Small Business Reality Check: The Myth of ‘Double Taxation’

Being financially smart today means more than simply living within your means, paying your bills on time, and setting money aside for retirement — it requires some foresight into the changing nature of the global economy. After all, the primary reason personal-finance education is so important today is that we can no longer count on big, paternalistic corporations to take care of us from cradle to grave. We each, individually, are responsible for our own long-term financial well being, and this fact has led many Americans to start their own businesses.

It’s a well known fact that most small businesses fail. But statistics citing a “failure rate” as high as 90% can be a little misleading. After all, if you start a business, run it successfully for four years, and then decide to move on to something new, was your business really a “failure”? And besides, innovations like eBay and Google AdWords have made running mini-businesses for supplemental income more practical (and lucrative) than ever. Just as the big businesses have gotten smaller, small businesses have become micro-businesses, meaning the financial commitment required to get them running has been reduced to nearly zero, and therefore, the risk of “failure” has been greatly diminished.

But this doesn’t mean that planning isn’t important. In fact, the more prepared you are with your business (i.e. writing a business plan), the greater the chances are for your ultimate success. But if you just want to start selling on eBay or build affiliate Web sites powered by AdWords, and you don’t plan on quitting your full-time job, then the worst thing you can suffer from is “analysis paralysis” — just get started and learn as you go: What do you have to lose?

In short order, however, you will want to make the decision to incorporate or use another”good” business entity such as an LLC or limited partnership. The “bad” entities include sole proprietorships and general partnerships. There are many resources outlining the benefits of incorporating, most especially the Rich Dad series of books, but for this article, we will just briefly explore the tax implications, which are often overlooked and/or misunderstood.

First, it’s important to note that when you incorporate, your business becomes legally distinct from you. It has its own equivalent of a Social Security Number (an EIN; Employer Identification Number) and it has to file its own separate tax return. The current IRS code taxes corporate profits at 15% for the first $50,000, and also charges a 15% (maximum rate, based on the recipient’s income) for dividends. In other words, if you wanted to take $50,000 out of your business, it would be taxed twice — once as profit, and a second time as a dividend. It is this double taxation that leads many people to avoid incorporating.

But this view leaves out the most important tax of all for most moderate-income people: FICA (Social Security and Medicare). Let’s say you earn $40,000 working a full-time job, and earn another $20,000 through your Internet business. If you weren’t incorporated (i.e. you ran your business as a sole proprietorship), the effective income tax rate on your $20,000 in business profits would be 24.7%. On top of this, you would pay 15.3% in FICA taxes — 7.65% as the employer, and 7.65% as the employee. Therefore, your total tax rate would be 40%!

By contrast, if your business profits were sheltered under a corporation, you would pay a tax rate of just 15%. This would leave you with $17,000 after taxes to pay yourself a dividend, which would be taxed at 15% for another $2,550 in taxes. This would total $5,550 in taxes, or an effective tax rate of just 27.7% — instead of the 40% a sole proprietor would pay.

What about FICA? It isn’t charged on corporate profits, nor dividends. So in this case, the “double taxation” of corporate profits and dividends is 12.3 percentage points less (over 30% less in “real terms”).

Of course, this all depends on your situation — if you earn more or less income at your job or with your business, your results may vary. But the main message is: Get informed! In this particular case, incorporation could have saved the business owner nearly $2,500 in a single year — and these kind of savings are what can help small businesses be in the 10% of companies that succeed.

About SMD

• A documentation of my exploration & understanding of the principles & teachings of Rich Dad author Robert Kiyosaki.
• An attempt to create an online business that can generate money in a way that doesn’t directly rely on specific units of work - building a pipeline, rather than carrying buckets. The idea is that at first, when the site is young, each article [unit of work] produces only a minimal return. But as the site grows [the number of incoming links, search engine indexed pages and bookmarks] then the ad revenue generated from each unit of work will also grow.
• A presentation of the lessons that I learned from my past businesses, real estate ventures and stock market investments.
• A growing collection of information that can be used as a guide for the process of transforming your way of working and expedite your exit from the Rat Race [working for money].
• The first piece & the cornerstone of a complete web publishing company.
• The creation of a Blogging style application written in ASP.NET. This will be the platform for many content-rich sites, possibly with an integrated administration.

