The Excuses People Give

There's three pillars that undermine every business. I don't care if you're a small Schedule C or whether you're a huge C corporation, it doesn't matter. 

All three of these things are important. It's just the scale of them that changes. And those three pillars are your legal format, your logistical organizations, and your tax considerations. You have to know these because if you change one, it changes the other two. They work together. 

That's why it's important to know all three of these because if you change something over here, you could be changing things over there and not realize it, get yourself in a lot of trouble, or lose a lot of money in the process  

We don't want that.

Transcript

MBB Episode 4 
Well, welcome everyone. I am so glad to be back. I know I've been gone for a while, but we had a little accident here at the old homestead involving fractured hips and femurs. And a lot that had to be taken care of. 

So I had to give up everything I was doing and become a caregiver for a while. But I am back to help you learn the art of business. With that said, cue the intro maestro.  

You are listening to the Mastering Business Basics Podcast, where we discuss how to build a solid foundation under your small business to improve your chances of success. And now here is your host, Roger Pearson. 

Now, in our previous three episodes, I've talked about your why and the necessity of creating one and determining what it is, because it's gonna help determine your success. 

I've talked about your likes and your dislikes and how you need to determine those. And incorporate them into your business plan, which will give you a better chance of success. I've talked about your skillset, sitting down and taking a close look at what you like to do, what you don't like to do, what your skillset is, what it isn't. What you need to develop yourself, and what you need to hire other people for. 

Those are important, but even more important than that is the foundational aspects of running a business. There's three pillars that undermine every business. I don't care if you're a small Schedule C or whether you're a huge C corporation, it doesn't matter. 

All three of these things are important. It's just the scale of them that changes. And those three pillars are your legal format, your logistical organizations, and your tax considerations. You have to know these because if you change one, it changes the other two. They work together. 

That's why it's important to know all three of these because if you change something over here, you could be changing things over there and not realize it, get yourself in a lot of trouble, or lose a lot of money in the process . 

We don't want that.

Let's go through these briefly. When I'm talking about legal formats, I'm talking about whether you wanna be a sole proprietor or partnership an LLC, an S corporation or a C corporation in the United States. And it's important to know these things. people say, well, you know, I'm just a little bitty business. I don't need to know all that other stuff. And that's not really true because over 70% of the businesses in this country are sole proprietorships. The sad thing about sole proprietorships and general partnerships is that they pay the highest taxes in the entire tax system, when you figure in all of your social security, and your Medicare. 

That's a shame. You'd think that small business person would pay less taxes than the large one. But as far as a percentage of profit, with state taxes and everything else, a small business can pay up to 50% of their net profit out to the government programs, and that's insane. 

But that's the way it is. You need to know these things. You need to know how the tax consequences affect what your legal format is and vice versa. You need to know them all because you may start as a sole proprietorship, but as you grow larger, you want to be able to minimize taxes. 

For instance, a lot of people will switch to an S corporation and that can shield some of your net profits from taxes. But the thing is, there's an overhead to doing that and there's a lot of rules and regulations to doing that. So you have to make sure that you meet all those rules and regulations. 

You have to make sure that you're making enough money to afford the extra cost of doing those things. And a good tax preparer can help you determine those. When's the best time to go from one to the other.

One example I had of that was I had a home chef who was wildly successful the first year. I mean, made a hundred thousand dollars in profit. That's incredible. But she was a sole proprietorship The bill came to, she was gonna owe $6,000 in taxes when I added up all the sole proprietorship stuff. So she came to me early enough in the year, and I knew the tax law well enough that I got her changed into an S corporation that year. And instead of a $6,000 bill, she had a $2,000 refund with her husband. 

The type of things that you need to know or you need to hire somebody that knows it well, that specializes in that, to help you go through that. 

On the other hand, if your goal is to build a business and then sell it and walk away with the profits, you probably want to do that as a C corporation. 

Or if you wanna go in the stock markets, you gotta be a C corporation. And the reason for that is to sell a business to somebody else, the C corporation is the only legal format that you can sell as one unit. Every other legal format, you have to sell every single part of your business piecemeal. That can be a nightmare. So if that's your plan. 

You need to know that Partnerships are always interesting because life presents us with a lot of opportunities if we know what we're looking at. if somebody comes up to you, a lot of times your best friend comes up to you and says, okay, I got this great deal I'm looking at going into. Would you like to go into business with me do this thing? I think we could be successful. How do you go about that? if all you do is shake hands and start doing business together, you could regret it later because if you go into a partnership, you need to know how to do a partnership agreement. 

