Sunday, December 11, 2011

Structuring Your Business

There are 3 traditional ways to operate a business in Canada;

i) a sole proprietorship
ii) a partnership
iii) a corporation

I’ve alluded to incorporating in my past but not provided any basic information. While there isn’t much in the way of unconventional wisdom in this post, I have found new entrepreneurs approach this whole discussion with fear & trepidation. I hope the following discussion will assuage those apprehensions. It really isn’t a big deal and no matter what you do you can’t cause irreparable damage with your choices

SOLE PROPRIETORSHIP
Technically as soon as you sell something, you are in business. This is a sole proprietorship and any profit you make is reported on your personal income tax return. The degree to which you grow from that point is just a measure of desire. You can stay at that level if you want. Of course CRA doesn’t spend too much time chasing people who have a garage sale or somebody selling quilts & crafts to friends. In fact, if your revenue is under $30,000 they don’t even expect you to charge GST. To be blunt, you’d be considered a nuisance more than a source of tax revenue.

Since you report any income from a sole proprietorship on your personal tax return there are two impacts, one is bad and the other is good.

Firstly, the bad one; your profits will be taxed at personal tax rates. For those who haven’t been paying attention to my previous posts, the reason it is bad is because governments charge much higher taxes to individuals than to businesses (but that’s another post).

The second impact is the good one. As a sole proprietor you are still considered in business so you will be recording all your business related expenses and deducting from your business income just like any other incorporated or partnership business.

The sweet spot is that if your business expenses exceed your business income in any given year you are allowed to deduct those leftover business losses from income on your personal tax return, specifically employment income! In other words CRA allows people to “grow” into their business as a part-time activity while still maintaining their regular 9-to-5 job. I recommend this option as a risk mitigation strategy.

The survival statistics on start-up businesses are not good. It can take a number of years of investing in these losses before a business can have all the pieces working well to make it successful. So CRA views this allowable support for a few years as a smart thing to help you out. Of course, don’t expect to run up continual losses over many years without any taxable profit. CRA is not that stupid.

To operate a simple part-time service as a sole proprietor doesn’t require much at all. You may need to get a municipal licence, or other certificates & approvals depending on your line of business. These may include registering physical store-front premises, parking, health & safety, employees and other considerations.

The one thing I recommend from Day 1 for any size business is to out-source your accounting and taxes to a good bookkeeper and/or accountant.

PARTNERSHIP
I won’t dwell on partnerships much. In some respects they are taking the limitations of a sole proprietorship and layering on the complexities of multiple decision makers. Many entrepreneurs often get started with peers and associates. Teamwork & collaboration is instrumental in building a successful business. However, I just think a partnership requires more skill and leadership to manage than a corporation. Many inexperienced entrepreneurs are intimidated by the concept of incorporating and feel a partnership is “simpler & easier”. I’ve seen many potentially good businesses flounder because the owners are spending so much time on the politics & stress surrounding management of the partnership instead of applying their efforts to decisive, proactive leadership in the business. I suggest you avoid the aggravation and start your venture yourself. If you need certain skills you can initially bring in those same people as vendors & suppliers to your business. Gain some leadership and business management skills first. Allow yourself the opportunity to see how things perform in an entrepreneurial environment before you hand over the keys. You can always invite additional people to join you as an equal or subordinate peer later. I would add a special caveat to family members and spouses. The stress of managing a business together can sometimes ruin good family or marital relationships.

Once you have a good understanding of business and acquired solid leadership skills there are some benefits of partnerships that are worth investigating, but for new entrepreneurs I recommend you start your journey with either of the simpler options; the sole proprietorship or the corporation.

INCORPORATION
Don’t let the word, the concept or your own fears prevent you from considering this. Once you start to seriously grow your business; once you are beyond being a dabbler for beer money; once you think you need help to keep up with sales; once you leave your employment position to work full time on your fortune; you should incorporate! In my opinion the benefits far outweigh the drawbacks. I prefer to discuss the drawbacks in worst case scenario; in other words; “Why wouldn’t you incorporate?”

The costs - this is often trotted out as a good reason not to incorporate. The truth is you can incorporate anywhere in Canada for $500 or so. There is a myriad of online services, including the federal government’s own website that can set you up as a corporation in hours or even minutes. The annual fee to keep them going is in the neighbourhood of $25 a year to file a piece of paper. So if your whole business venture is a flop, you are out-of-pocket $500. That is a throw-away cost. I would guess you probably burn that much running your car for a month. If anybody can afford to incorporate, then it isn’t much of a downside risk. What else could it be?

The financial record keeping - In my opinion anyone in business (excepting perhaps the handmade crafts people) have to pay taxes whether you’re incorporated or not. Anyone who has looked at paying taxes knows good financial record-keeping is essential to minimize tax. So whether you’re incorporated or not you should still have a bookkeeper and/or accountant handle that part for you. So paying an accountant to reduce your taxes is the same whether you are a sole proprietor or a corporation; that can’t be the reason.

The extra legal paperwork & administration – To keep your corporation running, the government only wants three things; i) you must pay your taxes ii) you must file your tax returns so they can confirm you are paying your taxes and finally iii) a piece of paper (& fee of course) that provides contact information in case they want to chase you for not paying your taxes! Do you see the common theme? Your accountant will look after i) and ii) leaving you with iii). You’ll spend longer waiting in your dentist’s office every year than filling out that form and mailing it with a cheque. The incorporation service or lawyer you selected for getting the corporation set up will have probably given (or charged ) you a little binder. It contains all the legal & administrative paperwork. In most cases, it is put in a drawer that day and will never again see the light of day. In theory, you are supposed to hold a meeting with yourself once a year and write some things down (meeting minutes and resolutions etc). In all practicality, I can’t think of anyone who would want to review those meeting minutes. My suspicion is you will go to your grave with that binder still in the drawer. The only exception will be those partnerships where one partner or spouse is suing the other for breach of their partnership agreements. In those cases you need to have all these documents formally kept up to date… primary proof that partnerships are more complicated than corporations!

The benefits of incorporation are numerous. The primary benefit is the provision of specific legal protection from liability. Corporations live forever; so if your business holds assets in United States, you will simplify the issue of US estate taxes. Corporations allow you to income split between family members who are shareholders; significantly reducing taxes. Corporations allow you to determine specific dates for payment of income to yourself to further reduce taxes. In my PHSP business alone, a corporation has unlimited room for eligible deductions whereas sole proprietorships have CRA-specified limits. In 2011 that limit is $1500 per adult.

And as for closing corporations down, you just have to ensure you’ve paid your last taxes and let them die. You can file paperwork and pay a fee to have them dissolved, or if you don’t file the paperwork for a period of time, they are simply placed on the defunct list. Done!

I have opened and closed dozens of corporations in my little empire. They are cheap, fast and easy to utilize. I don’t see any significant risk in a worst case scenario and they have significant upside.

Of course, when you are setting up your business you should talk to a credentialled expert in this field. My unconventional wisdom suggestions fit my risk profile but may not fit yours.

Thursday, December 1, 2011

Trans Border Credit & Financing

This is a longer post than usual because the steps are so annoyingly elaborate for what is a relatively simple process. My business partners and I are investing in US real estate during the 2008-2010 recession. This is what we did to handle the finance side of it. I streamlined some of the steps and eliminated those steps we took that resulted in a dead end. So you are already benefiting from our experience.

