Starting a large business with a not so large income?
"There are three (or four) ways that a company can grow: (Crowdfunding is a relatively new (in mainstream businesses) alternative financing method where people will finance a company with the expectation that they will benefit from the product or service that they provide.) Obviously a startup has no prior income to use, so it must either raise money through equity or debt. People say that one must borrow contingent on their salary. Banks lend money based on the ability to pay the loan back plus interest.  For individuals, their income is their primary source of cash flow, so, yes, it is usually the determining factor in getting a loan.  For a business the key factor is future cash flows.  So a business will borrow money, say, to buy a new asset (like a factory) that will be used to generate cash flows in the future so that they can pay down the debt.  If the bank believes that the use of the money is going to be profitable enough that they will get their money back with interest, they'll loan the money. Equity investors are essentially the same, but since they don't get a guaranteed payback (they only get paid through non-guaranteed dividends or liquidation), their risk is higher and they are looking for higher expected returns. So the question I'd have as a bank or equity investor is ""what are you going to do with the money?""  What is your business strategy? What are you going to do that will make profits in the future?  Do you have a special idea or skill that you can turn into a profitable business?  (Crowdfunding would be similar - people are willing to give you money based on either the social or personal benefit of some product or service.) So any business either starts small and grows over time (which is how the vast majority of businesses grow), or has some special idea, asset, skill, or something that would make a bank willing to take a risk on a huge loan. I know, again, that people here tend to turn blind eyes on unfortunate realities, but people do make giant businesses without having giant incomes. The ""unfortunate reality"" is that most startups fail.  Which may sound bad, but also keep in mind that most startups are created by people that are OK with failing.  They are people that are willing to fail 9 times with the thought that the 10th one will take off and make up for the losses of the first 9.   So I would say - if you have some great idea or skill and a viable strategy and plan to take it to market, then GO FOR IT. You don't need a huge salary to start off.  You need something that you can take to market and make money.  Most people (myself included) either do not have that idea or skill to go out on their own, or don't have the courage to take that kind of risk.  But don't go in assuming all you need is a loan and you'll be an instant millionaire.  You might, but the odds are very long." "For example, Biff Spoiles started an animation studio and production developing company to produce animations -- something in the ballpark of $12,000,000.00 U.S.D. -- and he had a $12K/yearly salary. I have no clue what you mean, as others have mentioned. (I'm not sure what the ""12 million"" refers to?  Do you mean ""total cost of animations created by the company in a year"" or?  If so, ""12 million"" would amount to say 5 to 20 major, brand name TV commercials, for example.  Do you mean the ""cost of plant"" - so, for a ""TV commercial production company"" you mean purchasing desks, drawing pads, Porsches, and so on?) Your specific example of a ""film or TV-commercial production company"" is a bad example, it's not really a ""business"" - that is to say, it does not rely on capital and return on capital. The way famous ""film or TV-commercial production companies"" happens is precisely like this: A young guy/girl G (perhaps a designer or filmmaker) is working, just as you say, for a menial wage at a film company. (G got that first job perhaps out of art school.)  G gets a chance at doing a photo shoot, animation, or helping direct a TV commercial.  G does a fantastic job. Later that year, a large important animation or commercial job arrives at the company; due to the earlier excellent result, G is allowed to work on the new one. G again he does a fantastic job.  Soon, within that company, G is a highly-regarded animator or director and has attracted fame amongst colleagues and clients. Eventually, G hears of a company (XYZ Hotel) that needs a TV ad made. (Or an animation, or whatever.) G says to XYZ, look, you could spend $230,000 with a production company, and in reality they'd have me direct it anyway. I'm leaving to work independently, so I will do your job for only $190,000. In a word, XYZ says ""Yes"" and hands over a cheque for $190,000.  G spends $160,000 on the usual actors, cameramen, editing, etc, and uses 2 months of G's own time, and pockets $5000 after tax. G then doesn't get a job for a couple months, and then gets three more in the new year. Because the commercial for XYZ was so good, XYZ gave him another couple to do, for another product line. Eventually G has just enough money coming in that he ""hires"" a few freelance people for a few weeks here and there ... a cameraman, illustrator, gopher, and so on.  