Start Your Own Company

Robert Frost, once said, "By working hard eight hours a day, you may eventually get to be the boss and work hard twelve hours a day." The key to financial success is not in working harder, but in working smarter. One of the best ways to work smarter is by starting your own business. You can have fun, make money and enjoy tremendous tax deductions.

The United States is one of the easiest places in the world to start your own business. How many times have you heard of an individual coming to America as an immigrant with no formal training or education only to succeed financially? It doesn't matter how much money you are making, your educational background, your gender or your heritage everyone can start a business.

Imagine how helpful $100, $500 or even $1,000 extra a month would be. Beside the money, one of the most fulfilling aspects of running your own successful business is the ability you can have to control aspects of your life. You choose the hours, the types of customers and your co-workers in short, almost everything.

Getting started

The first thing you need is an idea. What do you want to do? Consider your interests and choose an activity you would enjoy doing each day. If you have knowledge in a specific area, you could sell consulting services; if you have a talent, such as photography, you could sell your talent.

The key is coming up with an idea you can really live with. The rest is easy. One of the current, very popular small businesses involves auctions on the Internet through companies like Ebay. Typically, individuals buy items at wholesale-type prices at local flea markets and garage sales and then re-market the items through on-line auctions. There is no large inventory to warehouse, acquisition costs for goods are low, marketing is inexpensive, profit margins are good, you work your own hours, and the hunt for re-salable merchandise can be fun and exhilarating. This is about everything you could want from a home-based business.

As far as the federal government is concerned, all you need is "the intent to make a profit" and you are considered to be in business; it does not matter whether you eventually make a profit, but you must have the intent to do so.

As a sole proprietorship, you are presumed to be engaged in a profit-making business if you show a profit in three out of five consecutive years. This means that for the first two years you are in business, you automatically qualify to take tax deductions in excess of your business income. You do not even need to report to the IRS that you are in business until you file the tax return (Schedule C) for your sole proprietorship at tax time the following year. You simply register and obtain an occupational license with the city or county where your business is located.

If you intend to operate your business under a name different from your own, be sure to comply with the "fictitious names" statue for your county or state. Open a separate checking account for the business, have business cards made up and distribute them and that's about it. You are officially in business.

Strategy: Begin marketing your business immediately.

It does not matter whether you are selling consulting services or crafts; in order to attract customers, you have to let them know you exist. Marketing and sales drive a company's revenue.

Market as often as you can. One of the least inexpensive ways is word of mouth. Tell everyone you know what you are up to. In addition, offer all your new customers incentives to bring in other customers.

As an entrepreneur and budding business owner, don't bog yourself down with hypothetical "what ifs?" Dont mentally handcuff yourself with all the potential downfalls of a business and end up doing nothing. Have confidence in your business idea and your abilities. Imagine what the naysayers said to the creators of the pet rock and cabbage patch dolls before these ideas made millions.

There is another benefit to getting off the ground right away: by marketing your business immediately, your business expenses become fully deductible in the year you spend the money, as opposed to treating them as start-up costs, which must be amortized over a five-year period.

Business expenses

Some of the greatest benefits from owning a business are the tax breaks you get from the IRS. By using your personal assets as business assets you qualify for deductions for thousands of dollars of expensesitems like cars, phones, home offices, travel, retirement plans, employing your family members, and many others.

Strategy: Turn personal expenses into deductible business expenses.

Because your automobile represents one of your largest personal expenses, it is also one of your greatest potential tax deductions. For tax year 2006, you will be able to deduct 44.5 cents for each business mile driven. Imagine if you drove 15,000 miles per year and were able to turn half (7,500) of those miles into business miles by planning your trips around legitimate business purposes, such as visiting clients, picking up business supplies, banking and other business reasons. This single strategy would give you a $4,337.50 tax deduction (7,500 miles x 44.5 cents a mile).

Instead of taking the standard mileage deduction, you can choose to depreciate the value of the vehicle and take actual expenses, such as car insurance, repairs and gas. You can choose whichever method benefits you most. If you choose the depreciation-plus-actual-expenses method, you cannot change to the mileage rate in future years. You can change from standard mileage rate to actual expenses, so it is generally better to start with the standard mileage rate for your first year in business.

Your home is another large personal expense that is a great potential tax deduction, whether you own or rent. If you use part of your home exclusively for your business, even if it is to store inventory, you can deduct that portion of your rent or mortgage interest, real estate taxes, insurance, utilities and even furniture used in your office. If you buy a new sofa for $1,000 and put it into personal use, it has cost you $1,000. If you are in the 31% tax bracket and put that same sofa in your home office, it would cost you only $690 after your tax deduction. That is like having the IRS contribute $310 toward your purchase of the sofa!

Strategy: Employ family members in your business.

Employing your family members and funding retirement plans are other types of powerful strategies open to you through being a sole proprietorship. In 2006, your children who legitimately work in your business can earn up to $4,550 free of federal income tax, and you can still report them as dependents (if under age 19) on your tax return, as long as you provide 50% of their support.

In addition, if they are under the age of 18 and employed by your unincorporated business, you do not have to pay Social Security, Medicare or Federal Unemployment taxes on them. You get the full deduction for their wages and they pay no income taxes on the earnings. Children also qualify to fund retirement plans when they have earned income. You can take these deductions whether or not your business shows a profit.

Just think, your children could set up a Roth IRA with their earned income or, if your company is very successful, you could set up a SIMPLE-IRA retirement plan for your business and its employees (children) could contribute up to $6,500 for 2001. To illustrate how powerful this is, consider a 14-year-old boy who earned $6,500 from working in his parent's business and contributed all of it to his SIMPLE-IRA. If he left that money in this plan to grow until age 60 and averaged 12% annually, he would have amassed more than one million dollarswithout contributing one more cent the rest of his life!

Even if you do not employ your children in the business, your small business can provide other vehicles for you to save for retirement. A variety of retirement plans can be set up through a small business, as long as you make a profit.

As you can see, the benefits of business ownership can be almost limitless. You can add income to your monthly cash flow, turn non-deductible, personal expenses into deductible business expenses and save for retirementall while doing something you enjoy.

Beginning a business is inexpensive and you don't need any special qualifications. So stop dreaming of what you want to do and get down to business today.

-Jeff Herb is Director of Financial Services and a Financial Hotline Educator for http://www.TheMoneyExpert.comm. He has been an active Hotline Educator for over 10 years.

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2006 International Administrative Services, Inc.