1. Start doing some research about candidate city & state in which you would like to invest. Continue doing this for some time but you eventually need to decide to make a purchase at some point. Nothing is perfect. We selected Dayton, Ohio in 2007 because
a. The GM plant had closed over a year prior so the bad news was behind us
b. There is a major US Air Force base and two universities there to provide some stable baseline employment
c. It is a significant city but not a major metropolis so deterioration of urban infrastructure was not overwhelming
d. It is close enough for commuting to two major cities – Cincinnati and Columbus
e. It is not a tourist destination with fickle rental markets

2. Open a personal Royal Bank of Canada bank account; separate from any other account you have. This is your US property investment account. It will morph into a business account.

3. At the same time set up a US account at RBC Bank USA through the same Royal Bank branch. This is not a simple US dollar denominated Canadian account. It is a bona fide US bank account with US cheques encoded for processing in the US cheque clearing system. You will be selecting a physical branch in the US where the account will exist. Wells Fargo is the only other financial institution that offers this to normal Canadians, as far as I know.

4. Link the two Royal Accounts to move money seamlessly and immediately

5. Initially, get the RBC Bank USA cheques personalized in your name with your CDN home address on the face. They will take some time to arrive. Only order the minimum

6. Deposit a token amount of money in your Canadian Royal Bank account

7. Transfer a little money to your RBC Bank USA account so you have funds in each account

8. Over the next few months make more deposits and transfers. Don’t worry you will need your funds in US dollars for the property purchase so start sending it down now.

9. This activity will also generate monthly statements so you can confirm all the bank correspondence arriving at your home address from both accounts is switched to online. You cannot be receiving paper from the branches, as you will be changing the mailing address in later steps.

10. Incorporate a company (I will call it Alpha Co.) in your CDN province with you, your family and/or your business partners as shareholders. If you don’t know how to do this I’ll be putting up a blog post in the near future.

11. Incorporate a second company (I will call it Bravo Co.) in your CDN province with Alpha Co. as the only 100% shareholder. This is to avoid having Alpha Co. declared a sophisticated company because of an ownership of foreign US stockholding. It allows Alpha Co. to retain its qualification for the small business tax deduction (lower tax rate) as it will earn active income from this company rather than from being a passive asset owner. Money will move through Bravo Co. but never remain in it as it would be taxed at a higher rate. You can later sell or transfer shares in Bravo Co. to investors or family members without affecting any property ownership (land transfer taxes), US estate tax, or deemed income tax implications. You may want to do this to raise cash from outside investors or redirect your income streams. Never sell more than 49% so you always retain control and the ability to roll-up the revenue to your master company.

12. Incorporate an LLC (I will call it Charlie Co LLC) in the state where you will be doing business as a landlord – use an online service or a local lawyer.
a. Pay for it using your RBC Bank USA account
b. Have the only shareholder as Bravo Co.

13. Pass Director’s Resolutions in all the corporations to agree you will use the personal accounts for business purposes to reduce costs and facilitate low cost transfer of funds. All transactions between companies will then be accounting entries.

14. Now you can go shopping for US rental properties – We bought houses at first but found small apartment buildings more effective. It gives you diversification in the revenue stream

15. When you make the purchase, file the title in the name of Charlie Co LLC

16. Hire a property manager with whom you can work – This is tedious trial & error process or perhaps a referral if you’re lucky. You want someone who does it full time; not a realtor who does property management as a sideline. They need to provide reliable and credible monthly financial reports and have a capability for advertising, evictions & screening tenants as well as maintenance monitoring.

17. Get property insurance on your property

18. Arrange with the Property Manager to transfer the balance of your income to RBC Bank USA account each month. This will be your gross operating earnings; it is net of their fee, the float held in their account, and any other expenses

19. Set up automated withdrawals from your personal Royal account for
• Municipal taxes on your property
• local utilities on your property
• property insurance on your property
• any loans you used to acquire the properties

20. If you used an online incorporation service, ask your property manger to be the registered representative of your company in the state. You want to have a physical address in the US where you can have mail received if anything ever comes up. If you used a lawyer, it is likely included in his fee.

21. You will need to run like this for a while, say 6-12 months, until you are reasonably satisfied with your property manager. You are about to establish a strong link with him so be absolutely sure before you start changing the physical addresses.

22. Apply for an Employer Identification Number (EIN) so Charlie Co LLC will become an entity with the US IRS for taxes – don’t try to avoid US taxes.

23. Once the EIN is approved file the conversion to a Type “C” corporation from an LLC

24. By now, you should have confirmed online banking and no documents come to your home address each month. With your property manager’s permission, switch your bank account physical and mailing address to be your property manager’s physical address in the US.

25. Once your RBC Bank USA account has been open awhile, fly to your bank branch for a personal visit. (Ours is in Naples, Florida and the trip is a business expense!)

26. Ask to open a companion business account in corporate name with the same physical address as your personal bank account (i.e. remember the address is the same as the property manager). This may not work for you so you have to be creative about a physical US address.

27. Apply for a credit card in your personal name (or preferably business name if possible) to establish some business credit history in the US

28. Apply for a small LOC on your business name. (if possible) to establish more credit history

29. Transfer all automated debits & credits from your personal account to your business account.

30. One your first annual property visit you’ll be fly to your state. Purchase a cell phone for your business locally in that state. Register your address as the property manager physical address but have the cell bills sent to your online email address

31. Have that business phone forward to your cell phone in Canada with some sort of low rate plan

32. Set up a 1-800 number for your business terminating to that cell phone in your state; establishing more business credit.

33. You are now well on your way for credit building for future mortgage capability so you can purchase assets in the US directly. You will have credit bureau account references to your business name with a physical address (your property manager) from the following entities:
• Bank
• Credit card
• Civic municipality
• Electric power utility
• Gas heat utility
• Water utility
• Property insurance company
• Property manager
• Cell phone provider
• Toll free provider

34. Get your DUNS number from Dunn & Bradstreet

What you will have at this point is:
• A tax friendly Canadian corporate structure in which you can change ownership with your investors of any components of the enterprise without generating a costly transfer of physical property assets in the US
• The physical investment property will be forever owned by Charlie Co LLC meaning US estate taxes and any land transfer taxes are eliminated.
• You have limited your liability through the Charlie Co LLC corporate entity in your state where your properties are located to protect you from lawsuits
• You have a US Internal Revenue Service account with an EIN; it will be filing regular tax returns as a full bona fide C corporation
• A Business Bank account in the US with US cheques to facilitate payments in the US banking system and you can pay for any services you need in the US with US cheques
• You can now move money between countries without fees (other than exchange rates).
• You own a business in the US linked to a US physical address with a US business phone number
• You have some credit history in the US with which you can at least approach some lenders for mortgage financing directly within the US

Monday, November 21, 2011

I just got laid off. How can I make more money?

That question is the holy grail of society. Substantial sums of money, it seems, is equated to a successful life, although the philosophical debate continues about that. I don’t think there is a person alive that hasn’t asked themselves that question at one time or another. Of course, there are unspoken extensions to that question. One or more of these adverbs could or must be added depending on the questioner’s circumstances; easily, passively, without high input costs, legally, quickly, and so on.

Primarily for me the answer lies in asking a supplementary question of context; “Where does the money come from”? I was listening to a tape of Tony Robbins and he said “Your income is in direct proportion to your contribution”. That should inspire you to say “If I contribute a lot I should earn a lot”.

Some people suggest; do what you love and the money will follow. In some respects that works. However, I don't necessarily think it is the passion for some specific idea, concept, service or product that is essential. I'm not particularly passionate about some of the problems I'm solving for my customers… I just know I can do it effectively. I think it is more about embracing a philosophy of what you're doing to contribute.

