We got a $60k tax penalty for a zero-revenue side project
21 comments
Once you have incorporated as a company the company has to fill tax returns and possibly accounts. Even if you don't have customers, incorporating allows to file business expenses and to carry losses forward (mileage may vary by jurisdiction).
Well sure :) but we expected to pay a "normal" fine, not $60,000 right away. Especially since we had zero revenue. Today we would do many things differently...
You don't say why you incorporated in the US... Much cheaper to incorportate in the UK, it seems (especially if you include fines and wind down, from what you wrote). I believe that filing tax returns (and accounts) is pretty much an universal requirement, as mentioned, anyway.
Our target market was US, so US company was the first and only choice.
Let's say you wouldn't have been able to reduce the fine to $1,500, could you just have closed the company to avoid paying the fine?
Good question. We have considered all options. But the company cannot be officially closed without paying all taxes/fines, etc.
At the same time, with a C corp, only the company itself is liable for taxes and fines, not its founders. If a company does not have sufficient funds, it cannot operate, and there is a process for automatically dissolving the company (after several years, if you have no outstanding obligations to third parties, no fraud intentions, etc.). We didn't want to do this and be left with an unpaid bill in our minds.
At the same time, with a C corp, only the company itself is liable for taxes and fines, not its founders. If a company does not have sufficient funds, it cannot operate, and there is a process for automatically dissolving the company (after several years, if you have no outstanding obligations to third parties, no fraud intentions, etc.). We didn't want to do this and be left with an unpaid bill in our minds.
In your post you say:
> "Hey, the federal portal says we owe $60,000 in penalties for not filing a tax return."
That doesn't sound like they're asking you to pay tax on your $0 income business. It sounds like you need to pay a fine for not filing a tax return.
What's a "normal" fine anyway? The point of having a fine being a large sum of money is to create incentive so you to do the thing they want you doing, which you didn't do.
> "Hey, the federal portal says we owe $60,000 in penalties for not filing a tax return."
That doesn't sound like they're asking you to pay tax on your $0 income business. It sounds like you need to pay a fine for not filing a tax return.
What's a "normal" fine anyway? The point of having a fine being a large sum of money is to create incentive so you to do the thing they want you doing, which you didn't do.
When we logged into the tax portal, only this amount was shown as to pay. Terrible UX.
In fact, the fine was actually what we paid (minimum tax + missed deadline + interest).
“Normal fine”: We just didn't expect you to be able to incorporate a company and if you miss the tax payment deadline, you will receive a fine 100 times higher than the cost of incorporating the company, no matter what.
But of course, I don't recommend our way. Don't do it. It was wrong. Pay your taxes. Fill out all the required documents.
In fact, the fine was actually what we paid (minimum tax + missed deadline + interest).
“Normal fine”: We just didn't expect you to be able to incorporate a company and if you miss the tax payment deadline, you will receive a fine 100 times higher than the cost of incorporating the company, no matter what.
But of course, I don't recommend our way. Don't do it. It was wrong. Pay your taxes. Fill out all the required documents.
Are you sure this was the Federal tax portal, and not the Delaware Franchise tax? As far as I know, only the latter defaults to a "scary" tax calculation based on number of shares (but you can easily switch it to the Assumed Par Value Capital Method based calculation, which would be $400 in total for you, assuming you filed on time).
Federal taxes should be $0 if you had no profits.
This is 100% about Delaware Franchise Tax and is a rite of passage for all first-time founders. (There is no portal you can log into to view your federal taxes owed.)
Here’s a detailed writeup I prepared a while back about exactly how to resolve this if you want to DIY it. (This is one of the very few filings I actually recommend you DIY.)
https://pilot.com/blog/how-to-file-your-delaware-franchise-t...
Here’s a detailed writeup I prepared a while back about exactly how to resolve this if you want to DIY it. (This is one of the very few filings I actually recommend you DIY.)
https://pilot.com/blog/how-to-file-your-delaware-franchise-t...
I wonder what he meant by "days and nights reading IRS docs"...
But seriously, any AI tool could have explained exactly what was going on and what to do. I'm not even sure how he got to "$1500" since it's $400 + $200 late fee + 1.5% monthly interest. Maybe he missed 2 years?
But seriously, any AI tool could have explained exactly what was going on and what to do. I'm not even sure how he got to "$1500" since it's $400 + $200 late fee + 1.5% monthly interest. Maybe he missed 2 years?
I've heard rumors/suggestions that you shouldn't worry too much about things until you have a clear revenue or expense plan that reaches the IRS minimums: https://www.irs.gov/individuals/check-if-you-need-to-file-a-...
ie: if you're making $100/mo (talk to your tax advisor), but if you're clearly making $3k+/mo then you should have a plan to incorporate, file taxes, etc. (and should also be talking to your tax advisor).
It helps to cool my jets when my brain gets into "unicorn mode" ... do I have 30 people RIGHT NOW who will pay me $100/mo? Am I supporting 3 customers who are each paying me $1000/mo? Are 300 people beating down my door to pay me $10/mo?
...probably not... and if they were? Then you've got the beginnings of a company and should start with the paperwork!
ie: if you're making $100/mo (talk to your tax advisor), but if you're clearly making $3k+/mo then you should have a plan to incorporate, file taxes, etc. (and should also be talking to your tax advisor).
