Self Employment Blog #7
Quick Hitters
Tax Professionals
Owning your own business can be confusing and lonely. Legal and tax obligations appear at any time. If you hire a tax professional, they can help with your tax return and estimates. A good tax professional will also advise you on running your business and work with you to make it more profitable. They also can advise you on legal ways to reduce your taxes. Don’t depend on your friends and family when you are self-employed.
Checking Accounts
It is best to set up a separate business checking account for your business. Pay all your business bills from the business account and all your personal bills from your personal account. Transfer money from the business account to your personal account so your checks won’t bounce
Health Insurance
You can get health insurance from several sources. Chambers of Commerce offer health insurance options and there are various other organizations that offer this benefit. Your payments for health insurance are not deductible on Schedule C as a business expense, but could be deductible on the first page of your Form 1040.
Massachusetts requires that you offer health insurance to your employees if you have more than 10 employees. Most group health plans state that anyone working more than 20 hours a week must be covered under your plan unless they are covered under a spouse’s plan. The expense for covering your employees is deductible on your business tax return.
Employees
At some point you may need help in running your business. Often the first person hired is an administrative person to do all the things that keep you away from your clients and customers. You should talk with your tax preparer before you hire someone so that you understand your obligations. I’d recommend a payroll service to take care of all the myriad of details that go along with paying an employee.
Employees are expensive. You must have worker’s compensation insurance, match their taxes, and may even need to cover them with health insurance. Be careful who you hire and that you really need the person to help your business progress.
A quick bit of advice. If you view your employee as an expense rather than an asset, get rid of them and hire someone else.
Sales taxes
Be aware that if you sell a product you must collect and pay sales taxes in most states. Some states, such as Connecticut, have a sales tax on services.
Partnerships
Talk with your CPA before starting a partnership. They are harder to keep together than marriages. Generally partnerships break up because the various partners do not agree on the direction they are going in and how to get there.
Registrations
In Massachusetts you are required to register with the town or city clerk where you live if you use a fictitious business name. That would be any name other than your own. If you are an LLC or corporation you are required to register. If you do register, you can expect that the city or town will eventually show up at your door and want to tax your business assets. Other states probably have similar requirements.
Pensions
There are many different pension plans available to business. There is no perfect type for all business. A sole proprietor often wants to use a SEP plan because it is simple and inexpensive. Large companies use the 401(K) plan because it shifts the burden of funding the plan to the employee. There are many alternatives in between. You should discuss the options with your CPA as well as your financial advisor.
Management
There is an old Vermont saying, “The eye of the farmer fattens the stock.” Of course, now there are very few farmers. What this means is that the business will run better when you are there. Too many things can go wrong when you are not there. To minimize this problem, you need to have procedures in place that help your employees understand what is expected of them.
Customer Service
The measure of customer service is not what happens when things go right. It what happens when things go wrong. It is critically important to deal with complaints and problems quickly and effectively. The proper handling of a complaint can turn a problem into an asset. If someone is happy with your service they will tell one person— if they are unhappy they will tell ten.
S Corporations
This is a special tax designation for corporations. A regular corporation pays taxes on its net income.
An S corporation does not pay taxes on its income. It transfers the income to the personal tax returns of the owners. This prevents the double taxation of the income and provides some tax-reducing benefits to corporate owners. You need to make a special election to be allowed this privilege. Check with your CPA as soon as you set up the corporation to see if this is an appropriate thing to do.
Showing posts with label Self Employment. Show all posts
Showing posts with label Self Employment. Show all posts
Monday, December 14, 2009
Wednesday, December 9, 2009
Paying your taxes
Self Employment Blog #6
Important details #3
Paying your taxes
Your goal should be to pay a lot of taxes, but the least amount legally required. The government would like to take all your money but have not yet found a way to accomplish this.
Be sure you are sitting down. The taxes on the income from your business can be as high as 40 to 50% of your net profit. It all depends on what other income shows up on your tax return. Your spouse’s salary can push you into this level of taxation, as can investment income, unemployment compensation, or rental income. Here is how it breaks down:
The Social Security Administration gets about 15% of your wages or net income from self-employment to cover your Social Security benefits and Medicare. When you are an employee, you pay half and your employer pays half. When you are self-employed you pay the whole 15%. Your itemized deductions, such as mortgage interest and real estate taxes, do not affect what you pay for Social Security taxes.