By extension of logic then the following becomes true. Since I'm not thinking about "my" issues (and for most people asking this question, "my" issue is financial), then the business focus truly is on the customer. My marketing does not need to pressure them and is more sincere. My problem solving efforts are to make the business run more effectively to help customers even more. With that approach my customers can sense the sincerity. Consequently, sales just keep growing. The growing sales have the collateral result of putting more money in my pocket. It's like an upward spiral.

I have a consulting practice, two web based service businesses, a product manufacturing/wholesale business and a real estate investment business. They are the end result of answering that question by figuring out how to contribute more.

This question usually comes up when you hit the wall. Your company just laid you off in the middle of a recession. I don't want to sound patronizing but as an employee I have been laid off in the middle of recessions… numerous times, and sometimes for a long time. I had nothing with which to start a new venture. The pressure is on and I felt so incapable of getting ahead. The only thing I can offer immediately is the knowledge that the recession will end. You will survive and you will struggle back up again.

When I was in that situation, my way out was to realize I had to start preparing for the next recession right then. I eventually got another regular employee job to put bread on the table; you will too. But the key step at that point is... immediately I started getting my first business (IT consulting) organized. Although it was fully functional for the next recession, it was still only able to partially pay me a decent living through that second recession. So then I started the second business in 2005 (an Internet based service company). This 2009 - 2011 recession hasn't impacted me at all. In fact, I've added the last two businesses (real estate business and another web service company) in 2007-2009 right into the face of a recession!

So, to answer the topic question, in order of increasing ease & cost of set-up, my suggestion for businesses fall in these categories:

1/ A website selling a service is cheap and fast - no inventory, very limited fixed assets, scaleable with additional clerical staff. You just need a superior website, intelligent advertising and solid service delivery. You can compete globally with international conglomerates if your service is a better mousetrap. My first service website was pretty rudimentary when I look back now. I am amazed that within 2 years it was doing over a million in revenue. Before you get too excited that is revenue; the net earnings were still small.

2/ For a consulting practice, you just need your educational credentials, excellent service skills and what I think is the key ingredient... the savvy to run it like a business instead of a high priced employee job. Some, and I'd say perhaps even lots of, people can convert their existing job into a consulting practice with some concerted effort. I get ecstatic when someone says their employer wants them to become a contractor. And I sigh with resignation when they don’t recognize a golden opportunity dropped in their laps. The revenue for consulting starts flowing almost immediately depending on the time lag of your invoices getting issued and paid. I’ve been doing this the longest because to move from employment to consulting is not a major contextual leap. In other words it was simple to grasp and start the additional revenue coming in. I posted earlier about why I still think this is the best first step.

3/ A product based business - This is definitely harder to do, more risk and more activities to manage. The profit margins are thinner but potential scaled-up volume can put you in the big leagues if you have designed a better mousetrap. I'd say purchasing a small one that is already operating is the practical way to get started in learning this type of business.

4/ The last and IMHO the hardest is definitely the one that attracts most people as a simple & easy solution; investing. It is a high input cost activity – both cash and brain power. I’ve traded various types of securities for 30 years, I’m an ex-stock broker, have been involved in investment clubs and taken formal courses in all sorts of sophisticated trading strategies. In the beginning it isn’t a simple passive activity. And, it requires serious money to be put in before any serious money comes out. It wasn’t until I got the earlier businesses stabilized that I had the real money to fund this stage. Many people want to jump to this stage and take on the world alone. I’ve come to the conclusion the only reliable way to get serious cash is either long term savings or creating businesses that generate good cash flow. Savings is a concept seemingly lost by today’s governments, and citizens. Everybody seems to be running a deficit. So thinking you can get ahead consistently by shuffling paper assets around is a forlorn hope. So that leaves operating a business.

In summary, my advice is to keep your eyes open; look around to see what problems people are having. Most people are incessantly complaining about something, so there is no shortage of potential ideas. If you can address just one of their problems, your whole business venture and financial outcome just falls into place. I'm not religious but I heard a biblical quote from Jim Rohn that is appropriate... "find a way to serve the many, for service to many leads to greatness".

Tuesday, November 8, 2011

Rental Cars – A Good News Post

As entrepreneurs, we are oftentimes required to travel. Depending on how often you have to do it, where you go, and your travel companion circumstances it can either be considered a benefit or a chore. Of course, as the owner of the business, ensuring it is tax deductible is a necessary and serious responsibility, but that conversation is for another post. The two key components of travel bookings are accommodation, and transportation. This post is a about a specific component of transportation; namely rental cars.

I use National/Alamo/Europcar but I’m not a zealot about it. If one of the other providers has something more convenient, available or priced better I will switch at the drop of a hat. I would never recommend permanent loyalty to a provider of any service. We need to keep all our vendors on their toes all the time so they continually earn and deserve our business. You lose out if they get lazy and expect your guaranteed business without any effort.

There is a reason businesses want you to bundle your affairs with them and offer a discount for doing so. We’re all in business here (that is my assumption if you are reading my blog!). In our own businesses we offer discounts & incentives to get our customers to do things that are in the best interests of our businesses… such as buy more or buy sooner. These incentives are not necessarily in the best interest of our customers! So remember that when you are a consumer.

Sorry for the tangent… That being said, I enrolled in National’s frequent renter program; “Emerald Club” and it works well. I can provide, in advance, my credit card numbers, driver’s license, contact info and preferred options and rental vehicles. It does speed up the booking and the counter process. But then again I signed up with other provider loyalty programs for the same reasons so I’m not that loyal!! Back to the real story…

Car rentals are actually a thrifty expense item. I make a number of short 1-2 day trips around Canada for marketing and in my IT consulting business I have had a few assignements where I've rented cars for the day to visit client sites. The cost of a rental car for a few days is often under a $100. The collision damage waiver (CDW), however, is an item on which rental firms make a lot of money on top of the modest rental fee. It is expensive at $20-$50 a day. The counter agents are trained to encourage you to get this coverage with a line like, “It covers you in case you get in an accident when you could be responsible for the entire cost of the vehicle”.

Instead, I recommend you get a credit card that includes covering you for the collision damage waiver. Most are called Platinum cards but they are available without a fee. You can then simply decline the CDW when you pick up the car.

I have a serious phobia about paying a bank, additional money for an annual fee on a credit card on which they also charge the merchant when I use it! I’ve had heated debates with people who pay an annual fee for a credit card just to get loyalty points!!

Personally, I have 3 no-fee Royal Bank VISA platinum cards, and each has CDW coverage included. There are no special requirements or thresholds to get this card… any mallet-head with dubious credit can get one. They aren’t status symbols after all! Just apply for one or more during an economic boom when credit is easy to get. They come with very large limits but you never have to use them so they cost nothing. CIBC is the only bank that ever unilaterally cut my limits of cards for non-use. The rest of the major banks will leave you alone, once you have the card (and maintain your creditworthiness, of course)

And I have a particularly good anecdote about Royal Visa Platinum CDW coverage and this arrangement I’m recommending. I was in Nottingham earlier this year and had a rental vehicle. I had rented it on my Royal Visa Platinum card. As always, Murphy will show up at the worst time. We were backing into a parking space and the passenger side scraped into a low brick wall about a foot high. It seriously gouged both the passenger door and the front quarter panel. I figured “Oh crap, this is going to cost me! Foreign customer, inflated rates, no CDW and so on”.

However, I was pleasantly surprised. The Europcar agent in Manchester took the vehicle back without any problem. He did not want a second mortgage on the spot, he just gave me some paperwork and I was on my merry way.