It helps to cool my jets when my brain gets into "unicorn mode" ... do I have 30 people RIGHT NOW who will pay me $100/mo? Am I supporting 3 customers who are each paying me $1000/mo? Are 300 people beating down my door to pay me $10/mo?
...probably not... and if they were? Then you've got the beginnings of a company and should start with the paperwork!
How does that work if your customers want to get a proper invoice?
https://www.invoicesimple.com/invoice-generator (?)
Talk to your tax advisor? https://www.google.com/search?q=business+bank+account+requir... ?
If you're working with a business that wants to be writing checks to a business, then it sounds like you need to have your own business?
...but consider that you have ~$5k/yr "off the table" of your own business expenses, and I'd still stand by the suggestion that you'd want to have a clear revenue or expense plan that gets you to at least the minimum bar of $14.6k (ie: where $5k is 30% of your proposed income) before you get too excited about filing business paperwork.
Talk to your tax advisor? https://www.google.com/search?q=business+bank+account+requir... ?
If you're working with a business that wants to be writing checks to a business, then it sounds like you need to have your own business?
...but consider that you have ~$5k/yr "off the table" of your own business expenses, and I'd still stand by the suggestion that you'd want to have a clear revenue or expense plan that gets you to at least the minimum bar of $14.6k (ie: where $5k is 30% of your proposed income) before you get too excited about filing business paperwork.
I agree, and I think we knew that even back then!
However, we thought that starting a company would motivate us because we would be "commited" and this would demonstrate to each other that we were serious about it, given that we all had other jobs. And to this day, I still think it has some meaning.
However, we thought that starting a company would motivate us because we would be "commited" and this would demonstrate to each other that we were serious about it, given that we all had other jobs. And to this day, I still think it has some meaning.
I'm glad Slidepicker handled it. I use it almost every day / I love that it hosts not only the presentations but also the images I drag-and-drop straight from my desktop.
Did you incorporate as a C corp or LLC?
C corp in Delaware
Go with S-corp.
Seems like big no-no.
>The big reason why C corps are preferable is because S corporation shareholders can only be people -- not other businesses, like VC firms. (S corps also can't issue preferred stock.) An S corporation can't take venture capital without first reverting back to C corp status. But an S corporation can save a lot of money on taxes
https://news.ycombinator.com/item?id=13784
>The big reason why C corps are preferable is because S corporation shareholders can only be people -- not other businesses, like VC firms. (S corps also can't issue preferred stock.) An S corporation can't take venture capital without first reverting back to C corp status. But an S corporation can save a lot of money on taxes
https://news.ycombinator.com/item?id=13784
what is the difference?
Our pain point was simple: we hated fighting with PowerPoint/Google Slides. We just wanted to write content and get nice slides without babysitting fonts, sizes, alignment, colors, and 19 different "Title + Subtitle" layouts that all somehow looked bad.
So we built a prototype: a tiny click-together slide builder. Then we decided clicking was too slow and turned it into a full markdown-to-slides thing. Write markdown in, pretty slides out. Easy.
Then, like every good side project, we started bolting on features: Image uploads, PDF generation via API, AI integration and more and more stuff nobody had actually asked for....
Somewhere in there, in peak "we're definitely the next unicorn" mode, we incorporated a US company through Stripe Atlas. To feel extra serious, we issued ourselves 10,000,000 shares. Because that's what real startups do, right?
Then we went back to happily shipping features and... not so happily not. shipping a single paid plan.
(fast-forward about a year and a half)
One day a colleague messages us:
> "Hey, the federal portal says we owe $60,000 in penalties for not filing a tax return."
We all experienced the same full-body heat wave usually reserved for production database drops.
(Note for readers: We are originally from the EU, where if a company has no income, it doesn't pay any taxes and if you receive a fine, it is usually a few hundred euros max)
And so we learned something interesting: the number of shares you issue can influence how various fees and penalties are calculated. Which is nice to know BEFORE you click 10,000,000.
We spent days and nights reading IRS docs, emailing people, trying to understand if we'd just bankrupted a project that didn't even have a pricing page.
In the end, the solution was hilariously boring:
1) We filed a zero-revenue tax return.
2) The online system recalculated everything.
3) Our terrifying $60k penalty turned into something around $1500, which we paid.
Crisis kind of averted.
Then the end of the next year approached and we all had the same thought: "We're not doing this again."
Technically, we probably could have just ignored the company and let it die a slow legal death. But we're those annoying people who like things "done properly", so we paid roughly another $2,000 to have someone help us shut the company down the right way.
Total bill for our "we're definitely founders now" moment: aprox. $3,500 and a lot of stress and $0 in revenue.
After that, we basically put the project to sleep. Everyone had their own businesses, and this was a sufficiently painful lesson.
Except... we never stopped using it.
Internally, we kept generating all our slides with it. And honestly? The output still feels great. It's fast, it looks good, and once you get used to it, going back to Google Slides or Keynote feels like trying to design posters in Excel.
Recently, AI helped us refactor a bunch of the code, polish things, and add features we always wanted but never had the energy to implement.
So now the project is alive again at slidepicker.com.
The two takeaways from all this:
1. Don't incorporate (especially in another country), until you have at least one paying customer. It may be better to wait until these customers generate a stable income.
2. If you do incorporate, talk to someone who actually understands taxes before you excitedly type "10,000,000 shares" into a form.
And if you just want nice slides from markdown without accidentally speedrunning US corporate law, you can play with it at slidepicker.com.