Your federal income taxes depend on your taxable income and marital status. This blog cannot provide all the alternatives. A large majority of taxpayers end up in either the 25% or 28% tax brackets. Your actual percentage will vary with your return.
Most states have an income tax. Even some states that do not have an income tax have a business tax that applies to self-employed people. New Hampshire is one of those states. Massachusetts has a tax rate of approximately 5%.
Using the numbers above you would be paying either 45% or 48% in total taxes. Now that you are totally depressed, let me back off from that statement a bit. The taxes you pay depend on how your tax return goes together. High mortgage interest and real estate taxes will reduce your federal taxes. A non-working spouse reduces your taxes. Many of my self-employed clients only pay Social Security taxes because their income is low.
My advice to my clients is to put 40% of their net income into a savings account to pay their taxes. Maybe there will be enough left over after paying the taxes for a cup of Starbuck’s coffee.
The IRS and state departments of revenue require you to pay your taxes during the year, not when you file your return. So you must pay estimates each quarter to avoid being penalized. The due dates are April 15th, June 15th, September 15th and January 15th of the following year. There are vouchers that must be sent in with your check.
The final blog is a glossary of terms you will need to complete the process
Important details #3
Paying your taxes
Your goal should be to pay a lot of taxes, but the least amount legally required. The government would like to take all your money but have not yet found a way to accomplish this.
Be sure you are sitting down. The taxes on the income from your business can be as high as 40 to 50% of your net profit. It all depends on what other income shows up on your tax return. Your spouse’s salary can push you into this level of taxation, as can investment income, unemployment compensation, or rental income. Here is how it breaks down:
The Social Security Administration gets about 15% of your wages or net income from self-employment to cover your Social Security benefits and Medicare. When you are an employee, you pay half and your employer pays half. When you are self-employed you pay the whole 15%. Your itemized deductions, such as mortgage interest and real estate taxes, do not affect what you pay for Social Security taxes.
Your federal income taxes depend on your taxable income and marital status. This blog cannot provide all the alternatives. A large majority of taxpayers end up in either the 25% or 28% tax brackets. Your actual percentage will vary with your return.
Most states have an income tax. Even some states that do not have an income tax have a business tax that applies to self-employed people. New Hampshire is one of those states. Massachusetts has a tax rate of approximately 5%.
Using the numbers above you would be paying either 45% or 48% in total taxes. Now that you are totally depressed, let me back off from that statement a bit. The taxes you pay depend on how your tax return goes together. High mortgage interest and real estate taxes will reduce your federal taxes. A non-working spouse reduces your taxes. Many of my self-employed clients only pay Social Security taxes because their income is low.
My advice to my clients is to put 40% of their net income into a savings account to pay their taxes. Maybe there will be enough left over after paying the taxes for a cup of Starbuck’s coffee.
The IRS and state departments of revenue require you to pay your taxes during the year, not when you file your return. So you must pay estimates each quarter to avoid being penalized. The due dates are April 15th, June 15th, September 15th and January 15th of the following year. There are vouchers that must be sent in with your check.
The final blog is a glossary of terms you will need to complete the process
Friday, December 4, 2009
Tax Deductions
Self Employment Blog #5
Important details #2
Tax Deductions
The reason you need a bookkeeping system is so that you can deduct all the expenses possible to minimize the taxes you will be paying.
There are a couple of expenses that you will not collect in your bookkeeping system.
The first is your automobile expense. You have two choices in calculating your deduction for your automobile. With either choice you need to keep a log of your business miles and know the total miles you drive your car during the year.
You could record every expense, (gas, insurance, repairs etc.) you incur using your automobile. Once you get a total cost you multiply it by your business-use percentage. (Business-use percentage is your business miles divided by your total miles.) Alternately, you use the IRS automobile mileage rate of $0.55 per mile for 2009, times the business miles. The vast majority of my clients use the IRS standard mileage rate. It’s simpler to work with and the IRS adjusts it every year.
The second one is the deduction for a home office. To legally deduct the cost to maintain an office in your home, you must use the area exclusively for business. Thus you cannot deduct the expense if you work at your kitchen table. You are allowed to deduct the business-use percentage of all the expenses to run the house. This would include mortgage interest, real estate taxes, utilities, heat, insurance, and general repairs. You cannot deduct repairs to the non-business use portion of the house, like your kitchen. As this is a complex deduction, it would benefit you to hire a tax professional to help you figure it out.