When I got back to my office in Canada, I had a few conversations with RBC insurance and FAXed all the paperwork to them. They said they would look after it. That was in early May. Fast forward to late June, I get a package from Europcar with a breakout of the repair details. Good news; it was only $2,300 CAD and not any different than if I had done similar damage to one of our own cars here in Canada.

Then I noticed they just put the charge on my Royal Visa Platinum card. OK, not great, but at least it wasn’t inflated. Being the insurance skeptic, I figured … OK now I’ll have to fight for years with Royal Bank Visa to get anything back. I FAXed the Europcar claim to RBC Insurance (the insurance carrier for Royal Visa). Then the really good news; I was overwhelmed when RBC Insurance put a corresponding payout credit on my card in about 2 weeks.

I have to give high five kudos to Royal Visa, RBC Insurance and Europcar. I will continue to use my Royal Visa Platinum cards for CDW coverage with absolute comfort & confidence anywhere in the world as long as they provide that kind of customer service.

Another little tidbit on rental cars: Most consumer vehicle renters are on a limited budget so they will always book out the low-end cars. I’ve found that booking a popular consumer vehicle is a good choice even when I need or want something larger. In a number of cases, although I order a modest car, upon arrival, they are all booked out. In compensation, I am offered a substantially better or larger vehicle for the same price. Case-in-point: I was in Winnipeg last week and arrived very late in the evening. I was stuck with the only car on the lot, a Lincoln Town Car instead of my traditional modest vehicle. The fallback is if I don’t get what I want with that trick I can always pay a few dollars to upgrade to a larger vehicle on-the-spot. The moral of the story is the unconventional thinker will order a modest vehicle and often gets something much better.

The one last tip is something I learned from my experience with software. Some and perhaps most rental firms use demand-based pricing. This means the rental vehicle cost will go up if it is a popular time for booking. Unfortunately, some online web booking software is written to treat enquiries as demand. You can try this test to see if your preferred agency uses this kind of software. Go online and book a specific vehicle, for a specific location during a specific time. You don’t need to finalize the booking; just make the enquiry and close out. Repeat the enquiry & close out a few times to see if the daily rate increases. I got caught with this a few times by my own fault. I would start booking a car and then realize I hadn’t got some detail confirmed. In the time I went off to confirm the detail and got back the booking had timed out. Upon re-entering the booking, naturally, the price was higher.

It should teach all of us to pull together every piece of information required for the booking beforehand. Then book your car rental in a single clean transaction. Don’t allow it to timeout so you have to re-enter the enquiry. And don't keep checking for deals hoping you will get a lower price!

Thursday, November 3, 2011

Dividends Again

What about the tax considerations of paying yourself with a dividend, rather than salary?
a) Would CRA allow you to pay out all the corporate profits in dividends?
b) Does it matter if it is a one person corporation?
c) Can the earnings just be retained in the company and take them out later?


Yes dividends have a big advantage over salary because you can split the income amongst all your family members and utilize everyone's personal tax credits to the fullest each year. Initially, there is very little need to pay any salary at all.

The biggest advantage is avoiding the requirement to make periodic payroll deductions and submissions to CRA once you set up a payroll. My biggest beef is this extra paperwork and administration comes at a time you really need to be focused on management, sales & growth of your business. The payment of unnecessary payroll taxes is the icing on the cake.

The downside is without a T4 slip showing earnings, you won’t qualify for loans for a stick of gum, let alone a house, car or capital loan for business expansion. This is still an issue for me to this day, despite corporate revenues well on the way to 8 figures. My wife wanted a new car last week and qualifying for a new lease still took some serious arm-twisting.

Another downside of dividends-only compensation which I learned from my Private Health Services Plan (PHSP) business is the necessity of an “employee” in the family to qualify for operating a PHSP. Of course, accountants can show you other ways around that. Generally a PHSP should be opened early on but not necessarily used for claims. You should wait until your business startup period with its large deductible expenses is behind you. Then you will get greater value from the health benefit deductions.

a. Yes you can withdraw all your funds through dividends. Later once your business is making so much that you can afford the payroll taxes and you have administrative employees to do it for you, then you can set up your payroll.

b. It doesn't matter. From a business structure point-of-view (and that reflects on the tax point-of-view) a small incorporated business enjoys most, if not all, of the benefits of major corporations including the declaration of dividends.

c. Yes, you only need to take out what you want by dividends. They are more flexible than the tedious periodic reporting of fixed payroll amounts and administration of the corresponding withholding taxes. Alternatively, keeping your money inside the company is a viable tax planning strategy. When the business earns the money in the first place, the earnings are taxed corporately on the taxable income balance. In a typical small business situation (making use of the small small business tax credit) it will pay well below 20% corporate tax on this. Many people argue, by using the salary method you would avoid paying any corporate tax on it. However you would then be taxed on that same money at the personal rate (well above 20%) in the same year it was drawn out... i.e. this year - no choice. So that argument just doesn’t fly with me. For funds held back inside the corporation, you can utilize those funds as you see fit. If you decide to pay any of it out to you or your family, it will be taxed again at the personal level when the shareholders receive the funds. The key, in my mind of course, is to remember that you can now determine what year it will be paid out to yourself & your family! If, as you suggested, you build up your "pile of retirement cash" inside your corporation, then you can dribble it out to yourself over many years of retirement and pay essentially no tax on a significant part of it each year (again maximizing the use of those personal non-refundable tax credits!). Think of it as a better version of your own private RRSP.

Saturday, October 22, 2011

Start With Consulting

I have often heard the lament “I want to be successful. I know owning a business is the answer but I don’t know what business to start?” Standing at the starting gate with no clear path in front of you is a daunting feeling.

There is a surfeit of motivational speakers who can address the various psychological barriers and provide thought provoking considerations about starting a business. At the outset I’d encourage you to read or listen to as many as you possibly can. Sooner or later, however, you will have to choose a path or stay in your rut.

I’ll cut to the chase and recommend you start with consulting. It is a low overhead business; essentially zero hard costs. Meaning most of the money you earn is available for employee and/or shareholder compensation. That is why so many people confuse consulting with employment. I’ll explain why my path started conventional but the success part only came to me when I consciously embraced an unconventional approach. My outcome may address your question.

Unfortunately I started late. I remained an employee until I was 48. My biggest regret is following the conventional plan laid out by society and not taking charge of my circumstances earlier. The formula is Go to school – get a good job – work hard – retire and enjoy the benefits. That’s the plan modern western society has drilled into us… it’s conventional and 90% of us follow that plan. Sadly I’m convinced the plan doesn’t work for most of us. Give yourself this test: How is it working for you so far? My consulting career is what got me out of “the formula” and on the path to building other more traditional businesses.

Education is important because you need something on which to build a consulting career. If you don't want to embrace education with vigour and intensity, you reduce your chances of success. You don't have to become a genius but you have to embrace thinking more every day. I changed technical careers several times in my 24 years in the rut… all to no avail. So education isn't the answer, it is just a necessary part of the journey.

During my early years, I was exposed to consultants a number of times. I simply thought consultants commanded high fees because they knew everything and were more highly educated than me. My initial enlightenment came when I started work as an employee at a consulting firm. Overall, I am very thankful for that opportunity to learn how the consulting business works. As everywhere, I met some fine people and some nasty people there. The key thing was I learned that some were a dumb as a plank, but were still successful consultants becuase they embraced thinking and learning. So I conciously embraced learning about marketing, on-the-job performance, networking, presenting the corporate brand & image, meeting customer needs, solving problems from a business perspective not a technical perspective, a corporate resume, and managing customer expectations. I was able to learn all the components of successful consulting while being paid a salary; just because I watched, paid attention, and learned from those who were already successful.

