if you get yourself into a position where you can't pay the bill, then you will be screwed just like one of those companies you mention.
But - if you just simply use a payroll service and always pay the withholdings without fail then you won't have that temptation and won't get yourself into trouble. No need to try to hide your money or something so the IRS can't get it.
The smart thing to do is just withhold the tax with each paycheck. But, if you're a small business you do have until the end of the quarter to come up with the money. As I said, it's risky and generally a terrible idea. I was just explaining how companies come to find themselves in this position.
Early on in the days of the Internet, I would actually call up spammers and try to help them understand why they should stop. 80% of the people were confused small businesspeople who were glad somebody gave them the straight scoop. 20% were weasels who would say or do anything as long as it got them what they wanted.
After a few decades of bullshit excuses from irredeemable idiots, I would also end up in the "fuck you, pay me" category. Because nothing short of being as inevitable as death would be enough to get inveterate weasels to actually pay, and nobody wants to be jerked around by weasels.
It sucks for the rest of us, though, because it turns reasonable mistakes like this into land mines.
If you're not saying yes to one of those, then I'm not seeing what category applies other than "reasonable mistake". I agree it's a noob mistake, but a lot of businesses are started by noobs.
Given the rest of the story and his replies, I'm also inclined to believe that the mistake was ultimately due to lying to himself about the importance of bookkeeping and how fast funds should have been spent. But even absent that, "unreasonable" is a totally reasonable word for this.
It is not unusual for new or small businesses to just wing it on accounting for a while and then hire an accountant who has to tidy things up. (If you don't believe me, ask any small business accountant; my pals have story after story like this.) If we take him at his word, him thinking that the payroll service was handling the withholding is also reasonable. And him assuming everything was jake unless somebody was yelling at him is not just reasonable but typical of first-time entrepreneurs. The main unusual thing here is the scope of error and consequences, but startups are all about rapid increase in size, so that's not unusual in context.
Of course, this could also be fraud: he could have known for years that he wasn't paying withholding, hoping to make it up later. It could be that he actively avoided thinking it through or was willfully careless, which would make it negligence. But as he presents it, it's a reasonable mistake. You can see more about exactly what this means if you look in legal sources for "mistake of fact".
That said, I think your skepticism about his story is reasonable. That his partners have both quit after losing confidence in him would make me unsurprised if this turned out to be fraud, not just an honest but titanically stupid mistake.
However, are you sure that this doesn't work? The B of A system I am using (in California) calculates payroll taxes, and then even lets you submit them electronically. It also nags me constantly for forms I am supposed to submit to both CA and the US IRS.
There are actually all sorts of gotchas in business that happen as a result of some assumption that you make as far as a process being carried out that never has happened. Using BofA wasn't the sole problem here it was being asleep at the switch and not checking that something had actually happened that didn't.
When I pay my taxes (various real estate, business, personal etc.) I typically will actually look for and printout the cancelled check from the bank showing that the check actually arrived at the destination and was deposited.
The example I would use is the long standing thought in backups that you need to actually test your backups, [1] and not assume that they will work when you need them.
[1] For a certain Mac that I am backing up I just bought, for example, 2 - 3tb hard disks. One will be offsite, one will be onsite. One will be a disk clone (super duper) one will be done by Apple's time machine. Also, the two different 3tb disk were purchased from two different vendors. One is WD and is Seagate. [2] I will periodically test both backups to make sure I can boot from either if needed. This isn't for super critical data but for a large collection of photos and videos. (And there are more than one clone of the data for that matter).
[2] Theory being that buying 2 of the exact same 3 tb's (at the same exact time) could come from the same batch and be defective.
No matter how small your business you should at least have a general ledger and a liquidity forecast running 6 months to a year into the future.
Really good point. As it happens one day recently I questioned my wife why our personal account had so much money in it.
It turned out that she had transferred her money into it that should have went into another account.
This was after correcting problems where she had payed some personal bills out of our account because the bank bill paying "default" for her was set to our joint account rather than her own account.
So she switched it so default bill payment now = her account. So now I have a different problem. She pays our bills out of her account. Which (in addition to the above mentioned wrong deposit) has created even more havoc.
Don't you think the ease with which you can get into this kind of trouble (which may not be dischargeable in bankruptcy, and which may IIRC become a criminal matter) should factor into the "business friendless" score of the US? In every other tax regime I'm familiar with (several European and the Israeli one), everything which is not outright fraud gets you no more than a small fine.
As a post-mortem, I would understand, but surely not a good idea when your company is still trading.
Existing/prospective customers are going to read this, and it's not going to fill them with confidence.
So true. There is an immense amount of pressure within startups to 'bend the rules', and I think this hits the nail on the head.
Also, if you are conservative you'll have a spreadsheet that models your worst and best cashflow prognosis for the next 6 months to a year out. If you find yourself consistently outperforming the 'best' case in spite of an unchanged business outlook then it's high time to start checking things.
That gets expensive in a hurry (tax lawyer, fines, interest, surcharges).
FedEx, Evernote, Intuit, Zappos, Airbnb – I’m endlessly inspired by those founders who faced near collapse but simply refused to give up.
These stories can be inspiring, but remember that they suffer from survivor bias. The companies that do go under don't get as much attention in the financial press.
Sometimes the reality is that it's time to shut down. Give up on one thing, move on to the next thing.
Being in charge doesn't mean you get to win every argument, as you don't want your co-founders to quit, but it definitely shouldn't be a thing where all the co-founders have equal decision making capabilities because that may lead to never-ending strife. Most decisions shouldn't be arbitrary anyway, a decision should come with a convincing argument. It's those hard decisions when none of the answers seem perfect where you need someone to win out even though it may not feel right.
