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Personal holding companies

  One thing that scared us when we considered incorporating was the personal holding company rule, which can impose a 70% penalty tax on a corporation that makes too much of its money from royalties or other passive income. It turns out that there's a nice, clean exemption, designed for the use of movie and TV production companies, whose business is really very similar to the software business.

The rule is something like this: if half your income is from the sale of copyrighted material, and you spend 15% on expenses other than salaries, you're not a personal holding company. Our material will certainly be copyrighted, and we'll have no trouble spending 15% on advertising, so we seem to be home free.[Footnote]

Editor: John Walker