8 – YOUR OWN BUSINESS – the American Dream

Certainly one the greatest wealth makers of all time. No one got rich working for someone else. Nothing could be truer, except in Silicon Valley. We will talk about that later.

Many people dream about having their small business, some dream of having a large mult-million dollar business. Well they all grow from the same place, an idea and a lot of hard work. A business is half job and half investing. Your not getting paid for the countless hours, the money you put in it. You are taking a risk that the business will work out.

It is like the kind of the guy who buys some land, clears it, builds a house, then later rents it out to collect the rent. He works in advance and risks capital to achieve what he wanted, a future income stream. I am not saying that owning your business is bad, on the contrary I think it is the best thing someone should do. Let’s however separate investment, risk, income and profit. Let’s all also see how the IRS looks at it.

So let me tell you about my first business. When I was going to start the university those hot dog carts on the street corners became popular. A friend was working for a guy that had three. So I rented one from his supplier for $500 a month, for which I gave a deposit of two months rent, which was what it was worth. I bought all my supplies and my parents lent me a freezer in the garage, and my dad gave me $800 to buy an old car.

I had it out a couple month and I was making anywhere from $100 to $200 a day. Not bad for an 17 year old kid that was going to college next month. I figured that could have someone run the cart, and I would set it up in the morning and pick it up in evenings. Several problems, I was kind of doing it illegal, no licenses, and parking on the side of road going to the beach so police were doing there best to get me out all the time. Finally landed in a good spot in the airport next to were there were building a control tower. The business was set and I was making profit $200 to $300 a day. My dream of financial independence almost ended up in my death, being runned over by a car, he of course also destroy hot dog cart. Well after 6 months in the hospital, there was no hot dog cart, no car and thankfully I was able to walk away. The hospital bill, cart and everything else was close to $100,000 and I lost being able to get into the University with a partial scholarship I had earned.

But I learned my first $100,000 lesson, just because you have a business a planned out doesn’t mean it is going work that way. Later I looked into getting back into it, it was too late, everyone was into it.  This story had all the elements of a business tragedy. It had hopes, aspiration, investors, workers, it also had inexperience, hubris, unknown forces and a near death experience.

If you are looking to start a new business consider the risks, your life and what would do if it failed. If you have a business what do you need to do to protect it from the unexpected, even death. I learned that lesson really young, death can happen to anyone.

So why do I mention this, well most people are mistaken what a business really is. I call it a business if you can take a week or two of vacation off and the business still runs without you. If you own a restaurant and you are their since 6 in the morning until close every night that it is open. Do you own a restaurant or does it own you. If you own a computer service business, and you do all the work and sales, do you own a business or do you work for one.

What about you bought a delivery truck and a bunch of potato chips that put into machines, are you making money on your capital or are you basically being paid to drive the potato chips around. I am not saying these are bad things, just understand what you are doing. The Potato chip guy, bought a truck for $20,000, and a franchise, and $5000 in chips. And then he sells $2,000 a month of these chips. He is not making money, he will be investing more money into this venture in a couple years. Because his overhead is killing him, and the return on the chips is not enough.

So when I say invest in yourself, I don’t mean go buy more chips.

So let me give you some examples of businesses that do work so you see the difference and don’t say I am anti-business. The Trades offer a tremendous opportunity for someone to become rich. I know several very wealthy plumbers, electricians and Air conditioning guys. And they all have one thing in common they learned to multiply.

Let’s take a plumber for instance. He started with one van, working out of his house. He is making decent money because he is charging over $50 an hour, and when you need him on a Saturday night you will pay more. So if only works 10 hours a week, he is making more than most hourly workers. At 20 hours a week he is making as much as a first year attorney. At 35 hours he is making more than some doctors. So then he gets another truck, pays him $20 an hour, keeping the difference. Eventually he gets a third, a fourth, starts spending more on advertising. Soon, or really after several years, he is a millionaire.

He did three things correctly, via a skill makes more than a regular wage, multiples it by revenue sharing, and expands naturally as the business grow with no debt. He also did another thing correctly, he looked for ways to shelter some of that money from the IRS via the tax laws.

So there you have our millionaire plumber, but he has just one problem, in a few years, he is a little older, had more than his fair share of fast food, heart burn, he has beautiful house and wife, three kids, and really very little money if he where to get sick. If he became disable he would die poor, and they would have to sell the house. Or what if one of his drivers in his truck killed someone. Even though he has vehicle insurance with over a million dollars, they can still go after his retirement home, his boat and even put a lien on his house.

Even worse, it looks like the lied a little to the IRS and they want him to pay up, plus penalties. He is still living paycheck to paycheck. Why? He could not separate his business from his personal affairs.

He forgot the number one rule in business, pay yourself first. This is a hard concept to understand, it is an even harder concept to do. Set yourself a salary, whatever the minimum you need to live, then take 25% of the money left over and save it. Then take the other 50% and keep it for next month.

Now if you have nothing left over from your minimum, well sorry I can’t help with that in this chapter.

The 25% you took out, you go hide it, like it doesn’t exist. I am not telling you to hide it from the IRS, I am telling to hide it from yourself. Take from the top of the business income. The other 50% don’t worry you will need it to day taxes, misc expenses etc…

If these numbers don’t work for you, try your own your numbers. The trick is try to set aside a chunk of money every month outside of the business. If the business fails for some unexpected catastrophe, you have some money saved up.

I know so many of them because I have work with so many small business people, they truly are amazing. I am going to give you a few more small business stories.  After college I work in a newspaper, with a guy that had just recently come from Cuba, he spoke no English, had three kids and a wife. He made enough in the newspaper cleaning to pay for his rent and food I suppose. On the weekends he would go to gas stations an offer to run a car wash in their parking lot. He would bring a bucket, water, soap, sponge and they would provide space, and water. He would give them 25% back as rent. He open one, then two with his 16 year son, then another with his wife and other son. Soon he had two more people and two more locations. He got a job at night working at a gas station. He surprised all of us one day at work when he mentioned he was buying a gas station, and that he was quitting his day job.

All this from a guy who did not speak or read any English, with little education and no idea how our financial structured work. When he died about 10 years later at 60 from a heart attack his family had well over a million dollars in assets. He left enough money under the mattress (actually a life insurance policy) to keep them going. So what did we learn from him, work hard, multiply, don’t sleep, save, don’t spend and most important don’t die.

Small business owners can build large wealth over time, but it is not as safe as some people think. Death and taxes are always around the corner. In today’s world of money hungry government agencies it is not just the IRS you have to worry about but every local municipal, state agency around. Go open a new business and you will be amazed at all the new permits, fees and fines they want from you. The only way to avoid some of them is to have a smaller footprint. Don’t cross into their space and avoid paying their tolls.

Being a small business owners means understanding accounting, tax laws, investments. Just like with the stockbroker, you just can’t assume they being honest or well intentioned with you. Ultimately, you are going to pay the bill whether their advice was right or wrong. Let me repeat this, it doesn’t matter what they said, you are paying for their mistakes so understand them, don’t think you can delegate your responsibility over to them, or it will be so costly to you.

Example, Joe Robbie founder/Owner of Miami Dolphins, and builder of Joe Robbie stadium. His family had to sell everything on his death to pay their probate tax bill of over $100 million dollars. IRS was valuating company differently than what his tax assessor had promised. The IRS wins

Example, actor Welsey Snipes, his advisers said he didn’t have to pay income on movies he made outside USA. IRS said pay or go to jail. He refused, and went to jail until an agreement was made and he paid. IRS wins.

Death and Taxes, you can’t win….Until now.

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