Custom Amazon Associate Store $99

Sometimes being a click happy and easily distracted web surfer pays off. I was over at 43 Folders a couple days ago looking for productivity tips and I noticed the little store link waaaaay down at the bottom of their home page. If you click into the store at first you are presented with a directory of topics…nothing too special, but if you click into one of the categories you come to a pretty nifty looking store, that has cool features like a shopping cart, “live” prices and sales and product reviews. Are you thinking this sounds a lot like Amazon? Well it is!

It’s the Associate-O-Matic instant Amazon store for your website. I spent last night installing the Smart Money Shop [update: I've closed the shop] and, I’ve got a ways to go with customization and tweaking, but overall I’m pretty happy with it.

Here are the features that I’ve discovered so far:

• Free and Paid versions
• Use for one or many sites
• Configurable to match your site’s look and feel

As far as ease of install it gets about 6.5 out of 10. You’ll need to be a slight techie to set permissions on the files when you upload them to your server. They do have good instructions on their site [ Associate-O-Matic ].

The part I really like is that it allows you to customize the set of products that you pull from Amazon. So for example I created a Rich Dad section [natch] by choosing Amazon’s book category and sending the keyword “Rich Dad”. I could create a Business Books category using the same method. One of the things that I don’t like about the way 43 Folders has it set up is that have the whole Amazon catalogue in their store, which I personally found confusing. I think products that are related to the site topics are better for the visitor’s experience.

The one you see running on my site is the full version, which they allow you to test drive for free for 30 days. At that time I will need to pay the $99 dollars to buy a license or get downgraded to the free version. The free version takes 1/10 of your sales and puts them under Associate-O-Matic’s Amazon ID, so probably better to pay for the full version.

Another huge bonus with the paid version is that the license allows you to install it on as many sites as want as long as the Amazon ID associated with the installs belongs to you. So if you have 5 sites…that’s $20 per site and you can have a customized store with a related product set for each site.

A great idea, that’s been well executed and I’m looking forward to seeing how it works out.

[update: I've closed the shop]

I’m Fine With Being Rich and Clueless

It’s been a tough day to be a Rich Dad loving geek!

First, I got this email [see below] then, while checking my logs I found this comment on a story which says some guy removed me from his blogroll because I called myself a “Rich Dad loving geek”…uh, why did he add my site in the first place I wonder, since I’ve always used that tag line.

I mean I don’t post very often, I don’t really know anything, I’m not very original and my site’s design is kind of stale…all these would be good reasons to de-blogroll me, but because I’m a fan of Robert Kiyosaki…that seems kind of silly to me.

I don’t really feel any need to defend Robert Kiyosaki…I’m sure he’s heard it all before. As for me, all I can say is that I deeply appreciate what I learned from his books. I understand what his is trying to teach and I have applied it with great success to my financial and business affairs.

I also understand that his teachings are not for everyone. Most people are not willing to take full responsibility for their place in life because that would be, in most cases, too uncomfortable. From Robert Kiyosaki’s words I have been able to come to an understanding of the patterns in my mind that have kept me from creating wealth and enjoying money in my life.

I’ve seen my financial life transform dramatically as a result of the work I’ve done to apply Rich Dad’s ideas. Personally, I will read any book and learn from it. I believe there is at least some truth in everything and having a mind that focuses on finding and applying that grain of truth, is far more important to me than anything else.

It is a person’s way that has the real value in life and criticizing and ridiculing is just a waste to me. If you really find someone’s words worthy of attacking and fighting against, then a much more productive response would be to examine why those thoughts are offensive to you. Thoughts and ideas are completely neutral, it is us that make them “worthy” or “worthless” and it is nothing more than the orientation of one’s heart that turns cluelessness into riches, or riches into misery.