Here is a partial list of the other categories you should use to collect your expenses together:
• Advertising
• Insurance
• Interest
• Professional Fees
• Office Expenses
• Rent
• Repairs
• Supplies
• Taxes
• Licenses
• Travel
• Meals
• Entertainment
• Utilities
• Telephone
• Bank Charges
• Dues
• Subscriptions
• Computers
• Cleaning
Important details #2
Tax Deductions
The reason you need a bookkeeping system is so that you can deduct all the expenses possible to minimize the taxes you will be paying.
There are a couple of expenses that you will not collect in your bookkeeping system.
The first is your automobile expense. You have two choices in calculating your deduction for your automobile. With either choice you need to keep a log of your business miles and know the total miles you drive your car during the year.
You could record every expense, (gas, insurance, repairs etc.) you incur using your automobile. Once you get a total cost you multiply it by your business-use percentage. (Business-use percentage is your business miles divided by your total miles.) Alternately, you use the IRS automobile mileage rate of $0.55 per mile for 2009, times the business miles. The vast majority of my clients use the IRS standard mileage rate. It’s simpler to work with and the IRS adjusts it every year.
The second one is the deduction for a home office. To legally deduct the cost to maintain an office in your home, you must use the area exclusively for business. Thus you cannot deduct the expense if you work at your kitchen table. You are allowed to deduct the business-use percentage of all the expenses to run the house. This would include mortgage interest, real estate taxes, utilities, heat, insurance, and general repairs. You cannot deduct repairs to the non-business use portion of the house, like your kitchen. As this is a complex deduction, it would benefit you to hire a tax professional to help you figure it out.
Here is a partial list of the other categories you should use to collect your expenses together:
• Advertising
• Insurance
• Interest
• Professional Fees
• Office Expenses
• Rent
• Repairs
• Supplies
• Taxes
• Licenses
• Travel
• Meals
• Entertainment
• Utilities
• Telephone
• Bank Charges
• Dues
• Subscriptions
• Computers
• Cleaning
Monday, November 30, 2009
Record Keeping
Self Employment Blog #4
Important details #1
Record Keeping
The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.
Do not throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. Do not take a big box of receipts to your CPA to prepare your return. Be organized. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.
One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.
Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe (https://www.deluxeforms.com). A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.
You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.
Quicken (http://quicken.intuit.com) or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.
QuickBooks (http://quickbooks.intuit.com) is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.
A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.
Just remember to keep it simple.
The next blog will cover the tax implications you will face.
Important details #1
Record Keeping
The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.
Do not throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. Do not take a big box of receipts to your CPA to prepare your return. Be organized. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.
One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.
Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe (https://www.deluxeforms.com). A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.
You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.
Quicken (http://quicken.intuit.com) or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.
QuickBooks (http://quickbooks.intuit.com) is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.
A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.
Just remember to keep it simple.
The next blog will cover the tax implications you will face.
Wednesday, November 25, 2009
Corporations, LLCs, and Sole Proprietorships
Self Employment Blog #3
Corporations, LLCs, and Sole Proprietorships
Corporations
Incorporating your business requires filing long and formal documents with the Secretary of State and the spending of a lot of money on filing fees, legal fees, accounting fees, insurance, etc. just to set up the corporation. Then you have to pay $4,000 annually in various expenses just to keep the corporation alive.
The major benefit of a corporation is to limit your liability in case something bad happens. All your business assets are on the line if the business is successfully sued, and you could be put out of business. However, the corporate structure should protect your personal assets from being seized in a judgment. I only know of one of my clients who was successfully sued and that was because they neglected to deal with a complaint.
There is a marketing benefit to being incorporated. You appear to be bigger than you are. With today’s technology, you can look like a big company with vast resources, when in fact you are one person sitting in your spare bedroom. Appearance of size matters. Unfortunately, some big companies will not deal with you unless you are incorporated.
Finally, there can be a tax benefit to being incorporated. You need to be earning a significant income to take advantage of these opportunities. My rule of thumb is the benefits start to be available when you are earning over $50,000 per year and you break even when you reach $100,000. If you are losing money, a corporation just costs you more money.
To accomplish this you must observe all the niceties of having a business. You will need a separate business checking account in the business name. You should always use business stationery in the company name and sign as president, not just your name. Everything you do for business should be in the Corporation’s name.