Specifically, I was in IT consulting but there are a growing number of other fields being outsourced these days. A budding entrepreneur should seriously investigate if there are opportunities in your field of endeavour that could form a foundation for a consulting career. IMHO, modern businesses are embracing more and more contracting and outsourcing in all facets of their business. They are deeming everything not in their core business to be an expense worthy of contracting out. If someone can obtain the skills to effectively deliver that service; their consulting business is born.

This is all pretty conventional stuff and some employees even stay at this “contracting” stage forever without realizing they can learn from the opportunity being presented by the consulting company.

So, of course, once you think you understand how it all works, the first rumblings of business success come when you step away from being an employee to become a one-man independent consultant. You can incorporate a company, throw up a website, buy some business cards, hustle your first contract and you’re in business by the end of the week for negligible cost.

This is where unconventional wisdom starts to appear. I alluded to it in a post a few months ago. You can keep at that cycle and you will be handsomely paid for doing so. If earning handsome wages is your goal then you have arrived and many people stay at this stage for the rest of their lives.

And BTW, I consider trades as just another name for consultants. In my investment sales career many years ago, the first time I ever met a truly rich man; he was an unassuming electrician with a small fleet of trucks and workers. He had an astounding mass of cash, securities & other assets and no debt. So if you are a tactile learner and like working with your hands, it doesn't preclude you from becoming a successful "consultant"; you will just go by another name - that of your particular trade.

Back to the story; after becoming a consultant, unconventional wisdom says don’t stop here but take the opportunity to learn all the ancillary tasks associated with running a business. Despite still being self employed (Step 2 on Kiyosaki’s ESBI progression) the consultant role is a great prep school to running a larger business later. You can learn about business revenue, taxation, marketing, sales, contracts, banking, IT, vendors, finance & legal, education, accounting, conferences & travel, invoicing & receivables, collections, effective networking, and brand presentation.

Remember you are paid handsomely as an independent consultant while you’re learning all this. You are in a sweet spot. But keep in mind Jim Rohn’s adage that wages make you a living but only profits make you a fortune. A a consultant still makes wages.

So far, this has been a low risk progression from employee to consulting to independent contractor. But you are still in the middle ground; you have some freedoms and are master of your dominion but you are still at the beck & call of a client for 8 hours a day. You’ve got a single solid foundation but recessions and other risk factors lurk on the horizon. One of my businesses, Brock Consultants teaches people about living well and prospering in this realm.

There are two measures of whether you’re self employed or you’re in business. As a one-man consulting firm you don’t meet either of them:
i) You can’t leave on a two month expedition to Antarctica and expect to have your business generate increasing revenue while you’re away.
ii) You can’t sell your consulting practice because it has no physical assets or revenue streams someone could purchase.

It is rather obvious and even conventional to diversify with some of your consulting revenue. So we’re right back where we started “I don’t know what business to start?” However, now circumstances are different. You have seed capital and a primary revenue stream to nurture your second business to maturity. Some entrepreneurs jump straight in and grow revenue from a cold start at the same time they are living off the proceeds; that is a hard balance to achieve. Instead, you’re quite comfortable with your consulting income covering your living requirements and more.

So now, your are better prepared to start work on your fortune. Pick something you can launch part time; keep your consulting income as long as you can. It will get insane working full time as a consultant for wages and part time on your fortune but nobody said becoming successful was easy. Making good choices for this second business will be a topic for a future post.

In summary, my unconventional advice for getting into business the low risk way is to start your empire with a consulting practice and grow from there.

Tuesday, October 18, 2011

Timeshare Investments

This is another investing tip for the next recession. My accountant, who also happens to be one of my real estate business partners showed me this one.

We’ve all heard the pitch to attend a short seminar to receive a free TV, lunch, or stay in a nice hotel or even an exotic location on the cheap. For those of us who said “OK” we discovered the real definition of high volume – high pressure sales. After demonstrating the will power of a freight train in saying “No”, you are unceremoniously dumped in a parking lot to catch the bus back to your vehicle. You feel like you were mugged. Welcome to the world of timeshare sales.

Timeshares are common all over the world and for the most part are very attractive, sturdily constructed and well appointed venues in highly popular locations. My personal problem with them is the upfront capital commitment. It ties you down a bit; you feel obliged to either take vacations to the same place each year or trading points for another similar type of venue in another location. Some people really like going back to places, and that’s OK, just not me.

So to avoid the continuation of the mugging process, needless to say, a lot of people purchase timeshares that don’t really want, need or even use them. But they are saddled with the annual maintenance fees to keep them because timeshares are not easily liquidated… until a recession hits.

This is where the unconventional thinker is rewarded. When an economic downturn finally grips the proletariat it causes a stampede for the exit. And as with any stampede, rational thought goes out the window. The masses see the sky falling and immediately bail out of their assets just to cut their operating expenses and/or raise capital. The unconventional thinker, on the other hand, has been studying and selecting the truly valuable members of this collection of assets. His powder is dry and he is just waiting to take his shot to bag them at the lowest cost.

If you can get past all the hunting metaphors, you can pick up any number of timeshares really cheap at the right time.. They abound on EBay, Kijiji, sales websites and other general sales locations. They are particularly appealing just before December 31 when the owner will be tagged with the annual maintenance fee.

And by cheap, I mean irrationally cheap. When this last recession was just starting to bite in 2008, my real estate partners and I picked up six of them for an aggregate total price of about $80; two in Anaheim near Disneyland, two on the strip in Las Vegas, one in Banff and my personal favourite in Fairmont Hot Springs BC. Some were priced at $1, a couple at $20 and the highest was $35. These were essentially token prices by irrational people simply to offload the responsibility of the annual maintenance payments in the neighbourhood of $500 per unit.

In fact, I'm sitting in the Fairmont property as I write this. I use it as an annual retreat for strategic planning of my businesses.

We placed the ownership of these units in one of our real estate corporations so there is offsetting revenue to pay the collective $3,000 or so in fees. Our intent is to sell these 6 weeks for $1000 each during normal years and make a profit. Since they are such a small percentage of my empire I haven’t yet taken the time to build a proper marketing website to do that… I will get to it someday.

If you don’t yet have any real estate corporations, you could add them to your existing business corporation as the seed of your future real estate investment portfolio. They would begin to make travel for real estate purposes a deductible expense to your business if you want to start growing that arm of your empire. You should transfer them later because you don’t want passive real estate cluttering up your regular business.

In the meantime, as this economic expansion takes its time to get going, the four of us have been using them amongst ourselves and families personally as holidays at cost. We donated a few to charity fundraisers, used them to investigate & locate further rental property investments, and even entertained our potential rental real estate investors in them. They are basically tax deductible expenses for our real estate ventures and we got them for a song.

So, my fellow unconventional thinkers, you should start doing your research and get ready to buy or add to your collection for the next recession. There may be some more come available if this “double dipper” in the immediate term comes to pass. Worst case, the next recession (i.e buying opportunity), should be here around 2018 give or take a few years. I’ll be selling mine to the conventional thinkers during the boom that will happen immediately before the next recession.

Monday, October 10, 2011

Remote Property Management

In an old post in August, I recommended rental property investments in the US. This time I’ll expound on some of the issues we faced and solutions we implemented. These are in somewhat random order and you’ll need to sequence them to fit your own circumstances. These are all non-financial. I’ll leave those challenges for another day.

