As you can tell from the way I phrased the question, from my perspective the answer is almost always yes. Why? Almost all financially successful people have their own business. It might be sales, manufacturing, a service company. It might be high tech, low tech or somewhere in the middle like real estate investing. It might be network marketing or a franchise, but it’s a business they’ve nurtured and built into a success.
Your business is an important part of your financial foundation. The underlying financial reason is that business owners belong to a different tax club than non-business owners. Let’s illustrate: The tax system for non-business owners looks like this:
Earn - Pay Tax = Spend What’s Left
This is the tax system for W-2 wage earners where you earn a salary, and immediately you are taxed on the gross amount. You are left with the after tax dollars to live on. The tax system for business owners looks like this:
Earn - Spend First = Pay Taxes on What‘s Left
In this tax club, you still must earn money firs, but you next get to write off many of your expenses in the form of business tax deductions. Then you only pay taxes on what’s left. This provides a very different element of your financial foundation.
Who shouldn’t have their own business? That’s easy. People who are irresponsible, unmotivated, incredibly lazy or simply don’t want to get ahead financially should not have their own business. Everyone else should. That’s not to say that you are those things if you don’t have your own business, it means that if you fit into any of the above categories, I don’t think that being in business fits your personality.
This is a topic I cover more extensively in my audio program “Incorporating Brilliance – What the rich do to reduce their taxes, protect themselves and increase their privacy”, but I want to discuss it here also because it so fundamental to your business life.
There are five forms or types of business structure: sole proprietorship, general partnership, Corporations – “S” and “C”, Limited Partnerships and Limited Liability Companies (LLC’s). Here are some of the major distinctions between them, especially as they pertain to small business.
A sole proprietorship is the simplest form of business. It is established simply by making the decision to go into business. You don’t need to file any corporate documents (though you may still need a business license) – there are no corporate formalities. Just print up a business card (if you want to) and off you go. It’s simple, but fraught with danger and misjudgment. Here’s why.
Sole proprietorships provide absolutely no asset protect from within or without. That means that if you are sued because of something business related (product liability, for example) you can lose everything.
Now, most people realize that as business people, their investment and business assets are at risk. They are willing to accept that risk as part of the riskeward calculation.
What many people don’t realize is that as sole proprietors, their personal assets are also at risk. That means if you are sued as the result of a business problem, not only can you lose your business, but you can lose your personal assets as well. That’s right, your home, your car, your bank accounts, etc. Virtually everything.
That’s a foolish and unnecessary risk.
And there’s also a great tax reason NOT to have a sole proprietorship. It’s called self-employment tax. I call it the self employment tax penalty. Sole Proprietors are subject to self employment tax of 7% of approximately the first $85,000 in income. That’s about $6,000 per year! The cost of setting up and maintaining a corporation is a fraction of that amount, so it makes no sense. So, never do business as a sole proprietor!
A general partnership is an association of two or more people with the purpose of making a profit. You do not have to have a written agreement to form one, and, much like a sole proprietorship, no formal filing is required. It is also the most risky form of business there is.
That’s because with a general partnership, you are responsible not only for your own mistakes and problems (like a sole proprietorship) you are also responsible for the mistakes and problems of your partner(s). Every time you add a partner, you increase the chance of a problem exponentially.
General Partnerships have a concept called joint and several liabilities. This means that any member of the general partnership can be held liable separately or jointly, along with another partner or partner. The bad guys get to choose who they can enforce a judgment against, based on who has the deepest pockets. As a practical matter, you may have done nothing wrong, yet you are dragged into a lawsuit simply because you have more assets for the bad guys to attach. Once again, I suggest you Never do business as a general partnership.
A corporation is a separate legal entity that is governed by state law. It operates through its bylaws as well as through resolutions written and adopted by its shareholders and directors. It must not function as the alter-ego of its stockholders. Corporate formalities must be maintained in order to keep the corporation a separate legal entity. The state of incorporation has its own statutes, rules and regulations from which a corporation operates. We will examine the difference between “C” corporations and “S” corporations in a later section, as well as ideas about choosing the state of incorporation.
Proper entity structuring is vital to ensure that you are able to take as many tax deductions as possible. Sign up for a free strategy session to be sure your business is set up to save you as much money as possible
Sincerely,
Drew Miles, The Tax Saving Attorney
For more information about tax deductions, please visit the Free Tax Strategies main page.