Eventually G has enough TV ads solidly booked G can risk actually hiring long-time friend P as a producer.  P spends most of her time actually bringing in more work - and it builds from there. Eventually. You have a very busy, well-known in the industry, TV commercial production company with many staff and endless clients (example, say, http://rsafilms.com) It might be at some point in there (say, around year three), G would like to borrow the odd million bucks to basically ""help with cashflow."" The answer to that is nothing more than ""through business contacts, G knows a wealthy dentist/whoever who is prepared to do that."" But note carefully that at that point, G's company is already very firmly established, famous for doing 20 spectacular animations/commercials, and so on.  (Note too that 999 times out of 1000 when this happens, the money evaporates and the dentist D never sees a penny back. In that case G ""apologizes"".) Only much much later once the company has many, many staff and great cashflow, could the production company actually borrow from a bank, or perhaps from ""actual investors"", which is more what you have in mind. regarding your four categories.  Numbers 1 and 3 are totally wrong; they do not work at all like you are asking. indeed the very simple answer is: ""borrow money"" to start a category 1 or 3 type of business. It's totally inconceivable. (The only exception would be if you literally just have an extremely rich Uncle, who loans you a few million to ""start an animation studio"" - which would be completely whacky.  Because in that example: company XYZ could not care less if you ""have"" an animation studio (ie: your Uncle has given you a platinum card, and you bought a building, some drawing pads, and a few dozen Macs).  XYZ just couldn't care less.  All they care about is your folio of work.  In this example, RSA would get the job  :)  ) My guess is you're thinking people somehow magically go around ""borrowing money"" to get businesses like that started.  (Your examples 1 and 3.) The simple answer is they don't and can't -  your fears are assuaged!  :)"
It all depends on the country.  In the US, mobility at the top is reasonably high (ie first generation millionaires, first generation billionaires, etc).      In other western countries, mobility at the top is very poor.  This is typically due to regulation and taxes that make it incredibly difficult for small businesses to be compliant and compete (ie hire a bad employee as a small startup, and it can cripple the business if you cannot easily fire them).     Mobility at the bottom is reversed.   Getting out of abject poverty in the US is incredibly difficult, almost impossible.  In other western countries it is not easy, but far easier than the US thanks to those social safety nets. how does a single employee LLC bring in 500k?  I mean if you want to have it in a low-tax environment, you can probably invest it in something and then pull them out? I don't think you can put away pre-tax earnings to then use on salary costs. Would it be worth legitimizing his business or is it too late at this point? To be blunt, you're asking if we recommend that he stop breaking the law. The answer is obviously yes, he should be declaring his income. And it would probably benefit him to get on the same page as his employer (or client) so they can both start obeying the law together. Once he's filed a tax return for 2016 that would certainly help his cause as far as a lender is concerned, and  as soon as he can provide some recent pay stubs (or paid invoices) he should be ready to move forward on the mortgage based on that additional income. This depends on the nature of the income. Please consult a professional CPA for specific advise. Your back of the envelope calculation shows an income of about 5.5% per year, which is much better than a bank. The risk of course is that in a few years when you want to sell the stock, the price may not be at the level you want. The question is what are you giving up with this plan. You have 80K in cash, will cutting it to 30K in cash make it harder for your business to survive? If your income from the business starts slowly, having that 50K in cash may be better. Selling the stock when the business is desperate for money may lock in losses. "Agreed on all points.  You're still not saving a TON of money, given that you have to have a reasonable balance of salary/distributions, but an S-corp is the way to go if you're making substantial profit in order to save tax money.  I'll reiterate (my wife is a CPA and she guides me on my business) - you can't legally save ""untaxed earnings"" for next year." except that most companies are small companies and most business owners end up as families at some point.  I'm starting a business abroad and will be taxed at 35% in the USA even if I don't live there.   There's ways to get around it, but I'm not sure exactly how to do it yet nor am I making enough money yet to justify the up front expense of doing this If I understand you right, people are giving the LLC money for an ownership share.  That is NOT income - it would go under equity on the balance sheet.  It is analogous to getting a loan from the bank.  