1/ Turnovers are when an existing tenant leaves and the property needs to be filled by a new tenant. In my experience, this is what will eat you alive in remote ownership situations. By definition in remote property management, you have outsourced the task of getting new tenants because it isn’t practical to expect success with a long distance approach. There are also costs; re-keying the locks, cleaning, damage repairs, advertising, utilities, ongoing activities (lawn or snow), assessing your appliances, opportunity for minor maintenance updates, and so on. Your property manager will continue to charge his fee. This is just like long term profitability in the consulting business. You are far better to have a high utilization rate (long term tenant) than a high bill rate (the monthly rental rate). Do everything you can to keep your tenants happy once you have a good one.

2/ Make the choice to purchase multi-family properties (duplexes up to small apartment buildings) rather than single-family properties. This advice is simply to diversify a percentage of your revenue stream. When a tenant leaves, you still have revenue coming from the other units to cover expenses while you go through a turnover. With only one tenant in a single family home, it is a cash call to your wallet right away.

3/ When purchasing apartment properties, you should look at those with two bedroom units. They are rented by families and are generally more stable than one bedroom units which are preferred by single and more transient tenants.

4/ We have an “efficiency” (termed a bachelor in Canada) in our apartment building for which we can’t find tenants. In exchange for doing small repairs, upkeep, lawn mowing and snow clearing we waive the rent for a fellow who lives in our “unrentable” efficiency. We basically turned a necessity into a virtue. We gave him a new snow blower and lawnmower along with a small petty cash allowance for consumables and he is very happy. We found him through a notice in a church frrequented by one of our tenants. That's a good reference in itself and you can help someone get on their feet.

5/ Getting a property inspection before purchasing - this may seem essential and normal to home buyers in Canada but our first round of properties were single family homes; some with prices under $10,000USD. We just didn’t bother because spending 10-15% of the sale price to confirm the structure seemed unnecessary. It would be cheaper just to walk away from a bad purchase and write off the purchase price. We were only caught by a surprise once; with roof issues that were covered by snow. The replacement roofing was about twice the cost of thee inspections so we just took it on the chin. Generally our apartment buildings are more expensive (up to $100K each) so we do inspections routinely on them. We have walked away from two because of the house inspection results.

6/ Managing your Manager - Again by definition, you don’t live in the city where your rental properties are located. In those circumstances this advice is a necessity. And just like employees or other vendors, if you are not managing your property manager, they will start to take liberties. In the end this is your money and nobody cares more about it than you. However, finding a good property manager in the first place is a challenge. You need three basic things provided to you;
i) punctual, accurate, reliable & thorough financial reporting.
ii) timely triage on all the first line maintenance calls from tenants (you need to give them a discretionary limit on the budget for emergencies)
iii) handling of tenant turnovers, advertising, screening, evictions and so forth

7/ As with any vendor to your business, you need to pay them a fair fee to do all this, so don’t be cheap. Too many people in their own drive for profits, forget the old maxim about a fireplace... you have to put the wood in before you get the heat. In our lower middle class neighbourhoods in Dayton, Ohio that rate is 10%. In higher rent areas it is more like 5-8% as it is in Canada. Profound bit of advice: don’t accept a part-time dabbler. You will get what you pay for! The realtor that sold you the property may want to call himself a property manager but he is not. We used the tedious trial-and-error method. We hired & fired three before we settled on our current one with whom we eventually established a long term relationship.

8/ On the other hand, even when you hook up with a good property manager; you still need to "trust but verify" (see point 6). Any property manager will have an opportunity to charge you for a number of items that may not be required. Review your monthly statements in detail and confirm everything was or gets done as paid. Your review keeps everyone honest.

9/ Personal visits – you should plan the cost of an annual visit to your properties. It is a tax deduction! Technically, you aren’t supposed to work on properties (even your own) while visiting the US, but doing a few handyman things can save paying your property manager to do them. We haven't had any proiblems crossing the border even with service trucks & tools. During these visits, you can often resolve issues with or between tenants, re-align the activities of the property manager to your intentions, assess some major pending expenses, clean up the handyman repairs, refresh personal relationships with any vendors and just observe the general state of affairs. Face-time is worth it in many regards. There are 4 partners in our little group of adventurers. Only one of us has gone down to Ohio each year. I’ve been meaning to but when it comes up I’m always seem to be committed to administrative duties somewhere else in my little empire.

10/ Diversify to additional properties in different city markets. This is an extension of my model for diversified businesses. However, one caveat is do not diversify so much that you dilute the economies of scale. You need to reach a critical mass of “doors” in a geographic area to make your property management costs reasonable. We have 8 doors in Dayton and have reasoned out that we need more. I don’t know the magic number but suspect it may be about 12-15 doors before we get full economies of scale on the property management expenses. Then we might start the whole process over again in another area. As soon as we add another apartment building or two in Dayton, we may switch to Texas... good potential with oil & gas industry going forward.

I hope 10 tidbits is enough unconventional wisdom for today. Until next time.

Thursday, October 6, 2011

Investing in Recessions

With all the hoopla in the financial markets right now, sometimes it is hard to look past the immediate situation. If a recession happens it is important to remember they are a normal part of the business & economic cycle . This is an investing tip for the next recession.

We’ve all heard the expression Buy Low and Sell High. That is conventional wisdom that makes sense. Unfortunately, everyone (and I include myself in that list) has experienced the exact opposite. Circumstances have a habit of forcing us into a corner and we have to part with a good asset at the absolute worst time. Not good for us but an opportunity for smart buyers. Unconventional wisdom asks “How do I become a buyer at the right time?”

Have you ever noticed that recessions are the times when quality asset prices are the lowest, and competing buyers the fewest? It makes sense we should all be buying in recessions and selling in the booms. But this is where unconventional wisdom appears in the guise of reverse logic. Few people take this simple observation to heart… and I include governments, big banks and corporations in this groups.

Recessions come along with annoying frequency. We go through one every decade or so; some are worse than others. However, just like day follows night, an economic recovery follows every recession. You’d think after going through the cycle once the smart person would acknowledge that fact and have his affairs in order to weather the next one. You’d think! It took me three kicks in the teeth before I smartened up, so don’t feel bad. I hope and expect that in reading this blog you’ll benefit from my experience.

Sadly, I don’t hold similar expectations of government. It frustrates me to no end that governments trot out this old story when every recession arrives… “they were caught unexpectedly and they need to use deficit spending to stay afloat”. We have thousands of very smart people running this country… in theory. Why do none of them suggest we buy, build and invest when times are grim? Then they could close the public purse during the booms when every charlatan imaginable is selling stuff to them. Instead they could be setting aside those boom funds and preparing work plans for the next recession.

Big banks are the same; the vault doors are slammed shut in a recession when there are business bargains galore everywhere. You may identify the greatest business opportunity on the planet but don’t expect to get credit from a bank in a recession to help you purchase it.

So here’s an unconventional wisdom idea for you. Look around and get a sense of the economy. Start taking steps so when your next recession hits you have your personal and business life running completely counter cyclical to it. If the next recession is looming, you may have missed this opportunity and you’ll have to weather the storm to catch the next one. Remember this old adage: Opportunities are like streetcars – there is always another one coming along.

What steps may you ask? Well on the credit side get approved for as much credit as you can get during the boom, but don’t draw out any of it. When the recession hits; everything is on sale so you can purchase any manner of income producing assets (stocks, businesses, rental properties) or capital assets at low prices for resale (cars, land, tangible commodities, vacation properties)

On the revenue side, you should diversify your income streams. Get more of them for starters. Most people rely on one single job with a purportedly stable employer and don’t go on from there. Relying on a single employment position is like sitting on a chair with only one leg. Any little change throws you off your balance. This topic deserves its own post and I’ve said enough.

