Lifestyle
Publishing's
Home Business Course
Lesson 2
Welcome to part 2 of our home business mini-course. Today, we are going to discuss the exciting potential benefits of owning your own successful home-based business. But first, we will briefly present the three major types of business structures.
3 Types of Business Structures:
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There are basically 3 types of business entities or structures: sole proprietorships, partnerships, and corporations. A sole proprietorship consists of a single owner where essentially the owner “is” the business. If the sole proprietor dies, so does the business. This form is the easiest types of business for tax-filing, but it carries unlimited liability to the owner. All income and expenses flow through to the owner’s personal tax return via the one-page Schedule C attached to Form 1040.
A partnership is just like a sole proprietorship except there is more than one owner. Each owner carries unlimited liability, and the taxes are a little more difficult. All income and expenses flow through to each partner’s personal tax return (pro-rated by percentage of ownership). Typically, a prior formal agreement dictates how a partner’s interest is sold or dissolved when a partner dies. Partnerships are the riskiest type of business structure because each partner is fully liable for the debts, promises, and negligence of the other if the other acts in behalf of the company. Incidentally, if you just start working with someone else without formally setting up any other type of business, you are automatically construed as starting a partnership.
The final type of business is the corporation. A corporation is an independent legal entity that survives even if all the principals of the corporation die. A corporation enjoys the best overall tax advantages with many more powerful benefits, but it has the most complicated tax filing responsibilities. Since the corporation is a separate legal entity, it does not pass liability on to the principals or shareholders. If the company is sued, the plaintiff can not go after the shareholders, and he can’t go after the principals unless there was gross negligence involved. A variation of the corporation is an S corporation which has all the liability protection of a normal C corporation, but the income and expenses pass through to the share-holders personal tax returns like a partnership.
Generally, if you are planning to start your own business, the best type in the beginning is a sole proprietorship unless you feel there is undue liability in which case you should consider a $1Million Umbrella Liability insurance policy (costs ~$150 per year). You can start your sole proprietorship simply by “doing business” and filing a schedule C on your personal tax return at the end of the year. As your business grows more profitable, you will probably want to convert to a corporation (or a Limited Liability Company which is not discussed here) to limit your liability and to realize some tremendous financial benefits.
Benefits of Business Ownership:
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As you saw in lesson #1, there are some tremendous benefits to owning your own business. In this lesson, we will discuss some of these benefits in more detail.
The most obvious benefit is “more money”! There are actually two ways you get this benefit. One is simply by increasing your income. The other is by paying less taxes. When you have your own business, you will make investment in supplies, materials, services, equipment, utilities, and other types of “expenses”. As a result of your investment, you will eventually make sales or “revenues”. The difference between your revenue income and your expenses is your profit … which you want to be greater than zero as soon as possible. The question is, “How much money can your business make?”
There are a lot of so-called “business opportunities” available where the ads say, “You can make $1,000 a week for a one-time investment of only $39.95”. All you have to do is send in your money, and then they will tell you what the business is. Most of these offers ARE making money … but only for the person selling the “business opportunity.” Any legitimate business, with very few exceptions, is going to cost you time and money to get it going AND will provide you a full disclosure of what the business is. However, the important issues are how much money will it cost you, how much profit can you make and how soon.
Another tremendous benefit of owning your own business is
“freedom”. Freedom in terms of
freeing up your time to do what you want when you want and in terms of
independence. By independence, I
mean you are no longer dependent on your employer;
you can’t be fired or laid off; you
don’t have to put up a facade or beg to get a raise or promotion.
In your own business, if you pick the right one for you, you will have
more free time than you’ve had since h
Recognize, however, in many businesses, you easily lose the potential for “freedom” from the very first day. If you choose the wrong business, you can end up working for the business instead of the business working for you. If the business you are considering requires you to work 12 hour days Monday through Sunday, watch your employees like a hawk, or is highly susceptible to shifts in the economy, you may be more of a slave to your business than you are to your current employer.