Reader Email:

I came across your site while searching for more information on Robert Kiyosaki.  You seem to be very passionate about  his writings, etc.  I read his Rich Dad book and found it to be an incredible waste of my time.  It was drivel, and I’m not alone in that fact.  I suggest you do a google search on Robert Kiyosaki and John T. Reed to see the latter’s page on Mr. Kiyosaki.

About me; I’m not Rich, but I am happy.  Like Mr. Kiyosaki, I’m a merchant-marine academy grad, and also work for XXXXXXX.  Unlike him, I don’t measure my wealth in dollars and cents.  I’m starting to believe that Robert Kiyosaki makes his money, maybe all of his money, by  convincing you that his techniques can make you rich, whatever that is.

But, I like your site and it sounds like you are someone  who is pursuing his dreams.  The world needs more of that.  But I think there’s got to be more to it than Rolex’s, titanium drivers and inside information.  I’m not saying turn to god or anything like that… but trust me that more money does not automatically equal more happiness.  After making some of the former, I’m choosing to find more of the latter.  Hope you do as well.

Good luck.

My reply:
Hi XXXX,

Thanks for the comments; it’s always nice to hear someone else’s opinion.

To me I’ve never looked to money for happiness. Happiness comes from a much deeper place than money could possible affect. Money is only good for surface comfort, which in my mind makes its pursuit very worthwhile.

I’ve never heard Robert Kiyosaki peddling happiness from money, but I have learned a lot from his books and my wealth has gone up as a result of applying his teachings. If you or others think his teachings are a waste of time, that’s perfectly fine with me.

A friend of mine said something really wise:
“Money is really worth making, but it is not worth living for.”

Take care,

Jon

Smart Money Daily Turns One!

Smart Money Daily went live 1 year ago today. That was a fast year! I figured it would be fun to think back to last January and to remember what I was thinking and feeling as I launched this site…

Change of Direction

I was, of course, full of Rich Dad revelations and this site was the first action that I took in pursuit of that mythical beast: passive income. My initial intention was to build an application, a blogging platform to be specific, and then to sell it or leverage that into some form of business.

This site was intended to document that process and also allow me to perfect my product as I went. It is fairly typical of my style to want to learn by doing, rather than by researching in advance. Sometimes this is a good approach and sometimes, well, not so much.

Even though I loved building this site and it is satisfying to have coded it myself, I soon realized that the there was a lot more potential value in creating content than in writing a new blogging platform. After battling through code bugs, lack of styling options, lost work, hackers and comment spam attacks, I really wish that I had done a bit more up front research and started out with Wordpress. I have had the thought of shutting this site down or taking the time to migrate it to Wordpress…which is a lot of effort, but probably doable, but would result in a temporary loss of most of my search engine traffic.

Finally a Writer?

Another interesting aspect of the past year for me to reflect on is writing. Many years ago, I actually spent a lot of energy trying to be a Writer. Even though I did have one short journal style piece published in a literary journal [for you young-ins, this was back in the pre-internet days when writers spent countless hours submitting stories to magazines and journals following the near impossible dream of getting published] mostly I just filled notebooks with angst-ridden scribbles.

Fast forward 20 years and now thanks to the web and blogs, everyone is making their angst-ridden scribbles public, and a lot of people are really enjoying reading them. As I started out I remember how liberating it was to write into a public notebook, but after a couple weeks I remember checking my stats [I'm a self-confessed stats-o-holic] and being shaken by the realization that there were a few people reading my site on a regular basis. I actually remember experiencing performance anxiety when sitting down to write for a couple weeks after that; worried that what I was saying was not going to be worthwhile. I think one of the things that I had to learn as a blogger was that it’s okay to write stuff that your readers might not get, or like, or agree with.