It is not income - you get cash (an asset) and have an increase to debt (a liability) Yes you can. You should talk to your tax advisor re the specific expenditures that can be accounted as startup-costs (legal fees are a good candidate, for example). If they add up to significant amounts (>$5K), you'll have to capitalize them over a certain period of time, and deduct from your business' income. This is not a tax advice.:-) Assuming this will be a taxable account (since you want to pull income off of it, although this will lower wealth growth), you could open a brokerage account at some place like Vanguard (free on their ETFs) and look at tax efficient index fund ETFs (such as total stock market or their 500 fund), including  some international (foreign tax credit is nice in taxable) and muni funds for the (tax advantaged) income, although CDs are likely better for the income at this point. Expenses are where the catch is found.  Not all expenditures are considered expenses for tax purposes.  Good CPAs make a comfortable living untangling this sort of thing.  Advice for both of your family members' businesses...consult with a CPA before making big purchases.  They may need to adjust the way they buy, or the timing of it, or simply to set aside capital to pay the taxes for the profit used to purchase those items.  CPA can help find the best path.  That 10k in unallocated income can be used to redecorate your office, but there's still 3k in taxes due on it. Bottom Line:  Can't label business income as profit until the taxes have been paid. "I'm sceptical of your position.   I reckon that people who put crazy long hours into a business that fails are lacking some intangible qualities of entrepreneurship.  There are people you can just tell, they don't have what it takes. They're putting in loads of commitment or loads of money into an idea that just isn't right. Or they spend money in the wrong ways - you know how all these internet companies spent money on champagne breakfasts and $1000 chairs during the dot-com bubble? I've seen the small-scale version of that, as people rent expensive offices when I'm thinking ""why aren't you just working from home?""   As a (small time) entrepreneur I'm obviously biased, but if you've got what it takes (so I think there is an element of ""predestination"" here) and you work hard then you *will* succeed, to some greater or lesser extent.  I mean, I know electricians and builders that have started their own contracting or supplies businesses - they're not rich by the standard of mutli-multimillionaires, but they have a bloody nice house and a bloody nice car in the driveway and they probably take an afternoon a week off to play golf. They're doing better than most of the other guys they worked with as electricians or builders 20 years ago, and I don't see that they're really doing anything too clever or sophisticated.   Also, the classic figure of 9/10 businesses failed - ""failed"" here is a very dramatic word, implying that the entrepreneur lost his or her shirt. Often it's not a case that the business lost them money - they pissed away thousands on rent or wages or misplaced marketing - but more that it made a bit of money, but not enough, so they moved on to something else. That something else might be regular employment for some people, but there are *plenty* of entrepreneurs - perhaps some of the greatest and most famous ones - who have gone on from one failure to a much bigger success." You are wildly over-estimating your taxes.  First, remember that your business expenses reduce your gross income.  Second, remember that taxes are progressive, so your flat 35% only applies if you're already making a high salary that pushed you into the higher brackets of US and CA. I think the deeper problems are: 1) you are expecting a super early start-up (with no finished product) to pay you the same as a steady job, including health insurance, and 2) you are expecting Kickstarter to independently fund the venture. The best source of funding is yourself.  If you believe in this venture and in your game design abilities, then pay for most of the costs out of your own savings.  Cut your expenses to the extent you can. You may want to wander over to startups.SE to get more perspective and ideas on your business plan. Because some overhead expenses will be shared (accounting, most salaries, sales etc.) it's far easier to give him an ownership stake in the company because you won't be able to calculate net profit for each component correctly. What I would say to him is, in exchange for $80K and the contract with his building company (make sure it is significant enough to be worth it$ you will give him 35% of the company.   How did you come up with he $1 million in net profit calculation? How much of that is reliant on his business? Apart from what the other posters have said, you could look at some 'good cause'. I'd keep on saving 50% as spending more won't really make you more happy. You already sound happy. What I used to do, when I could, was to donate 10% of my 'profit' per year. I'd compare year start with year end and do the math. Afterwards it was just a matter of choosing. there are non government organizations that will get most money where it's needed. Edit as soon as the business I'm starting becomes profitable, I'll continue my donations. Thanks for the appreciations.