The leadership structure should be determined when the founding team forms, so there's no ambiguity later and each person needs to decide then and there if they can live with the setup and thereafter stick to it.
I do respect that it's difficult to write about, though. In addition to just wanting to not feel like a failure, you don't generally want your employees and investors to feel like everything is about to go down the toilet. I'm glad to see more people writing about their real, honest experiences.
It also makes you part of a relatively small crowd that tends to use that particular fact as a credential. At least they earned that, the OP did not.
However, it is but one of several schools that make up Harvard University, which include graduate schools like Graduate School of Arts and Sciences, and professional schools like Harvard Business School, Harvard Law School, and Harvard School of Medicine.
There is overlap between the different institutions at Harvard; the Faculty of Arts and Sciences teaches undergraduate classes at Harvard College, graduate classes at the Graduate School of Arts and Sciences, and performs research.
Harvard Extension School differs from many of the other schools in that it is not selective; anyone can simply pay to take a class. That means that merely attending Harvard Extension School confers considerably less prestige than attending Harvard College or one of the other schools at Harvard; all it means is that you paid for some courses.
Saying you "dropped out of Harvard" makes it sound like you were really brilliant and had a lot of promise but founding your own company held even more promise than finishing your degree. Saying that you dropped out of Harvard Extension just says that you took a few night classes and never really got around to finishing anything.
I took a few courses at Harvard Extension in high school. Some of them were really good, some of them not so much. A top notch school tends to offer a much more consistent program than Harvard Extension school. I've also attended another Ivy League school (group of very prestigious, fairly selective schools in the Northeastern US) as a full time student, as well as a flagship state school, and I can say that based on my personal experience, I'd rank Harvard Extension a little below the state school (which also had some really great classes and some mediocre classes), not up with the Ivy League school.
More info on all of the schools that make up Harvard University: http://www.harvard.edu/schools
Obligatory [semi-]relevant xkcd: http://xkcd.com/385/
Then again, I ride the Ⓣ every day. Maybe people just have no clue what "Harvard Extension School" is.
The confusion extends even to Harvard grads. Because of the mix at alumni events of Harvard College graduates, MBAs, JDs, MDs, Extension School grads, etc., sometimes the organizers print up name tags with the degree abbreviations on them. It does little good, though: I've had Harvard MBAs ask me what my "A.B." means. (It's an abbreviation for the Latin artium baccalaureus, pretentious Harvard-speak for "bachelor's degree". I.e., it means I "went to Harvard" in the colloquial sense of the phrase.) As far as most of them know, A.B. and A.L.B./A.A. (the Extension School degrees) might as well be the same thing.
That's nice & humble of you, but it's not precisely true. There are very few requirements for taking a random course or two (or 20) at HES, but to be admitted to a degree program at HES is not so easy. You have to take a certain number of HES courses and earn a high GPA in them to be admitted to a degree program. Then, of course, you have to pass the full slate of courses to earn your Bachelor's degree.
Some people also seem to be under the impression that HES courses aren't as difficult as regular Harvard College courses. If anything, I'd say there's far more grade inflation in Harvard College than in HES, i.e., it's probably easier to make an A in a lot of (though obviously not all) regular Harvard courses than it is in Extension courses.
You are right about grade inflation, but the difference in the level of rigor between the two schools means that not all As are equal.
Someone mentioned that HES courses are less rigorous, and I believe that's true. (Although Greek and Latin were still pretty tough!) On the other hand, the students I met were all extremely motivated and hard-working. It changes things a lot when everyone in class is attending voluntarily on their limited free time and out of their own pocket. I'm sure we weren't as smart or intellectually curious as an undergrad Harvard class, but I had way more respect for my peers there than I did in my own undergrad setting.
The first is that HES's own guidelines instruct students to list their degrees in ways that can be confusing. See: http://blogs.law.harvard.edu/lamont/2013/09/18/harvard-exten...
The second problem, and I think the reason behind the first problem, is that the formal way to list a degree on a resume is not by the school one attended but by the university that grants the degree. That is, an HBS graduate would list their degree as an MBA from Harvard University; an HLS graduate would list their degree as a JD from Harvard University. Harvard's method of identifying the school is that it awards unique degrees according to which school was intended. Thus an MBA will always come from HBS. A JD will always come from HLS. There is no BA or MA from Harvard Extension School, but rather a BLA or MLA. In this way, the correct listing of a BLA from Harvard Extension School is distinguishable from a BA from Harvard College, but of course, only for a person who knows the difference (or doesn't assume the "L" is a typo). This is, in my view, more a problem of poor convention than of anything else.
Yes, there are also people who plainly abuse language to mislead people. They make people like myself ('07 ALMM program) very self-conscious when it comes to talking about my education there. I never brag about the Harvard name. If pressed I refer to my program as "Harvard's night school for working adults" (because let me assure you - nobody knows what the hell "Extension School" mean anyway). It's a shame that there's no clear, accurate way for HES students to talk about their programs without denigrating their own accomplishments or risking being impostors.
Finally, there is one bit of praise I would like to bestow upon HES that cannot be said for any of Harvard's other schools: HES is the most meritocratic academic system I have ever seen. Your success boils down to whether you can do the work and whether you put in the time. It doesn't matter what your grades were in high school. It doesn't matter how much money your family has donated. It doesn't matter if you can throw a football. The requirements for admittance are as black and white as they come. If you show up, do the work, and get good grades, you'll get admitted. If you take three classes and can't consistently get Bs or better, you will be rejected no matter how much money or legacy you waive in front of the school. I hope someday the rest of academia will consider this model.
I really enjoyed reading your article. It was extremely insightful, and I hope to read more articles posted on your blog in the future.