Limited Liability Company (LLC).
Like a corporation, you are required to register your LLC with the Secretary of State and pay a filing fee. The fee varies by state. The registration process is easy and generally just a one page form. Then you have to keep the LLC alive by filing an annual report each year. There is of course another filing fee for the annual report.
There are two benefits to an LLC. First, it limits any liability that arises within the business from affecting your personal assets. For example, you start a business painting houses. The first house you paint catches fire and burns to the ground. An LLC will hopefully protect you from losing your house and other assets.
There is more good news about the LLC. If you are the only member you do not need to file a separate tax return for the LLC. The income and expenses of the business go on Schedule C of your personal 1040 tax return. It is also less expensive to run because you are not paying a tax preparer to prepare an LLC return and your personal return.
An LLC has the same marketing benefits as a Corporation but none of the tax benefits.
Like the corporation, you need to be careful to transact all business in the LLC’s name.
Finally there is the sole proprietorship.
Essentially when you stand in the middle of your living room and declare yourself a business you have become a sole proprietor. The niceties of the LLC or corporation do not have to be observed. You can run the business through your personal checking account. You do not have to register with the Secretary of State. You do your work, collect your invoices (hopefully), pay your bills, and keep the rest of the money. At the end of the year, your business activity is reported on Schedule C of your 1040 Form.
The plus side... It is simple to start and close a sole proprietorship. You end it by standing in the middle of your living room and saying, “I’m out of business!” Your record keeping requirements are much simpler. (Record keeping will be explained later.) The cost to stay in business is much lower than a corporation or LLC.
The downside... If something goes wrong, all your personal assets are on the line. They can take your house and all your assets. A homestead exemption will help protect your home. Under federal law, retirement assets are generally not available to creditors.
More bad news… Many large companies will not deal with you as a sole proprietor.
The next blogs will cover the details of business ownership.
Corporations, LLCs, and Sole Proprietorships
Corporations
Incorporating your business requires filing long and formal documents with the Secretary of State and the spending of a lot of money on filing fees, legal fees, accounting fees, insurance, etc. just to set up the corporation. Then you have to pay $4,000 annually in various expenses just to keep the corporation alive.
The major benefit of a corporation is to limit your liability in case something bad happens. All your business assets are on the line if the business is successfully sued, and you could be put out of business. However, the corporate structure should protect your personal assets from being seized in a judgment. I only know of one of my clients who was successfully sued and that was because they neglected to deal with a complaint.
There is a marketing benefit to being incorporated. You appear to be bigger than you are. With today’s technology, you can look like a big company with vast resources, when in fact you are one person sitting in your spare bedroom. Appearance of size matters. Unfortunately, some big companies will not deal with you unless you are incorporated.
Finally, there can be a tax benefit to being incorporated. You need to be earning a significant income to take advantage of these opportunities. My rule of thumb is the benefits start to be available when you are earning over $50,000 per year and you break even when you reach $100,000. If you are losing money, a corporation just costs you more money.
To accomplish this you must observe all the niceties of having a business. You will need a separate business checking account in the business name. You should always use business stationery in the company name and sign as president, not just your name. Everything you do for business should be in the Corporation’s name.
Limited Liability Company (LLC).
Like a corporation, you are required to register your LLC with the Secretary of State and pay a filing fee. The fee varies by state. The registration process is easy and generally just a one page form. Then you have to keep the LLC alive by filing an annual report each year. There is of course another filing fee for the annual report.
There are two benefits to an LLC. First, it limits any liability that arises within the business from affecting your personal assets. For example, you start a business painting houses. The first house you paint catches fire and burns to the ground. An LLC will hopefully protect you from losing your house and other assets.
There is more good news about the LLC. If you are the only member you do not need to file a separate tax return for the LLC. The income and expenses of the business go on Schedule C of your personal 1040 tax return. It is also less expensive to run because you are not paying a tax preparer to prepare an LLC return and your personal return.
An LLC has the same marketing benefits as a Corporation but none of the tax benefits.
Like the corporation, you need to be careful to transact all business in the LLC’s name.
Finally there is the sole proprietorship.