Sunday, September 18, 2011

When Presented With a Roadmap

I was in Merrickville, Ontario a few weeks ago and was thanked by a young lady in their local museum. It occurred to me that people thank me from time to time for little things I do for them. Sometimes though, people are presented with fairly large opportunities. They will say Thanks but never pursue the opportunity to its correspondingly large and successful conclusion. That perplexes me, especially given that everyone expresses the desire to be successful.

There are lots of examples of this. People want to control their health & physical appearance so they sign up for a gym membership. I don’t know the exact statistics but I’m sure a gym owner knows it precisely… those new members don’t show up after the first surge of attendance & effort despite paying money every month. Another one is New Year’s Resolutions; they are often on the trash heap by February. The high percentage of lottery winners who are broke within five years is a classic example. Motivational speakers and self help program salespeople are ubiquitous. They provide advice, “secrets”, sure-fire methods, step-by-step guarantees on all manner of successful endeavours.

With a few exceptions for the charlatans selling snake oil, most of these are roadmaps anyone can follow and they will achieve success. The presenter is living proof of his own success and often very genuine in wanting to help you. Maybe this blog about my steps to success is in that category. There is often self-interest. I do sell some tools that would help but that isn’t a serious motivation. I can often be talked into giving away my offerings for free (to my accountant’s chagrin).

Why is it that such a small number of people follow through with these roadmaps? I don’t know what the percentage is but I am surmising it is in the single digits.

Is it fear? Is it scepticism? Is it genetic or just human nature? Maybe those are rhetorical questions. The person that comes up with the definitive answer to that will go down in the history books.

Whatever the reasoning behind it, there is still a tactical roadmap in your hands right now. Nike even trademarked the answer, “Just Do It”.

As a reader of this blog you’ll know I’m a big fan of starting a small business and growing an empire to achieve success. I believe everyone should do it! I guess that is a forlorn hope. The 80-20 rule applies and 80% of people are content to work for a modest wage and come home at the end of the day to a modest lifestyle. Maybe that is just the way it is. The world needs employees and they’re it.

My wife is always telling me I’m not normal (sometimes disparagingly) but maybe she’s right. Sometimes you just can’t help people even when you give them the roadmap. I’ll just have to live with the dismay and keep writing this blog in hopes I will help someone.

Friday, August 19, 2011

A Good Resume

This is another blatant plug for one of my businesses, but I wanted to explain how I got into it in the first place.

My wife is British so we spend a bit of time in England and Europe. As a member of the European Union, a UK passport will get her into Europe as citizen. Our kids, although born in Ontario also got UK passports as her offspring. That’s another small business advantage for another post in the future.

Back to the story… in the 1980’s, just after we were married, my wife needed a new resume to apply for Canadian jobs. Being the one-man, John Wayne, can-do-anything, kind of guy (and probably a cheapskate too) I said I would write her resume for her. I was a geologist in the mining business at the time and my resume had been reasonably successful so a simple clone would work for a registered nurse too… right?

Wrong! She applied for quite a number of positions with it and got no response. Of course, I insisted it couldn’t be my resume writing skills! My wife suggested to me several times that she should get one done professionally. Eventually, I relented and she hired a resume writing service to get it done. This was BI (Before Internet) so I can’t recall how she contacted the resume service. Nevertheless, she used the new resume a few times and was hired in an RN position in a few weeks.

The moral of the story is you should outsource certain things to professionals. The cash cost may seem high, relative to whatever financial filter your brain has running at the time but the net cost is inconsequential when you achieve the objective. You may have read the Four Hour Work Week by Timothy Ferris who is a proponent of this idea. As with everything there is a practical limit. His suggestion of outsourcing apology notes and birthday cards your wife exceeds my limit. The same applies to small business. You need to use unconventional wisdom judgement to decide what you should outsource and what you should optimize with in-house talent to make it a strategic advantage.

It may have taken me awhile to learn this lesson but I apply it effectively to my business affairs today. I leverage their skills to achieve my objectives. And while I'm on the subject, don’t be afraid to pay people what they’re worth. An Earl Nightingale quote comes to mind; "Some people want the fire before they put wood in".

Oh, and here's the blatant plug. A few years ago through one of my Toastmaster associates, I connected with a couple of HR professionals who write resumes everyday. So I started a business (Brock Resume Services Ltd.) that is essentially a mechanical admin service for me. I contract out the resume writing to these young ladies. They get all the glory, do all the work and I pay them most of the revenue. I own 100% of the business, run the website, do the marketing, billing and financials. My admin staff from my bigger businesses handle that in a blink. With a smaller share of the revenue, I only need to pay the few annual expenses. I must say, it doesn’t earn much and I give it a corresponding amount of focus. At some point (specifically before the next recession) I will pay more attention to it. Obviously it needs to be grown and positioned to get a better share of that “resume-writing pie” during the next layoff frenzy. In the meantime, if you need a quality resume for a fair price have a look at our service.

Sunday, August 14, 2011

A Three Legged Stool - Your Empire

I’m sitting in Stonewall Manitoba as I write this. The inscription on my grandfather’s tombstone is “As you are now, so once was I, As I am now soon you must be”. In the end we’re all going to die. Before that point, most people simply want to be successful or live a good life while they’re on the planet. Now the definition of “success” or a “good life” is philosophical so I won’t go there, but I can say you’ll need some sort of financial resources to accomplish it. Zig Ziglar use the expression “Money may not be the most important but it ranks right up there with oxygen. And I want to comment on that aspect of being successful. I call it building my empire.

We all know that sitting on a three legged stool has less risk of falling over than balancing on a unicycle. Why is it that the bulk of people are quite willing to allow their financial balance to hang from a single thread? Having one employer is the riskiest proposition to choose financially. There was a happy time after the “serfs & lords” era when employees could work for a lifetime with one company and retire in relative comfort. I get the sense that is not true today. I can tell you from many personal experiences back when I was an employee how shattering it is to be laid off. Invariably, it is in an economic downturn when another job is hard to find. Recessions happen with relative frequency and you’re at risk every time. I talked a bit about this on my Three Types of Work post.

On the revenue side, even as an employee, you need to develop your income streams. Get more of them for starters; do not rely on a single employment position. That is like a stool with only one leg. Of course, being an entrepreneur I always recommend starting a part-time business because you only have so much time in a day. Trying to get a three legged stool by simply by having more employee jobs simultaneously will kill you. With a second income stream from a business, it becomes a two-legged stool; still a struggle to balance but better than one. Even an employee can do moonlighting in a separate business on the side part-time.

IMHO, starting a part time business has a key advantage over simply doing more of what you do at your first job. That is education. You can learn a lot of the basics about being in business by running a low risk part time venture.

Of course once you have the first one stabilized, you should add another and so on. Like a stool I’d say three businesses is a minimum for stable minimum risk lifestyle. After you learned how to get the first one running smoothly, you’ll realize the subsequent ones are a piece of cake.

You may ask “How much do I have to do?” The lesson I’m trying to drive home is you can start businesses with your own sweat, but for you to grow an empire for retirement you need ventures that can operate without you being there. Some people call them passive income; some people simply make the distinction between being self-employed and being a true business. That is more of your education. I’m in my fifties and I didn’t even think of this point until I realized I had to get resources (physical, human, and financial) working for me.

