The Case for Business Ownership

“John, I wanted to make one more case for business ownership and I know a lot of the tax information I provided is just that: making a case to go into business and you may have already made up your mind to do so. So perhaps it is a moot point but I wanted to make sure you knew the right reasons to make the leap.

“A business provides a great tax strategy that you cannot get anywhere else. A person who earns a paycheck has very tools to manage taxes while a business owner has many. And remember, taxes are your number one expense.

“One more point I wanted to make regarding the why. If you have a job John, and you work it diligently for 20 years, at the end of that 20 years how much can you sell your job for? Better yet, who has control over when your job is sold and bought? The employer, right - you're either hired or fired. What do you walk away with at the end of the job? A good resume and experience perhaps.

“After 20 years, how much can you sell your job for?

“If you own a business, how much can you sell your business for? Let me tell you. If it involves a building that your business has purchased for you over the years you can perform a comparable market analysis to determine the value.

“If you are selling a cash flowing business then the computation used is the earnings approach ... the accounting net profit plus excess owner's salary, plus depreciation and amortization expense, plus discretionary and extraordinary one-time expenses divided by a capitalization rate. The equivalent to the required return on investment on earnings which can range anywhere from 20% to 40% for small business.

“After 20 years, how much can you sell your business for?

“Now, there are no guarantees with business. You could lose your shirt, end up in worse shape than if you had just held your day job and have nothing to sell at the end. But if you are in the business of building assets, and build the business correctly and purchase the correct type of assets within the business such as a building, you will have something worth value at the end.

“Also John, where does one receive favorable tax treatment - as an employee or business owner? We have covered this already but again, Robert Kiyosaki author of Rich Dad, Poor Dad provides us with this simple quadrant:

Figure 5-5

“On the left side we have Employees and Specialists or Small Business owner's. On the right we have Business Owner's and Investors. To get favorable tax treatment and to accelerate your wealth building capabilities, you want to be on the right side of the quadrant in the B's and I's. An employee is taxed off the top and then spends what is left over. A business owner receives an income, spends and is then taxed on what is left over.