Essentially when you stand in the middle of your living room and declare yourself a business you have become a sole proprietor. The niceties of the LLC or corporation do not have to be observed. You can run the business through your personal checking account. You do not have to register with the Secretary of State. You do your work, collect your invoices (hopefully), pay your bills, and keep the rest of the money. At the end of the year, your business activity is reported on Schedule C of your 1040 Form.
The plus side... It is simple to start and close a sole proprietorship. You end it by standing in the middle of your living room and saying, “I’m out of business!” Your record keeping requirements are much simpler. (Record keeping will be explained later.) The cost to stay in business is much lower than a corporation or LLC.
The downside... If something goes wrong, all your personal assets are on the line. They can take your house and all your assets. A homestead exemption will help protect your home. Under federal law, retirement assets are generally not available to creditors.
More bad news… Many large companies will not deal with you as a sole proprietor.
The next blogs will cover the details of business ownership.
Sunday, November 22, 2009
Franchising and Multi-Level Marketing
Self Employment blog #2
These are two quick ways to get into your own business.
Franchises: One option for starting your own business is to buy a franchise. This can be a great way to get a business going and, if you get the right one, it can be a great financial boon. The big benefit of a good franchise is that all the set up work and on the job training has been taken care of. A good franchise will give you great training in their proven system of doing things and then help and monitor you as things progress. They will help with a location and get you going. If you do it their way you are almost guaranteed to succeed. One problem is that the franchises you can afford are the ones who don’t do any of these things. They take your money, mail you a Xeroxed copy of their manual and say “Where’s my royalty check?” There are exceptions of course but generally you need the big bucks to get a good franchise.
Multi-Level Marketing: This type of business is also called Network Marketing. Here is Wikipedia’s definition of MLM: http://en.wikipedia.org/wiki/Multi-level_marketing
The basics of MLM are fairly simple. MLMs are usually centered on a consumer product. The product is always top quality (according to the company) and more expensive than similar products you can buy at your local store. You are recruited to be a distributor of this product by someone who is already in the business. This might be a friend or colleague. You are encouraged to sell the product and to recruit distributors. You earn money on your own sales and a commission on the sales of the people you recruit and those that they recruit, ad infinitum. This organization is called your “downline”. The more people in your downline, the more you earn.
MLMS are generally inexpensive to enter. They also entail much more work than you are led to believe. The success rate in this type of business is no better than starting any other small business and is probably much smaller. You can be fabulously successful but that is a rarity. Most participants plod along and then drop out. My observation is that companies in MLM pop up, are very popular, and then settle into a maintenance mode. Then someone decides that you can MLM dog biscuits and folks jump on this bandwagon. I have had some clients who have generated some income from this business model but most have dropped out within a year of joining. For an MLM to work, everyone needs to sell product as well as recruit more people to sell. Setting up a wholesale club by recruiting distributors and using the products but not selling will not work.
Next time, I will discuss corporations, LLCs, and sole proprietorships.
These are two quick ways to get into your own business.
Franchises: One option for starting your own business is to buy a franchise. This can be a great way to get a business going and, if you get the right one, it can be a great financial boon. The big benefit of a good franchise is that all the set up work and on the job training has been taken care of. A good franchise will give you great training in their proven system of doing things and then help and monitor you as things progress. They will help with a location and get you going. If you do it their way you are almost guaranteed to succeed. One problem is that the franchises you can afford are the ones who don’t do any of these things. They take your money, mail you a Xeroxed copy of their manual and say “Where’s my royalty check?” There are exceptions of course but generally you need the big bucks to get a good franchise.
Multi-Level Marketing: This type of business is also called Network Marketing. Here is Wikipedia’s definition of MLM: http://en.wikipedia.org/wiki/Multi-level_marketing
The basics of MLM are fairly simple. MLMs are usually centered on a consumer product. The product is always top quality (according to the company) and more expensive than similar products you can buy at your local store. You are recruited to be a distributor of this product by someone who is already in the business. This might be a friend or colleague. You are encouraged to sell the product and to recruit distributors. You earn money on your own sales and a commission on the sales of the people you recruit and those that they recruit, ad infinitum. This organization is called your “downline”. The more people in your downline, the more you earn.
