Tax attorney Brayden Drake admits he formed his S-Corp two years too early. Inconsistent revenue made it difficult to pay himself a required salary, leaving insufficient profit distributions to generate significant tax savings. This premature move added complexity without the financial benefit.
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Don't default to a 50/50 split on day one. Instead, agree to formally discuss equity only after reaching a predefined milestone, like $10,000 in revenue. This allows you to base the split on demonstrated contribution and commitment, avoiding the resentment from premature, misaligned agreements.
Most new entrepreneurs wait for revenue before formalizing their business with an LLC or hiring an accountant. The savvier approach is to establish this legal and financial foundation from day one, even before profitability. This professionalizes the venture immediately, forces a serious mindset, and builds a solid base for future growth.
Instead of seeking a soul-fulfilling first venture, focus on a business that pays the bills. This practical approach builds skills and provides capital to pursue your true passion later, without the pressure of monetization.
Many entrepreneurs love their core business but lose motivation as their role expands to include responsibilities they dislike (e.g., finance, operations). The solution is to reinvest early profits into hiring employees to handle these tasks, freeing the founder to focus on their strengths and passions.
Don't rush to form an S-Corp. The tax savings typically don't outweigh the added costs and complexity, like running payroll, until your business is generating at least $60,000 to $80,000 in profit. Before that, a sole proprietorship or standard LLC is often more efficient.
Despite Figma's massive success, Dylan Field considers their long pre-monetization period a mistake. The company started in 2012 but didn't earn its first revenue until 2017. He strongly advises founders against this path, emphasizing the need to ship and learn from the market more quickly.
An LLC is a legal designation for liability protection, not a tax classification in the eyes of the IRS. By default, a single-member LLC is taxed identically to a sole proprietorship. To change this, you must proactively file to be taxed as an S-Corporation.
Contrary to popular belief, spending money just for a year-end tax write-off can be a poor financial move. If your income is on a sharp upward trajectory, delaying the expense to the next year could result in a larger tax saving, as you'll likely be in a higher tax bracket.