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.

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?

What is a real asset?

Most people today want to be rich, but no one is willing to learn. Like I have constantly stressed , the importance of financial literacy is more than knowing the definition of a word, but to understand the meaning. Many people want to become a rich investor, but many do not know the simple difference between an asset and a liability. An asset in the simplest terms is something that puts money into your pocket , where a liability is something that takes money out of it.  The distinction between the two can be shown the examples below for further understanding.

                        (Image taken from Rich Dad's Guide to Investing By: Robert T. Kiyosaki)
Please Note an asset puts money into your income, on your income statement.

   (Image taken from Rich Dad's Guide to Investing By: Robert T. Kiyosaki)

Whereas a liability will put money into your expense colum, in other words taking money from your pocket.

A viewer of this blog asked me a question "Why is it so important to be able to know the difference between being : Rich, Comfortable or Secure; the reason being can be deprived from the examples above. A Secure investor would have a balance sheet that is leveled between assets and liabilities. So although they may not be poor, they are also not in a situation to become rich.

A comfortable lifestyle would be the same as the "Average Joe" in regards to the balance sheet and income statement someone who is comfortable would show a minimal amount of assets while having a liability colum full.

A rich investor would have his assests pay off eachother as well as provide income for further investments as well as personal net income. I will go more into depth of what it takes to become a rich investor in my following blogs. For now I would like all readers to adapt and understand the basic meaning between an asset and a liability , it is crucial for any type of success in the financial industry.