The partnership agreement, I always discuss as it's like a prenuptial. It's what happens if the partnership dissolves, because I've seen some nasty fights, and this is even if a husband or wife go into a partnership, they still, should still have one because I've seen some nasty fights. Even, with married people, when the business goes sour and they decide to dissolve it. 

So you need to do that. But would you have known that if you hadn't studied it? Probably not. And you may have regretted that down the line. There's lots of little things you need to know, not only what you're doing now, but what life is gonna throw at you , what the business world is gonna throw you, and what your ultimate end game wants to be. 

You need to know what legal format you want to be in and what you want to gravitate to.  

You could be an S corporation, but then you'd say, I want to sell this. you can get rid of the S Corporation election and become a C corporation and then sell the C corporation. There's little things that you need to know to do this and to do this, you need to educate yourself. 

The tax considerations, a lot of people don't realize that taxes are probably, if they're making a good amount of money, the taxes are probably one of their largest line item expenses there is. And yet so many people, when they look to see if they're making any money. don't take that into consideration until they sit down and do their taxes and they have to take all of their net profits and give it to the government, all the different government units, and they freak out, especially the first time. 

You have to know how the taxes work for each legal format To be able to put that into your calculations, because if you put that in your calculations, “maybe I need to charge more for my services because I need to make enough money to cover my taxes also” 

But if you're not aware of the tax laws or you don't have a good tax advisor that can help you put that together, you may put yourself outta business paying the government all of your money. So you need to know all of that too. And between the two of those stand your logistical organization. 

You have to know how to organize your paperwork. You know, I always tell people the thing about it is, at any day, or hour of the year, I should be able to ask you what your gross profit is. The gross profit is everything minus taxes . You should know what your gross profit is. If you wait till the end of the year to find out if you made any money, you're not gonna be in business very long, so you need to know that. 

And you need to know how to do your accounting, and keep your papers organized. For instance, anything that costs more than $2,500 for equipment or things you buy, you have to keep track of that separately for tax reasons. 

Then you do all of the other office supplies, landscaping supplies, or painting supplies - whatever your business is. You have to keep that separate. So you have to keep tax records and accounting records. As far as accounting goes, there's two different ways you have to split things out, and it's important you know how to do that or you're gonna throw away money. 

I'm here to help you not throw away money. 

I have so many people give me excuses why they don't need to learn, besides they don't want to do it. First of all, our schools, don't teach business. They don't. Even if you go to colleges and take a business major in college, they don't teach you this type of stuff. 

I've taught, tax classes before, as an instructor and I've had business majors come up to me from college and they say that, ‘they don't teach us this stuff at school. They don't teach us. They say, you have to go find that type of stuff someplace else., And the first time I heard that., it just blew me away. It blew me away that the very basics of business you can't even learn in college, much less high school or anywhere else. you have to educate yourself. I have a lot of people say, “I don't have the time. I'm so busy getting clients, doing my work.” 

But if you don't take the time, it can lead to bankruptcy, A lot of people will tell me, and this is a big one, “I can just hire somebody to do all the accounting or taxes for me”, and at some point in your business, when it gets profitable enough, you should absolutely spend the money to bring a good accountant online and a good tax professional online. 

A lot of people hire a bookkeeper and the bookkeeper does their taxes on the side. And that's not necessarily a good idea either. The really successful people you'll find have a separate accountant and a separate tax professional because these are both very specific skills and specific knowledge sets, and it is hard for one person, I think, to do both. 

The other reason is one can check the other. I've had clients that have an accountant and they bring all the P&Ls to me, and I find errors in those P&Ls because I'm looking at them from a different perspective, and we have to go back and correct the accounting so they don't lose money on their taxes. 

That happens all the time. I have accountants that retire or tax preparers that retire, accountants that were also tax preparers that retire. I've inherited those clients and the mistakes I find sometimes baffle the mind, but I find them. That's one thing you should think about, how do you know who to hire? 

How do you know who to hire for an accountant? How do you know who to hire for a tax professional, unless you know the subject yourself and know how to interview these people. If you're not interviewing your accountants and tax professionals, then you're doing yourself a big disservice and that could lose you money. 

Here's an example: If you owned a plumbing company and you are gonna hire a new plumber, would you sit down and interview that person to see if they were a good plumber?