The final benefit we want to discuss is “tax deductions”. If you are an employee, you pay taxes “before” you get your money; you pay the Government first, and then you get what’s left. If you make more money, the Government gets their cut first! You have to figure out how to pay for all your expenses after the Government gets its cut. If you pay for the “right” expenses (e.g., certain types of investments, mortgage interest, etc.), you can get some of “your money” back, but you have to “justify” it on your tax returns!
If you are a business owner (even if you are an employee and have a part-time business) and especially if you own a corporation, your business gets paid first, and the Government gets paid last! What do I mean by that? Well, first for a sole proprietorship or partnership, any expenses you pay that meet the needs of your business (even if you were already paying for them before you started a business) become tax-deductible.
For example, if you have a car you use to go back and forth to your job, the Government lets you pay for the car, maintenance & repairs, gas, tires, etc. with your money “after” you pay the Government. If you are a sole proprietorship business owner and you use your car for your business, you can deduct the price of the car (through depreciation), the maintenance & repairs, the gas, the tires, etc. This can result in a tax reduction of thousands of dollars every year. If you own a corporation that owns the car, the corporation can buy and maintain the car and then pay taxes on any money left over; they NEVER pay taxes on the money used to pay for their expenses.
Another example might be if you have a network marketing
company which requires you to meet a $100 worth of business volume per month to
qualify for your commissions. Since
this is a business requirement, you can deduct the $100 worth of purchases you
make every month to ensure your qualify for commissions.
If you are in the 35% tax bracket (e.g., 28% federal and 7% state), your
$100
If you are an employee and a business owner, you can deduct all things pro-rated to the percent used for your business. If you own a corporation, the corporation pays all these car expenses, subtracts the expenses from the revenue income, and only pays taxes to the Government based on the remaining profit. In other words, a corporation gets to pay his expenses and “then” pay the Government based on what’s left.
However, you’re probably not ready for a corporation, so let’s take a few more brief examples assuming you started a part-time home business. Let’s assume you like surfing the Internet using your own computer and telephone. For this favorite pastime, you had to earn your money, pay the Government, then buy your computer and all the peripherals that go with it, buy your software, pay up to $22 per month for Internet access, buy books to learn how to use the computer and where to go on the Internet, and pay your monthly phone bill so you can use your modem to get on the Internet.
Now, let’s assume you started a business that requires you to access the Internet. Even if you already bought your computer, printer, modem, removable disks, etc., you can now deduct all of this on your taxes (using “depreciation” again). But that’s not all … you also get to deduct any software used for your business, your Internet access fees, books you purchase for your business, website-hosting fees, fax service, etc. You also get to deduct your telephone and voicemail costs (to the extent used for business), travel costs associated with your business, any business start-up costs, any business operating costs, and on and on and on. In other words, even if it takes you 3 years to turn a profit (as is the case for most businesses), you can still profit the very first year just by greatly reducing your taxes … even on the same stuff you are already buying!
Incidentally, the business available at http://www.LifestylePublishing.com/MSPWP.htm
not only saves you money in taxes, it also shows you more than 770 ways you can
slash your current monthly bills, AND includes more than a dozen ways to make
money. You are virtually guaranteed
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Conclusion:
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As you can see, there are some tremendous benefits to starting your own home business even if you don’t make extra money right away. In tomorrow’s lesson, we will explore some of the typical challenges of starting a new business and how you can avoid them.
Additional Note:
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Please note, whereas this mini-course is providing educational information to you, neither I nor my company is in the business of providing legal or tax advice. Nothing you see in this course or on referenced websites should be construed as legal or tax advice. If you need such advice, you should contact an appropriate competent professional.
FREE BONUS:
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You
can download a free ebook that shows how you can actually get paid the very
first month for
starting and running your own business. Just
visit this websites: http://www.LifestylePublishing.com/MSPWP.htm
Dr. R. Bryan Stoker
President, Lifestyle Publishing
http://www.LifestylePublishing.com/index.htm