Blogging isn’t Passive Income

Another important realization came when I saw that what makes a blog successful is the blogger. As I educated myself in business and financial principles I began to understand that a blog is about the writer, and this by definition, is not a good business model. It is not scalable and, blogging on its own, is somewhat tied to an exchange of hours for money. Given this realization, despite that I found blogging a surprisingly addictive and fulfilling activity, I knew that I needed to look elsewhere to reach my goal of getting rich.

It is a systematic approach that has the best chance of making you serious money and a system can not be tied to an individual. In a system the parts, including the human ones, are replaceable, so I felt that blogging, at least my personal approach to it at that time, was not going to be the holy grail for me.

…

Full Circle

That brings my little ramble up to the present. Smart Money Daily is a ‘for fun’ site and it not top priority on the road to riches. I admit though, I often dream of what it could become if I applied myself to it fully. I have a promise that I’ve made to myself, in the back of my head, that once I have made enough money to resign from the aggressive pursuit of wealth, that I will pull all the ads and affiliate links off of this site and dedicate myself to pure writing about the financial matters that fascinate me so thoroughly.

One Year’s Effort

For myself and the other curious folks I thought dig up a few ‘one year’ stats:

Total Number of Stories: 205
I should have called it Smart Money Every Second Day
Total Comments: 215
I’m not the most social person in the world, so it doesn’t surprise me that this would also show up on my site. I do like comments though, even though I don’t often reply or participate.
Number of Days with over 1000 page views: 3
All a result of my participation in the Carnival of Personal Finance.
Total Pages Served: ~70,000
This stat has me and all robot traffic filtered out. It is actual pages send to a human visitor.
Total AdSense Earnings [this site only]: $570
The majority of it coming in the last 3 months…since escaping the Google sandbox.
Other Earnings [affiliate-this site only]: $50
Number of Backlinks: 4,340
According to Yahoo, who is generally considered to be the most accurate
Biggest Influence: Darren at ProBlogger
I even bought the t-shirt, but I’m still to shy too post a picture, despite the fact that Darin promised a link to anyone who sent him a shot of them in their ProBlogger shirt.
Feedburner RSS Feed Stats:
a nice progression of subscribers

Some Smart Money Daily stories that I consider hidden gems

Anything That Can Be Measured, Can Be Improved - a look at the many forms of statistics available to webmasters.
“Coined the Term ‘Weblog’ - Never Made a Dime” - a look at Jorn Barger who invented the term Weblog.
How Much Money is Enough? - I realized that my idea of a lot of money was always one step ahead of where I was at.
Obligatory Gas Price Story - Musings on my local gas station’s bad business planning and the price of gas.
I’m Not Very Good at Being Rich [Yet!] - Where I remember how to enjoy myself on vacation.
Succeed By Embracing Reality - The story of two McDonalds franchises in South Africa.

Overall it’s been a great year as a newbie blogger. It’s surprising how may friends and business connections that I’ve made by particpating online and getting involved in the blogging community. Blogging is a lot of fun and I’m glad that I’ve kept it as a pure pleasure and looked elsewhere for business opportunities.

Take care,

Jon

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Robert Kiyosaki Audio Interview

I discovered a cool find on the web tonight. Over at pbs.org there is an audio interview with Rich Dad Poor Dad author, Robert Kiyosaki. Robert is interviewed by Travis Smiley.

We continue our “Road to Wealth” series tonight with best-selling author Robert Kiyosaki. The first of his “Rich Dad, Poor Dad” books wound up on the “New York Times” bestseller list for four years. 10 books later, the series has sold more than 20 million copies. His latest is “Rich Dad, Poor Dad for Teens: The Secrets About Money That You Don’t Learn in School.” Robert Kiyosaki joins us from Phoenix, Arizona.

The interview is pretty basic but Robert is plain and simply a interesting guy. They cover the basics of his teaching and methods and answers the standard arguments against his philosophy. As a hard core Rich Dad fan I loved it. You can find the Travis Smiley audio interview of Robert here.

Take away…”It’s not you money that make you rich, it’s your habits that make you rich.” A rich person with bad financial habits can still end up poor.

Mantra: “Cash is trash!” You want assets that will work for you instead.

