Solo Founder without any salary

[SSDZ]

Bootstrapped Startup Solo Founder & CEO - How many years can they legally operate without receiving any salary as the CEO/Founder and the only person in the company (no payroll, as no profits)? In fact she is spending her savings for company every year.

[Mark_5]

The IRS has many factors in considering if there is a business with actual deductions or a hobby with nondeductible losses. Some of the factors are

• Is the activity carried out in a business-like manner with complete and accurate books and records.
• The time and effort showing intent to make it profitable.
• The taxpayer depends on income from the activity for their livelihood.
• If there are personal motives for carrying out the activity.
• If the taxpayer has enough income from other activities to fund the operation.
• Losses are out of control or due to the type of business.
• There have been methods changed to improve profitability chances.
• There is the expectation of profit in future years.

All facts and issues need to be considered.  With start up restaurant there would be expectation of profit seen in the first couple of years but a business raising racing horses could take close to 20 years.  So it is not only the questions but also what might be considered comparable for the activity.  Not showing a profit for a business tax return can raise questions and increase the risk to examination. 

[SSDZ]

Not sure you answered the question. 

The business has revenue, just no (or very little profit, which gets reinvested in the business).  It would be great if the focus of the answer is on how to thing about operating such a business if the founder is willing to keep spending from their savings.  In other words, does not giving salary to the only person in the business, the founder/CEO pose any legal problems (if the founder wants to keep going for few years)?

[KristinaK]

The IRS requires that a reasonable salary is paid for services performed. Now, sometimes the company doesn't have cash to pay the owners. In situations like that, once you do have funds to pay salaries, you would have to catch up for all the missed years.

As an example, let's say your reasonable salary is $60,000. Assume that in the year 2026, you start drawing funds from the company. You will have to run all the draws through payroll, up to the amount your reasonable salary is met for all the missed years. 2024, 2025, 2026. Up to $180,000. 

One thing to remember, if you are paying yourself indirectly through paying personal expenses with company funds, that is considered a salary and needs to be processed through payroll as well.