Chapter 22: Own Yourself First - The Millionaire Fastlane

CHAPTER 22: OWN YOURSELF FIRST

Events and circumstances have their origin in ourselves. They spring from seeds which we have sown.
~ Henry David Thoreau

The Paralysis of “Pay Yourself First”

Fastlane success demands a well-tuned vehicle primed and prepared for the journey that awaits. You are the vehicle to wealth. You are mechanism for movement. You are responsible for making the journey and the first step in taking charge of you, is to own you.

Surely you've heard “Pay yourself first,” a common Slowlane declaration born from the classic 1926 book, The Richest Man in Babylon by George Clason. A good read, but fundamentally flawed.

If you aren't familiar with “pay yourself first,” it's a Slowlane doctrine that urges you to save your money (pay yourself) before all else-food, gas, car payments, and other bills. This supposedly forces the Slowlaner's savings rate to accelerate their putrid wealth acceleration vehicle: compound interest via market investments.

The fact is, advising a Slowlaner to “pay yourself first” is like advising a quadriplegic to climb a flight of stairs. It's futile.

If you have a job, examine your last paycheck.

Is your gross pay that same as your net pay? It isn't and for some, it may be as much as 35% less. Additionally, pre-tax saving weapons such as 401(k)'s and IRA's severely limit your contributions to infantile amounts where creating wealth on a pre-tax basis in a job becomes organizationally penal.

If your primary income source comes from a job, your ability to pay yourself first is paralyzed because the governments are paid first! For “pay yourself first” to be legitimate, you truly need to pay yourself first in infinite amounts and the government last. You must own your vehicle.

To Pay Yourself First, You Must Own Yourself

You can't pay yourself first if you don't own yourself. Your vehicle (you) must be free and clear. When you have a job, someone owns you. And when someone owns you, you aren't paid first, but last.

The first step to controlling your vehicle-you-is to own yourself so you can truly pay yourself first and the government last. That is accomplished by shelling your business into a corporation that you control.

The corporation serves as the Fastlane frame because it offers the immediate tax benefit of “pay yourself first” versus “pay yourself last.” When you own a corporation, net profits are reduced by expenses. The remaining profit is taxed, and those taxes are paid to the government. Additionally, corporations exist separate from their owners and survive time. It's the surrogate structure that serves as your business system.

When you own a corporation, the government is paid four times a year, once every quarter through estimated taxes. If you have a payroll, taxes are paid each time you pay your employees. I pay myself first 365 times a year while the government is paid four times a year. Doesn't that sound like a structure that is conducive to not only “pay yourself first” but also wealth?

How to Own Yourself

Like many entrepreneurs, I made the horrific mistake of getting into business as a sole proprietor. Any “adviser” who recommends a business structure as a sole proprietorship or general partnership should be avoided like an airport toilet. These entities are risky because they don't protect you and catapult unlimited liability onto you and your personal assets.

If you're a plumber organized as a sole proprietor and you accidentally leave a pipe cutter at a client's house and the client's three-year-old kills himself with it, guess what? They're coming after you because you chose an ill-protected business entity. Instead of suing a corporation, they sue you and everything you own is up for grabs. The best business structures for your Fastlane business are:

• C corporation
• S corporation
• Limited liability corporation

Each has its advantages and disadvantages, but all share two common benefits: limitation of liability and tax efficiency.

The C Corporation
The C corporation is a business structure that survives time and can be easily transferred. Corporate profits are taxed at corporate income tax rates, with net income distributed to shareholders.

Some C-corp owners use this structure to deploy a strategy known as “income splitting.” The strategy is to partition the business's income to both the owner and the business, effectively lowering the tax bracket of the two, versus a large income for just one. While it's not within the scope of this book to dive into tax strategy and corporate formation, it does offer up a Fastlane component, which is control.

While C corporations and their owners are subject to double taxation (tax on corporate profits and dividends to shareholders), they are advantageous for larger corporations and corporations with an “asset growth” strategy. In other words, if you don't plan on distributing profits and are focused on building “asset value” over “net profit,” C corporations do the job. The majority of publicly traded companies are C corps that do not distribute dividends to their shareholders. They grow revenue and asset value.

The S Corporation
An S corporation is like a C corporation except that it isn't taxed as a separate entity. Considered a “pass-through” entity, taxes aren't paid at the corporate level, but at the individual level and reflected on the owner's personal tax return. S corporations also have some tax advantages because profits are not subject to the hefty self-employment tax that comes with sole proprietorships. However, unlike C corporations, which can have limitless owners, S corporations are limited to 100 owners and will have additional filing requirements.

The Limited Liability Corp (LLC)
An LLC operates just a like a corporation with the benefits of a partnership or a sole proprietorship. LLC profit passes through to its owners, called members, and is reflected on their personal income tax. LLCs are also considered “pass-through” entities because profit passes directly to the owners. For partnerships, the LLC or the S corp is the recommended structure in lieu of a general partnership, which, again, does not offer liability protection.

For small startups, I recommend either an LLC or an S corp. Stay away from partnerships and sole-proprietorships, as they do not limit liability. Creating a corporation is not as daunting as it seems. Depending on your state, it shouldn't cost more than $1,000. In Arizona, one can be created for less than a few hundred dollars.

Selecting an Entity

Selecting an entity depends on your goals and your vision for your business. Here are some general questions to help you decide.

• What is your exit strategy? Go public? Sell to private investors?
• What is your growth strategy?
• What is your liability exposure in the worst case?
• Do you plan on raising capital now, or in the future?
• Do you plan to hire employees?
• Do you plan to take on new partners?
• Do you plan on earning profits fast? Or not for a while?

Your answers will determine the best entity for you. In my businesses, I use both an S corp and an LLC. And finally, I'm not an accountant or an attorney and this should not be construed as professional advice, so please, consult with someone who has the appropriate credentials to verify (or disprove) what I recommend.

Chapter Summary: Fastlane Distinctions

• “Pay yourself first” is fundamentally impossible in a job.
• To own your vehicle (you), start a corporation that formally divorces you from the act of business. Your corporation is the body of your surrogate.
• The recommended Fastlane business entity is a C corp, an S corp, or an LLC.