What to know when starting a business

Throughout the past couple weeks I have been blogging to all of you my viewers on the importance of financial literacy. Now with the foundation I have provided for you, we are able to take it to the next step. What do you really need to know when starting a business? Well first you need to decided what type of business you would like to run here are the following types:

Sole Proprietorship : This form of business is usually deemed the "simplest form." Having a sole proprietorship is saying that you and the buisness are one of the same entity, meaning that all your personal assets and or liabilities are all of the same with the business. There are no legal distinctions between the two. If the owner dies, so does the business with them.

General Partnership: This form of business is usually two or more parties creating a buisness in order to generate profit. You can have a silent partner of the business of which they are usually just a cash flow, or a general partner which would share the liabilities and assets with you as a whole. Like a sole proprietorship both partners in a partnership are one with the business there is no legal distinction. When one of the partners die, so does the business.

Corporation:  A corporation is different from both sole proprietorship and general partnership, because a corporation is a seperate legal entitity , it is a business made up of shareholders. Having an incorperated business would mean that your personal assets and liabilities are none of the same with your business. A corporation has unlimited life, and its own assets. If the company were to be sued , you yourself would not be personally liable but the company as a whole.

A corportaion is usually broken down into two types of stocks:

Common Stocks: Investment into a company with voting rights in relation to the board of directors
Preferred Stocks: Investment into a company with no voting rights , most have divedend rates while common stocks do not.

I would like to leave you all with the idea of how can you generate income for your business? Once you have decided what and how your going to create your business, the next step is always the cash flow, think of some ways you can generate cash flow for your business.

The idea of being penniless on paper

Last post I left you with a question , using the prior example how could we make ourselves appear penniless on paper? The idea of making ourselves penniless on paper is one great key to financial success, because I have mentioned numerous times the market is not safe, investing is risky and if your not willing to take the risk your not on the path to becomming a successful investor. A great investor will have plans for each market, whether the economy is doing great or poor, they have a plan to make it work for them.  Which brings me to my point of being penniless on paper. You always see people become instant millionaires from a great idea, facebook is a prime example. But what happens to a lot of these instant millionaires, they have never learnt to invest their money like the rich do, so they loose it they go bankrupt. Whether it be over a lawsuit or over spending of money.  This is because they did not properly secure their assets to make themself look poor, but their business rich.

When owning a corporation you and your business are seperate legal entities, anyone owning a sole propriotorship or partnership, if the business fails one or both partners is legally endebted to any liabilities, which can be paid off with personal assets like your home and cars if the partners defaulted. I believe that a corporation is the best choice because it is the most secure for the founder.

The idea of being penniless on paper is transfering all your assets into your business. Make your business earn the money , not you. When your business is the one earning all the money, one paper you can recieve many tax incentives, and breaks as well as keeping yourself secure incase of a lawsuit towards you it cannot directly harm your business or a lawsuit towards your buisness cannot directly effect you. Knowing how to harvest the idea of being penniless on paper will reward you greatly in your future endvaours.

Three Types of Income

Throughput the weeks I have touched upon the subject of creating more than one plan for yourself in order to be successful you must always have a plan no matter the situation, lets refer back to the three types of lifestyles : Secure, Comfortable and Rich.  Just as I had said in order to prepare for being rich, you must prepare for being secure and comfortable as well, I cannot stress enough that one willing to take these steps must create each portfolio for themself.  Today I would like to introduce to you the Three types of Income :

 

 

1. Ordinary earned incomeThis type of income is what mainly the poor, or middle class focus on. This income is generated from wages, or paychecks from a secure or comfortable job title that you may have aqquired with or without post secondary degrees. This income is also the highest taxed income , which makes it harder for you to become rich by simply saving your money.
2. Passive income
This type of income is usually derived from many different entities. One may earn a passive income from license agreements, or patents to a product, or even through real estate.  Real estate is a major factor in creating your passive income. This type of income has many tax benefits.

3. Portfolio income
This type of income is what we will call "Paper Assets." Paper assets such as : Stocks, Bonds and Mutual funds. On an investment stand point this portfolio income is by far the most popular, this is because of new technology, everything as I mentioned is paper assets, it is far easier to maintain and track tons of investments because it is all generated online through markets.

