Starting Your Own Business: It’s all about the tax code

Paraphrasing President Clinton famous campaign slogan

“It is about the tax code …”

If you read our previous articles Are you an Entrepreneur, or Can you Make it as a Business Owner you may have learned that you can have your own business, and be your own boss; but still you may be hesitant because you have a job and you’re not sure if you can make a decent living for your family. If we agree that over 90% of new business failing within the first 3 years, being able to make a living with your own business is one of the most important questions that you must answer, and one that may help you make the decision to move forward or not. On the other hand the U.S. economy has barely grown during the last 10 years, and we may be entering a long period of stagnation, where companies keep moving jobs overseas, and job security disappears as fast as did company benefits and stock options (and I mean benefits and options for regular employees…)

Financial Benefits of having your own Small Business

Having your own business can help you not only to increase your own job satisfaction (you’re the boss and now you get to make the decisions without having to deal with the day to day politics), but it can substantially increase your bottom line. As you can imagine no company will hire you unless you can actually generate income for them, enough to pay not only your salary, but also the salaries, stock options and benefits of the organization ruling class. If you just remember that today quite a few CEO’s make over 100 times more than their own company average salaries (CNN, Bloomberg), and that as Warren Buffet indicated the CEOs pay a lot less taxes than their own secretaries, it may be time for you to rethink if “working-for-a-living” is the best way to help provide for your family.

It’s all About the Tax Code

As my FIU finance professor Dr. Zdanowicz used to say in class,

it is not what you make it is what you keep

In an uncertain economy like today, the U.S. government keeps trying new schemes to raise more money from the working class, while at the same time reducing the corporate tax liabilities. With disappearing government and company benefits, uncertainty about if Social Security or Medicare will be there when people retire in the next 10 or 20 years, its up to the individuals to make the proper financial decisions that can help them secure their future and that of their families.

Just following the IRS own recommendations, there is a large number of expenses that are the same for employees or business owners, but that can be only deducted if you have your own business. From the use of your home for business, to your car, health insurance, retirement plan, to even some travel and related expenses, having your own business can make a substantial difference between making it or not in today’s challenging economic times. If you look at the table below, you can clearly see what the year end difference will be for someone having your own business, v just being an employee…

Employee v. Business Owner Income Comparison

Monthly Income/Expenses Employee/Salary Deductible Business/Income Deductible
Income Yr. $180,000 $180,000
Income Mo. $15,000 $15,000
Expenses =========== =========== =========== ===========
Mortgage $1,500 $0 $1,500 $300
Electrical Bill $150 $0 $150 $30
Internet $60 $0 $60 $30
Cell Phone $60 $0 $60 $60
Car Payment $300 $0 $300 $300
Education $300 $0 $300 $300
Health Insurance $250 $0 $250 $250
Car Insurance $200 $0 $200 $200
Taxes $5,250 $4,823
Mo. Savings $0 $0 $514.50 $1,470
Mo. Effective Income $6,930 $0 $7,444.50 $0
Yr. Savings $0 $0 $6,174 $17,640

Assumptions:

  • Mortgage, Electrical 20% use for business
  • Internet 50% use for business
  • Cell Phone 100% use for business
  • Car Payment 100% use for business
  • Education 100% business investment
  • Health Insurance 100% business provided
  • Car Insurance 100% used for business
(Courtesy of psmag.com)

(Courtesy of psmag.com)

So when we consider the previous table, in addition to the standard benefits of being your own boss, being able to cash in by selling your own company stock as a long term gain (15% tax v. 35% for salary tax), and others, by having your own business you are legally able to keep more of your own hard earned money at the end of every month. That may be enough of an incentive to help you decide if you want to spend the rest of your life sending resumes out, or to take the next step as an entrepreneur.

In our next article we will discuss the different types of business that you may want to launch depending on your specific needs. From individual owner, to a global non profit organization, the right selection can help you achieve your objectives by allowing you to select the right tax code, or financial model.

About Inloso

Inloso offers strategic business consulting in Latin America and the U.S., in the areas of multinational strategic business development, multinational operations, and entrepreneurship. We have over 20 years of experience and can help you expand your business, improve your profits and customer satisfaction, and/or reduce your costs of operations. Please visit our contact page if you are interested in our assistance in any of these areas.

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