I have been running my side business for just over a year now. It was a tough start – but we got there.
Starting a business requires research and investigation. You are continuously learning about the pros and cons of being a small business owner, and if you have been a wage earner, you consistently compare the two. The thing is, they are so different it is difficult to compare. Each can provide you with something that the other can’t.
Being an entrepreneur is all the rave nowadays. But while I was listening to a podcast something the host said really stood out. Everyone wants to be an entrepreneur because we hear the success stories of the 20 somethings making millions overnight. But statistically, the probability of you falling into this kind of success is low. Which is why, I think, as a business owner we need to define what our goals and purpose for the business will be.
I’m not a tax expert, but as I understand it, a business’s profit is taxed at a flat rate of 30%. Whereas under income tax, your tax rate won’t hit 30% until you earn around $144K per year. The benefit of a business is that you are able to claim deductions (related to business activity) reducing your taxable income. However not making a profit (or breaking even) would mean no money for saving or investing. The business would simply fund it’s own operations. And when you do start to make money, your business will be taxed at a higher rate then income tax (unless your personal income is greater then 150K, and you start to break into the 30+% tax bracket).
If you think about your salary, like the business’profit, you are paying less tax earning a salary under 144K per year. Note that less then 6% of the population earn this salary, which means 94% of the population will be paying a lower tax rate then a business (exc. sole traders and partnerships – whereby the business taxable income is added to their personal income).
It doesn’t cost you to earn an income. Therefore your entire salary is like a profit – for you to use as you please. On the other hand, it does cost a business to earn their income, so the business’s profit is like a salary.
I know this might be an odd way to look at the world of business, but it helps me define what kind of business I want to run and the reasons behind why I would run one. We have all heard that 4 in 5 businesses fail within the first 5 years. That is a 80% failure rate. Then in the next 5 years, another 4 in 5 will fail. That makes it a 90% failure rate in the first 10 years. These numbers make it clear to me that it is not enough to start a business with the idea of becoming a millionaire or for the pleasure of being your own boss. You need to start a business base on passion. And maybe…. don’t leave your day job.
My husband is passionate about performance cars. We spend so much of our personal income on car parts and motoring events so I suggested he start a performance parts business. Why? because this would allow him to fund his passion through his business instead of our personal income. He would be able to buy and sell car parts, enabling him to earn enough money to reinvest the income into a business owned performance vehicle for trade shows. Whilst it addresses a business need, it will also satisfy his personal interests. Earning more money through a side business, which is relevant to what you would have spent your personal savings on, is a great way to fund your business and passion while you nurture it through growth. If it fails, you would have had 5 great years of working on something you love, and if it succeeds you can continue doing what you love. But you also need to have an exit strategy. At what point, will you stop investing your personal income into the business which may be draining your funds dry? Don’t invest more then what you would have if you didn’t have your business. Start small, learn and grow. We are not all born entrepreneurs. I’m just a mum, finding ways to support myself and my family.