Rich Dad In Entrepreneur Mag

I’m not big into Christmas so I mostly just wish the whole gift-giving thing would go away. Jscott, who woke on the 25^th to find his stocking filled with coal thinks it was a bad thing, but with the current price of heating fuels, I think he should reevaluate. As for me, dispite acting like Scrooge, I did find the latest edition of Entrepreneur magazine under the tree, which is cool, and I was pleasantly surprised to find my hero Robert Kiyosaki [a.k.a. "Rich Dad"] is now a regular columnist.

His column is called [RICH RETURNS] and you can find it on the last page of the January 2006 edition. This one is called Minding Your Business and he recalls a story about meeting a man who tried to tell him, after one of his talks, “Nice talk, but you can’t do what you talk about here in New York City.”

After calling the guy a wimp [one of the thing I truly love about Robert is that his has a very low tolerance for whining], he goes on to explain that he hears that argument and the familiar, “I would, if I had the money” a lot and he explains that the reason people limit themselves with these types of notions is that they are thinking like employees rather than entrepreneurs.

Simply put, entrepreneurs focus on opportunity, while employees focus on resources such as money, people and time. For example, a person who thinks like an employee will say “I can’t do it, because I don’t have the money.” A person who thinks like an entrepreneur will say “Let’s tie up the deal and find the money later.”

He goes on to say, noting his audience, that even if you are an entrepreneur you could still be thinking with an employee mindset. I know I have been guilty of that in my business. It can be very limiting and even destructive.

It reminds me of one of the jewels in the Rich Dad books. It is a simple exercise of being aware of every time you say something like “I can’t afford it”, and then reframing the question to “what can I do to afford it?” You can see that one is like a brake and the other like an accelerator.

You can’t expect old defeatist thought patterns to change overnight, but with the help of some excellent wisdom from Robert and his Rich Dad at least we can get things headed in the right direction.

Jon

I Love Being Obsolete

A while ago I discovered these guys and almost immediately gave them a large hunk of my portfolio and essentially retired from worrying [and writing] about the stock market [they are up 100% in the past 3 years, with only a moderate amount of risk and a MER of 0%!]. Then today while thumbing through this month’s MoneySense magazine [Canadian content eh!] I find a story about The Market Guy:

“This is a personable blog with a sense of humor. It is focused on income trusts and authored by an instructor with the psychology department of Carleton University with a specialization in behavioral finance. Market Guy says in his teenage years he looked like junior capitalist Alex P. Keaton (played by Michael J. Fox) in the TV sitcom Family Ties. Now he just looks like a grown-up nerd, he reports.”

The Market Guy writes about the psychology of money [one of my fav topics] and since he has a great education and tons of experience [he had pulled over $400k out of the market by age 35] he’s a lot more qualified, and possibly more entertaining than I am, to write about it…

In mainstream economics, there is an assumption that people are rational economic decision-makers. Therefore, the focus is on what people should do. Psychology believes that people aren’t always rational and a focus is placed on what they actually do. Economists often dislike psychology, believing it’s about penis envy and reading minds. Psychologists often dislike economists, figuring that human activity is far too complex to be reduced to a series of mathematical equations and normative predictions.

What’s the punch line? Researchers in behavioural finance believe that psychological phenomena pervade the world of finance. They use models of human behaviour to understand financial decision-making. Questions that are of interest to such a researcher might include: Why do so many investors buy high and sell low? Why will so many people travel across town to save $5 on a tank of gas, but won’t drive across town to save $25 on a fridge? Why do people hold on to stocks that have gone way beyond their targets? Why do people focus so much on where a stock used to trade? You get the idea.

So that’s investing and the psychology of money crossed off of my list of topics. How liberating…check out the Market Guy and his family members Market Gal and Market Dad…meanwhile I’m off to see if I can find a fabulous Rich Dad blog.

