4 lessons I learnt the hard way setting up and operating a US-based software holding company
My hold co will generate about $70k this year but getting to this point meant stepping on some landmiles.
Hey friends,
Back in 2022 I made the decision to set up a holding company that I would use to acquire SaaS apps. Since November 2022 I’ve completed 4 deals for the acquisition of 6 micro SaaS apps. This year the portfolio will do about $70k in revenue.
In this post I’m going to go into detail on 4 lessons I learnt the hard way setting up and operating my US-based software holding company.
The 4 lessons:
Don’t cut corners when it comes to taxes
Admin costs are higher than you expect
Keep the portfolio small
When a deal goes wrong, it costs you more than you think
Firstly, some background
Before I can dive into the lessons, I first need to share some important points.
Back in 2017 when I left my 9-to-5 and decided to “go on my own”, I changed my tax status in Israel from employee to “osek hurshe” or “contractor / freelancer”. If you’re not aware, I’m originally from South Africa but immigrated with my family to Israel in 2004.
From 2017 to 2022 I worked as a freelancer / agency owner while operating without an actual business entity. This wasn’t very smart but since I had a very small team and only a handful of clients at any one time, I didn’t think it was a big deal. I was also hesitant to set up an Israeli business entity considering I wasn’t physically in the country, and basically all of my business was outside of the country.
When I decided to enter the acquisition game I knew this setup wasn’t good enough and things needed to change.
There are two main reasons I needed a business entity if I was going to start acquiring SaaS.
The first reason is when you acquire SaaS you are acquiring assets that previously belonged to a business. The ownership of those assets need to move from one business entity to another. Now even though it is possible for an individual to own business assets, it’s not a smart idea.
If you study how the rich operate, you’ll learn that they don’t personally own anything. Their businesses (or trusts) own everything.
The main reason for having a business owning your assets is liability protection. If a customer of mine sues me for whatever reason, I’m personally protected since all my assets are owned by my business entities. There are many other benefits from tax benefits, to easier access to capital, etc.
The second reason I needed a business entity is because I knew that most SaaS use Stripe for their subscription management and payment processing. Stripe, and basically all payment processors needs you to list your company details in order to do business with you.
The decision to go with a holding co and set up everything in the USA
Part of my decision to enter the acquisition game was to apply the same playbook as Andrew Wilkinson. I shared Andrew’s background and how he inspired me in an earlier post on this substack, The Holding Company.
I realized that if I was going to play the acquisition game, that I needed a holding company that would be my main business entity. This holding company would end up owning everything in my business empire.
After some research, I learnt that the correct entity type for my holding company would be a C-corporation. A C-corp is a popular business entity type and would give me the option down the road of raising capital by bringing on additional share holders. A C-corp can also own other business entities outright and has all the legal protections you’d want from a business entity.
I decided to set up my C-corp in the USA for the following reasons:
I’m bullish on the USA: Even though there is a lot of discussion around the weakening of the US dollar, I believe that the USA will continue to be the place where you’d want to do business in the coming years. The US is such an outlier in the global economy that if there is financial collapse in the US, every country will be massively impacted.
Access to the US banking and financial system: By having my business entities based in the USA, I get access to the US banking system. The number of quality service providers in the financial industry in the US is unmatched anywhere else. Access to capital is an important consideration, especially since I plan on doing larger deals down the road. I use Wise and Mercury for my online banking and couldn’t be happier.
Having a US entity is better for fundraising: There is a reason most successful tech startups end up setting up business entities in the USA. The reason is that the US has a very strong VC and angel investor ecosystem. These investors prefer to invest money in companies that have their business entities registered in the USA.
Stripe works with US-based companies: Unfortunately Stripe doesn’t operate in Israel so I knew I needed a business entity registered outside of Israel. Since the US is the biggest tech market in the world, I knew that having a US-based entity that I could work with all available service providers.
At the end of the day I decided to use Stripe Atlas to set up a Delaware-based C-corp for my holding company, Hawkeye Ventures, Inc.
This post is going to focus on the holding company side of things but I should note that a few months after creating Hawkeye Ventures, Inc, I also created a new entity for my agency, projectBI.
Lesson #1 - Don’t cut corners when it comes to taxes
You know that feeling when you get really bad news and the bottom of your stomach feels like its turning inside out?
That is how I felt when I read in a letter sent to me by the IRS that I owned $25,000 in penalties for not declaring that my business was run by a foreigner (or something along those lines).
When I first created my holding company I knew that I needed to pay corporate tax and that it was a bit of a nightmare. The mistake I made was not taking this area of business serious enough and tried to cut corners instead of working with experts.
Since I was new to this game, and I’m not an American, I had a lot to learn about corporate tax, and did as much research as I could.
During my research I came across a company called Taxfyle which would connect you to a CPA that would take care of certain tasks on your behalf. I used Taxfyle for a number of projects including submitting my taxes but this was a mistake. In short, Taxfyle is a horrible service and I would recommend you avoid it at all costs.
I spent thousands of dollars with Taxfyle and critical tasks weren’t handled correctly. This led to getting more than one penalty from the IRS.
I ended up resolving all these issues and even got the $25k penalty from the IRS dismissed by working with an established tax advisory firm. I was lucky they took me on as a client since my business is still quite small.
My advice to you is to connect with an experienced CPA or tax advisory firm from day one. The cost of working with tax experts will be higher than you’re comfortable with but trust me, its worth it.
Lesson #2 - Admin costs are higher than you expect
I was very surprised at how high the administrative costs are for running a US-based business. Now of course everything is relative and a lot of the admin costs are fixed, but I still think you’d be surprised at how these costs add up.
Below is roughly what I spend each month in admin costs for Hawkeye Ventures, Inc: