This should not catch anybody who reads this blog by surprise and if it does, it really is a failure on my part but I am a HUGE advocate of starting and owning a business. One of the biggest reasons is that it allows you to incorporate your life and get the many advantages that get from doing that.
I have spent virtually my entire adult and professional life involved in some manner helping individuals start their own businesses. In fact, I have purposely chosen to concentrate this blog solely on the three pillars needed to build wealth; (1) the Money Mindset, (2) the Financial Blueprint and (3) Entrepreneurship.
Although I do believe people can attain Financial Independence without being an entrepreneur, I know from personal experience that the time that it takes to get there is reduced significantly when you own your own ‘money machine’. The reasons for this are severalfold and I want to address them here in this blog post.
Reason #1: Leverage
First and foremost, a business creates a framework for an individual to be able to take advantage of all forms of leverage.
The obvious example is being able to hire others to maximize the number of hours that others can work on your behalf, Other People’s Time (OPT), creating wealth for you through your business system (manufacturing, distribution, retail, etc.), whatever it is.
The next item of leverage is being able to use Other People’s Money (OPM). By having a business you now have a separate legal entity and therefore can effectively borrow funds from a bank to utilize in the building of additional wealth.
Reason #2: Legal and Asset Protection
By having a legally incorporated business, you have the ability to conduct interactions with other businesses and individuals in a legally protected entity. If conducted correctly, you can enjoy legal protection against losing personally owned and controlled assets.
This is referred to as ‘piercing the veil’ and if approached correctly, your legitimate and responsible actions in your business stand separate from you as a personal individual.
As a result, as long as you are operating your business separate from your personal affairs and in a legally conscious manner your personal assets and holdings are not vulnerable to lawsuits or claims.
Reason #3: Tax Benefits
There’s probably little argument that businesses are treated differently and arguably better than a W-2 individual. Businesses get to deduct legitimate business expenses prior to being taxed.
These include a variety of expenses such as cell phone service, internet, vehicle, business travel, office space and even retirement plan payments provided all these expenses are going into the business to generate income for the business.
Businesses also get to keep their hands on the money they earn immediately when they earn it and then pay taxes afterwards. In addition, with the new 20% deduction allowance businesses only pay taxes on 80% of their income whereas the last time I checked W-2 employees pay tax on 100% of their earned income (not including tax benefitted contributions into retirement programs and HSA’s).
Business owners also get to spread out losses in later subsequent years so as to ‘protect’ future generated income, whereas individual W-2 taxpayers have to take losses immediately within that tax year.
Reason #4: Income Control
Although it’s not fool proof, owning a business allows you to effectively control the generation of income. As such, you may have multiple income sources from a variety of sources and be able to diversify where your income is coming in.
What this means essentially is that if one of those sources dries up for whatever reason, you still have income coming in. However, as a W-2 employee if you were to lose your job you lose 100% of your income.
In addition, theoretically you have the ability for unlimited income generation provided the market is large enough and accessible for what you’re doing. Even in the event that the market is limited, as long as it provides for more opportunity than what you’re currently making as a wage then you have a substantial opportunity for upside income growth.
You’ll also be more likely to be able to charge more for the equivalent of your time through your business as you currently make as an employee working for someone else.
Reason #5: Retirement Advantage
Being an employee in United States is the least tax advantaged form of generating an income. Like it or not, there’s a reason for this and it’s somewhat reasonable if you follow the logic. The thought is that there are very few Americans who are business owners or independent contractors, less than 30% in the United States in a recent survey.
Therefore, 70% of the rest of the working population essentially depends upon these 30% for the creation of their jobs.
As a result, the US tax policy is written to incentivize individuals to create jobs and wealth for their communities and neighbors.
As such, the tax policy allows self-employed individuals with solo 401(k) programs the opportunity to put in upwards of $58,000 in pre-taxed dollars into this retirement vehicle. W-2 workers are only allowed to put up to $19,000 in their 401(k) program.
Just taking these differences alone into account, it’s easy to see how the government is trying to encourage individuals to become employers and not employees. Think about it!
The government would be way more interested in taxing you than having to spend funds on social services for your neighbors. Better that you provide for yourself and your neighbors than the government. That’s why the system is set up to advantage wealth and job creators over workers.
There are so many more reasons than simply these five that I gave in this post to start and own your own business. However, they are certainly the five major themes as to why being an entrepreneur is one of the quickest ways to accelerate reaching Financial Independence and or at least reaching a level of financial security.
Conclusion
As discussed, being able to control the levers that create and generate income is simply unavailable as an employee. In addition, being able to apply different forms of leverage to grow that income by applying it to the money making machine is also something not available as an employee.
That said, the ‘system’ is literally set up to extract a disproportionate amount of money out of someone who makes ‘earned income’, such as an employee, and provide multiple advantages and incentives to investors and business owners who generate dividend income and capital gains.
We’ll touch upon several other benefits of owning a business in later posts but the important take away here is that if you’re someone with the right temperament to own a business, can tolerate the inconsistencies in the level of income that you make from week to week and month to month, have the ability to stomach some risk and want to control your own financial destiny, then ‘incorporating your life’ is the way to go!