MLMS are generally inexpensive to enter. They also entail much more work than you are led to believe. The success rate in this type of business is no better than starting any other small business and is probably much smaller. You can be fabulously successful but that is a rarity. Most participants plod along and then drop out. My observation is that companies in MLM pop up, are very popular, and then settle into a maintenance mode. Then someone decides that you can MLM dog biscuits and folks jump on this bandwagon. I have had some clients who have generated some income from this business model but most have dropped out within a year of joining. For an MLM to work, everyone needs to sell product as well as recruit more people to sell. Setting up a wholesale club by recruiting distributors and using the products but not selling will not work.
Next time, I will discuss corporations, LLCs, and sole proprietorships.
Wednesday, November 18, 2009
Starting Your Own Business
This is the first blog in a series about starting your own business.
Many people dream of being in business for themselves. They think about the financial rewards, the independence of being their own boss, and the freedom you get when you do not have to answer to someone else. It all sounds wonderful. Doesn’t it?
Let me fill you in on an alternate reality.
We all know the urban legend about Bill Gates. He dropped out of Harvard to start Microsoft. He worked hard, made some good decisions, (except Vista of course) and is now the richest man in the universe. Well, that rarely happens. The financial fact of small business is that 80% fail. Most of the remaining 20% struggle to get by and a rare few end up with the big bucks.
It is true that you are your own boss (except maybe for your spouse, clients, and employees). The (big or small) buck stops at your desk. That means that when something goes wrong, you also do not have anyone to pin the blame on. All the decisions rest on your shoulders and you can’t ask for advice from your friend in the next cubicle. It can be very lonely having your own business.
You now have the freedom of working all day and then doing estimates, billing, record keeping in the evening. Oh and don’t forget those phone calls you need to make and the supplies you need to pick up. Oh and paid vacation. Who are you kidding? When you go on vacation, there is no one back at the shop to earn money for you.
We are going to explore the world of options you have for starting your own business. To end this section, I want to share some definitions with you, which will be expounded on in subsequent blogs:
Break Even – This is the point where the revenue from your work equals the expenses to accomplish that work.
Contractor – This is a person who is working for your company and does not have any taxes withheld from their pay.
Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return.
Employee – This is someone who works for you and has taxes withheld from their pay and receives whatever benefits your company offers.
Franchising – A quick way to get into business. You pay to be part of a large company with established policies procedures. Dunkin Donuts and MacDonalds are well known franchises.
Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.
Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return.
Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.
Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and personal checking account.
Multi-Level Marketing – Another quick way to get into business. MLM is almost always selling consumer goods. You are compensated for your own sales and earn a commission on the sales of people you recruit into the business.
Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.
My next blog will discuss Franchising and Multi-Level Marketing.
Many people dream of being in business for themselves. They think about the financial rewards, the independence of being their own boss, and the freedom you get when you do not have to answer to someone else. It all sounds wonderful. Doesn’t it?
Let me fill you in on an alternate reality.
We all know the urban legend about Bill Gates. He dropped out of Harvard to start Microsoft. He worked hard, made some good decisions, (except Vista of course) and is now the richest man in the universe. Well, that rarely happens. The financial fact of small business is that 80% fail. Most of the remaining 20% struggle to get by and a rare few end up with the big bucks.
It is true that you are your own boss (except maybe for your spouse, clients, and employees). The (big or small) buck stops at your desk. That means that when something goes wrong, you also do not have anyone to pin the blame on. All the decisions rest on your shoulders and you can’t ask for advice from your friend in the next cubicle. It can be very lonely having your own business.
You now have the freedom of working all day and then doing estimates, billing, record keeping in the evening. Oh and don’t forget those phone calls you need to make and the supplies you need to pick up. Oh and paid vacation. Who are you kidding? When you go on vacation, there is no one back at the shop to earn money for you.
We are going to explore the world of options you have for starting your own business. To end this section, I want to share some definitions with you, which will be expounded on in subsequent blogs:
Break Even – This is the point where the revenue from your work equals the expenses to accomplish that work.
Contractor – This is a person who is working for your company and does not have any taxes withheld from their pay.
Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return.
Employee – This is someone who works for you and has taxes withheld from their pay and receives whatever benefits your company offers.
Franchising – A quick way to get into business. You pay to be part of a large company with established policies procedures. Dunkin Donuts and MacDonalds are well known franchises.
Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.
Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return.
Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.
Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and personal checking account.
Multi-Level Marketing – Another quick way to get into business. MLM is almost always selling consumer goods. You are compensated for your own sales and earn a commission on the sales of people you recruit into the business.
Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.
My next blog will discuss Franchising and Multi-Level Marketing.
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