Absolutely. But how would you know how to interview them unless you knew the plumbing business? Unless you knew how to do it yourself. At least the basic concepts. And it's the same way if you're gonna hire an accountant, or a tax professional, then you need to know how to interview these people. 

if you get one of these accountants that says, just drop it off, I'll call you when it's ready. Take your stuff and turn around and run the other direction because they don't care about your business. You're just another number. And that's sad. Your Tax professional should be sitting down with you at least twice a year, once during tax season and another in the October, November timeframe, to see if you need to make any changes before the end of the year, that could save you some money. And if they're not having these conversations with you, then something's wrong. For me to do my job, as a tax professional, I have to learn your business. so I've had to learn the plumbing business, the painting business, the electrical business, all the different trades. I've learned all of them plus other things all of the people that work for themselves, the landlords, the flippers I've had to learn those businesses to be able to do a good job for my clients because I have to know the ins and outs to see what they're missing that I can include to help them save money. 

A lot of people are lucky to get somebody that is good at what they do and cares. These people should be sitting down with you, at least yearly and having a conversation with you. I hope you will take that to heart so that you are hiring the right people. 

And if you're doing all of this yourself, you're still small, and doing it all yourself, then learn this information. It will come back to save you so many times. It's amazing. So when you hire somebody, interview them, make sure they know your business or they are willing to learn your business. 

And they're willing to sit down with you every single year and have a conversation, see where you've been, where you want to go, and can give you the proper advice. That's what you're paying them for. That's what you should be paying them for. 

Now, a lot of people will buy some software and do their own taxes, and that's fine. That's fine. But the mistakes I see, when people do that are amazing. Do you know how to set up your chart of accounts? 

Because a lot of these softwares will give you a basic chart of accounts. These are the basic items. But for you to be able to do a full analysis of your business, you have to learn how to set up a chart of accounts, how to, adjust the chart of accounts. And that's something most people have no clue how to do, but it's very important because it, is a pain to go back and correct it later unless you set it up properly to start with. 

So you have to take that into consideration if you're doing it yourself, and as I said before, you need to do these things simply because life happens. And the more you know, the better you are. 

If you go out and read some of the people that are really successful in this country, or in the world for that matter, Warren Buffet's one of the most, wealthy people in the world. And, he gave some outstanding advice. Somebody asked him, how to be totally successful, like he's been,  

He says investing in yourself is 50% of being successful, and by investing in yourself, he was referring to educating yourself, if one of the richest men in the world says that, then that gives some credence to what I've been saying all this time. This is the reason that I've written my books and do the podcast. For people that are looking for side incomes, I help them get 'em set up and things like that. 

I want to help people to be successful. But to do that requires education and. that's what I want to help with I want to educate people becauseI believe there's probably nothing more satisfying in the world than owning your own business and being successful at it. That's part of the Great American Dream here and what we've made possible in this world. 

But the sad part is that about three quarters, probably, of small businesses will fail within five years. Some of it is market conditions. Some of it is not knowing how to market properly. One of the reasons is because you don't know how to structure your business properly and you're losing money and you didn't know this because, if you start losing your money in the first couple of years, chances are you're not gonna make it. 

And you're gonna lose money if you don't understand how money works. If you don't understand how bookkeeping works, if you don't understand how taxes work and if you don't understand legal formats, those things are vital for you. And so I encourage you to, whether you learn from me,  or whether you learn from somebody else or whether you find a good mentor someplace that can help you with this. You need to be willing to educate yourself and take the time to do it. You'll be amazed at how much better your business runs and how much less stress you put on yourself, because you'll have a better understanding of what you're actually doing. 

That's where I'm going to hand off things today. We're gonna get more in depth to these various things, and I'm gonna try to give you a better understanding of them. Not as good as reading the book I wrote, which took me two years to write and has 50 years worth of experience put into it. it's pretty good. I was kind of proud because I got a five star review on it the other day and I say I never expected that because it's my first one and whoever expects a five star review on their first book, so I was pretty proud of that. 

I hope you'll come back next week and we will get to talk about more things. And I've got the next five episodes planned out. One of 'em is gonna make a lot of people mad, but that's all right. I have some things that need to be said and we're gonna have some good guests coming up in the next year that, gonna give you some things to think about also. So thanks for coming along today, and we'll see you on the flip side. 

You have been listening to the Mastering Business Basics Podcast with your host, Roger Pearson. For more information about all of the business education options that are available, we invite you to visit https://seagulltechnologies.com and continue your journey.