 

 

From the diagram drawn above , this is the direct corrolation between the three types on income. Simple really, you want your ordinary income, to convert into passive and portfolio income. Like I mentioned earlier the difference between the rich, and the middle class/poor is that the rich focus on their portfolio and passive income, where the poor and middle class focus on their ordinary income. Let me give you an example :

Say you have landed yourself a job at a local bank, the job seems secure enough good pay so you keep it, you are generating an ordinary income. With these wages you tell yourself its a good time to invest in the real estate market, so you buy a house worth $80,000 for $60,000 on a forclosure auction. You now have generated $20,000 profit for simply investing in the porperty, you find a new couple who would like to rent out the home for $1400 a month, now your simple investment has made you a profit of $20,000 and is also generating you a passive income because you now earn a monthly $1400 for rent.  With this new found cash you go to your financial advisor and say you want to invest in some stocks, mutual funds and or bonds. Remember investing is risky and does not always have a positive output, but a great investor knows how to invest in a good and bad market, but for this case we will say you made a profit of $30,000 on your initial investment. You can see through this example that your Ordinary income generated a Passive Income which then generated a Portfolio income. This brings back into play your assets paying off your assets creating strict profit for yourself, for further explination for any new followers to this blog please refer to earlier blog postings to get up to speed.

I want to leave you with the idea of creating your three types of income, and stump you with a question. From the example listed above, how can one create a profit but seem penniless on paper?

Education, Experience , Excess Cash

The concept I left you with prior to this blog post was the Three E's : Education, Experience , Excess Cash. I would like to further your knowledge on why these three E's are extremely essential in your journey towards becomming rich, in the exact order they are placed in.  We will start with :

Education : In life education is the key. Whether we would like to become great at something, or we would just like to further our knowledge about a subject , we do this by educating ourselves. "A Man willing to learn his whole life, will be the richest man."(Kiyosaki, 2013) Lets think of this logically, if you as a person are willing to never stop learning throughout the course of your life, do you believe that education can simply make you rich? No. It is how you use this education that will determine your success, this is where Experience  comes in.

Experience: Now that you have based yourself with all the education needed to start your journey, well you must now put it to use. The easiest way to grasp the 3 E's is to put it in terms of your educational map. For all those who have went, plan to go or who are currently in post-secondary schooling, many of your programs may offer a co-op.  Think of the three E's in terms of your program, first you need the Education so you have chosen your program, and are willing to educated yourself through it. Now that you have accomplished your first year and have furthered your knowledge it is time for your Experience this would be your co-op. Your school has set you up for success by using the three E's whether they knew it or not. Finally, once your co-op is done, your schooling is up, you've gotten all the Education and Experience you need, you have now set yourself up for the process of creating Excess Cash.

Excess Cash : Now we look at excess cash in the view of an investor, because in order to become a rich investor you need to have your assets pay off eachother, while your income your Excess Cash is exactly what it needs to be Excess. This is the money that when it comes in you can throw down on a worth investment , one that may take some risk , so this excess cash is money that can be lost, and it wont be needed to recover, because you've already bought assests that now pay eachother off and accumulate an income, where your excess cash generates its own income on its own.

I have laid out the three basics to further someones life in becomming rich. Now it is said that there is a rule called the 90/10 . This rule states that for every 90 Citizens only 10 will become rich. Why is that? If everyone knows the basics on becomming rich, learns the three E's , lives by them, what makes someone move from that 90 to the 10 % of those who become rich? I would like to encourage some feedback, on what you believe seperates someone between the 90/10 rule.

Is your time and asset or a liability?

In earlier discussions we discussed the difference between and asset and liability. Today I would like to ask you : Is your time your most valuable asset, or is it your worst liability? Many would argue that time is a liability because you cannot gain more time, we are not promised time, so why would time be considered an asset, would it not be a liability? Time is determined on how you use it. To me time would be my most valuable asset, why? Time is not given to us, time gives me a dealine , time will give you the opportunity to set a goal and to do whatever it takes to accomplish that goal by your deadline. Time can be your most valuable asset, but your worst enemy. I touched upon the topic in my previous post that most people want to become rich, but almost none of them are willing to put the time and effort in , to succeed.

Let me ask you this, are you willing to put your time in to become rich and successful? Would you attend classes to further your education?

I want to leave you with the concept deprived from the book : Rich Dad's guide to Investing  by: Robert T. Kiyosaki, the Three E's To Success:

•    Education
•    Excess Cash
•    Experience
  I encourage readers to tell me what they believe these three E's have to do with success? What do you believe is the most valuble of the three?
  I will touch more about this concept in my later posting.