Rich Dad Forum Meetup in Phoenix

A bunch of us entrepreneur types from the Rich Dad forum are planning a meetup next spring that I wanted to let you know about. You can grab all the info here, you’ll have to sort through the chit chat, but the basics are:

Phoenix, AZ

March 24-26, 2006.

The plans include peer-to-peer presentations on topics like real estate investing, taxes, incorporation and my fave, web businesses. You can expect a couple games of Cashflow 101 & 202 and a good deal of casual networking and socializing. I’ve learned a huge amount from the people on that board and I’m really looking forward to meeting them in person.

Also Phoenix is the home of Rich Dad headquarters, so I’m hoping that we may be able to get a tour or a visit from Robert or one of his advisors. I have no reason to suspect that it will happen, it’s just a wish at this point.

I booked my ticket last night so I’m committed to being there. I’m expecting to learn a lot and make the kind of connections that are invaluable to a business. Many of the Rich Dad forum folks have been at it for a while and are long since graduated from the rat race. They are the types of people that you want to find in your rolodex when you need to get a deal done, either for capital or advice.

Some of you may want to check it out and come and hang with the Rich Dad crowd for a couple days in Phoenix.

One Year Ago

This week at my work they are having the annual United Way fundraiser book sale. The reason this is noteworthy is that it was at this sale one year ago that I picked up my first Rich Dad book [Rich Dad's Guide to Investing] for $1. So this anniversary caused me to reflect on what at the time seemed like a relatively minor event.

As soon as I began to read the book I realized that the approach really hit home for me. The emphasis was on examining the roots of my relationship with money and my beliefs around work and money in general. In short the reason I did not have abundance in my life was that I did not create it; neither with my beliefs nor my actions.

Rich Dad’s books have allowed me to become aware of the fact that I had lived my whole life in a comfort zone and that has caused me to manifest financial illiteracy, in short a poverty consciousness. Since I have taken Robert Kiyosaki’s words to heart, I’ve been able to examine my limiting beliefs and move beyond them. I was stuck in believing that I had to do everything myself and in always being in control, but now I realize that partnerships and moving beyond my previous patterns of business behaviours are essential to growth.

Currently, I am reading Robert’s Rich Dad’s Guide to Becoming Rich Without Cutting up Your Credit Cards and there is one section that I really love. It is when Robert has just gone from being a paper millionaire to being over one million dollars [real dollars not paper] in debt. Rich Dad tells him that not many people are capable of making a mistake of that magnitude, but the best part is that Rich Dad does not indulge Robert’s instinctive reaction, which is to when making a mistake to lie, blame, deny or pretend it didn’t happen. Instead Robert’s Rich Dad forces him to accept complete responsibility for the result of his financial train wreck. Rich Dad considers that the key to growth.

I’ve written about my examination of the reasons for my financial mistakes in Why I’m Not Rich and  Paying the Price but as I take a couple moments to reflect on the differences in my life financially in the past year, it is pretty dramatic.

Total gross earnings: October 2004 = ~ $ 3560
Total gross earnings: October 2005 = ~ $ 8300

In the past year I have started a business that is truly creating income in the business quadrant rather than the self-employed or employment quadrant which is a huge step for a life-long control freak that was destined to be trapped in the wrong side of the cash flow quadrant.

More important milestones include admitting my limitations by joining the Freedom Investment Club, because I recognized that they were better investors than I am [what a relief]. That decision has made me several thousand dollars in 6 months and had many other educational spin-off benefits. And, consulting a certified accountant to help with the incorporation of my business structure was another very positive step beyond my comfort zone. These are things that I would never have done without the influence of Robert’s teachings. That Rich Dad book that I bought has to go down as the best $1 investment of all time.

Overall the most striking difference is in my relationship with money. I used to be stuck in a world of lack, because I believed that the only way to make money was to trade it for my time, but now I am beginning to shed that thought pattern and the money is coming to me much easier. There really are many ways to make money and it is our own limitations that determine how it will happen. If you’ll take responsibility for these limitations then you can move past them, into a new, lighter relationship with your money and your work.

Take care,

Jon

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