You should also be diversifying your income streams to make your stool more stable. If you can, spread your sideline business(es) around geographically, across different industry verticals and in different sectors. For example, working for an oil company, saving your pension in your employer’s stock, investing in other oil companies, and opening a moonlight business servicing oil wells is still only one leg on your stool. If oil prices drop you are facing problems on every front exactly like the single thread employee

It may seem counter-intuitive to move out of your realm of expertise but sometimes that one expertise is just not in demand. This can be hard to see sometimes, you think you are diversified but ultimately they are just variations on a theme. You may have your financial investments in 6 different sectors, but when a stock market crash happens all of the sectors go down… even good stocks and that’s a topic I’ll talk about in the future. To me discussing the relative merits of a sector that only dropped 10% rather than the 30% of the overall market is like re-arranging deck chairs on the Titanic.

I read “The Snowball” by Alice Schroeder; a biography about Warren Buffet. He was adamant that diversification was just limiting your potential profit. He may have a point but personally diversification fits me better.

Remember you’re looking to solve somebody’s problem, so instead of looking for opportunities to make money for yourself look for other people’s problems. They are easier to find… the conventional people are always grousing about something. Just start a business to solve their problem and Presto! They shove money in your pocket. That is the real opportunity.

I will talk about my experiences starting a consulting practice in a future post. Some people choose to add employees for their consulting practice as a way to evolve a self employed practice into a business. That can work as step 2 but I saw that as simply strengthening one leg of your stool not adding another leg. It works well for some people particularly if your service is recession proof or regulated. However, in my case, I started with IT consulting, then launched a Private Health Service Plan administration business, followed by a purchase of a vinyl wholesaling business, then launched a web based resume writing service and most recently diversified into real estate rental properties. I had a couple of flops in there; US car importing and a travel agency. I’m still working to digest these 5 businesses to maximize their potential.

You should dream big, but don’t make it an excuse not to get started. Don’t wait for the home-run opportunity – if you happen to stumble onto one, then that is great. Just keep adding legs to your stool; each one can contribute. Not everyone becomes Bill Gates but there are plenty of us plain-Jane entrepreneurs who do quite nicely on a collection of mundane enterprises. You should consider building your empire too.

Wednesday, August 10, 2011

US Real Estate Investing

In 2007 the signs of the financial meltdown of the decade were becoming apparent to practitioners of unconventional wisdom. A recession was coming. However, Canadians were still talking about their house prices going to the moon and their "wealth effect" had them making US real estate investments in vacation properties. The price collapse occurs in 2008 and suddenly the pundits are saying you should never invest in risky property in the US. Property owners take a bath along with mainstream Americans. Wallets snap shut. Fast forward ahead 18 months or so and property developers are now advertising beautiful sun belt properties at very low prices compared to Canadian homes. Wallets open again and Canadians become the largest investors in US real estate.

As I write this in mid 2011, it occurs to me that these buyers are being taken to the cleaners for the second time in the same recession. The assets they are purchasing are non-income generating. An asset that costs money in taxes, maintenance and insurance must be supported by revenue from somewhere else. For those who intend to reside in them for significant periods and already have a reliable source of revenue to pay those expenses then that is fine. Some retirees may fit the description. Otherwise, these properties are just another boat anchor. They are not investments because they are not revenue generators.

With that dirge of a preamble, I have to say I am still quite positive on US real estate. My 3 business associates and I believe now is a good opportunity to procure some quality income generating assets at modest prices in the United States. We currently own a few houses, and an apartment building. We are shopping for more. I would like to outline some of the logic why we are investing at the same time I’m fearing other Canadian property buyers are going to hit a wall.

Primarily unconventional wisdom draws a distinction between an investment and a place to live. The famous (or infamous) author Robert Kiyosaki has this as one his basic themes. In fact, I would sum up his entire published collection as “Do not buy assets unless they generate income”. We all need a place to live so buying a nice house in which to reside is a reasonable trade-off for a non-income generating asset. Almost everyone has an income stream to carry it. However, buying a second non-income generating property, calling it an investment, and then expecting it to appreciate in capital value is a forlorn hope in my opinion.

Recognition that tenants generate the income from a rental property is the key difference. Tenants are temporarily or permanently in life circumstances where their income is not sufficient to own property. In North America, tenants make up a minority but significant percentage of the population. In Europe, they have a better perception of renting and tenants are more common. Remember that turnover is probably the biggest variable expense for property owners, so you want long term tenants. It follows that the property you purchase should be in a location that meets the needs of tenants.

This is where unconventional wisdom comes in. The percentage of tenants is one of the first measures to judge a neighbourhood. You should be looking in areas where that is a high percentage of tenants to increase your customer base. Remember, also, that access to transit, proximity to schools, shopping and jobs is more important than pools, patios and granite counter tops. Tenants do not have the money to buy nor do they expect the extras. They are looking for basic, clean and safe accommodation.

There is a long window of opportunity for multi-unit properties in mainstream America right now while this recession drags on. We are buying in Dayton, Ohio and that is a long way from the sunbelt. Look on the US MLS for multi family investment properties and you will be astounded at the low prices in absolute terms not just low relative to the market value of your home in Canada today. I encourage you to consider buying income generating assets at rock bottom prices.

Monday, August 1, 2011

What are some good marketing strategies that have worked for your online business?

None of my suggestions to follow are going to generate a nickel for you tomorrow. In fact, they are all going to cost you money in the short term. Unconventional wisdom says marketing campaigns are investments not sales tactics. Here goes:

1. The biggest one of is the primary business model. I presume your offering is designed to be solving the potential customer’s problem for a fair price with quality customer service. Once you have that, you need to be searching and exploiting any natural or engineered advantage you have over your competitors. Because in the end, it will be three things that sustain you for the long run through thick & thin. Those three things are related; word-of-mouth, repeat sales and referrals. You will never have any of them if you don't have a good product, superior customer service and a fair price.

2. Next, the biggest online strategy that worked for me is I started by paying someone with some design talents to design & build the website. I have skills in general business and technically delivering what my business sells but that doesn't mean I have any of the requisite sense of colours, shapes, images, cosmetics, visual flow, user friendliness or general creativity to bring the site to life. I still authorize the textual content but we hired somebody to create the gift wrapping. I'm still getting positive feedback on the first site design 4 years later.

3. After 6 months of doing DIY search engine optimization (SEO) and tinkering with the content to try to get noticed, the next big leap was paying somebody else to do SEO on the site. There is a minefield of substandard people & offerings in this area. Most of my junk mail is people trying to sell me this stuff. I ignore all of those of course. So unfortunately, finding someone who truly does know what they're doing; is up-to-date; and does it for a fair price is a challenge. Be skeptical of the tinkerers, posers, cheap ones or expensive ones. Similarly you shouldn’t be cheap… this is a niche area and people need to be compensated for niche skills. I selected Convurgency out of Ontario. I found them by lurking on my favourite entrepreneurship online forum (Red Flag Deals) and reading everyone’s posts and questions around SEO. I hired him based on the quality of his responses to user questions. The payoff after he completed his work, however is consistently top or high Google organic search results that last for a long time.

4. Next you need to read up on related "exposure-to-SEO" marketing, so you can manage entries in all the appropriate directories, Better Business Bureau, Industry Canada, professional listings, free and paid directories, customers & vendors and other linked resources. These are a cornucopia of little efforts that can consume an enormous amount of time. Nobody said this was easy (or if they did they're either lying or haven't been doing it for a sustained period). No single one of these will make or break you but collectively they add up to exposure and a consistent brand.

5. Blogging & forums. You need become an expert in specific areas so you can offer your help & expertise. You need to lead the way in some cases so you can accrue some scars of experience. Get off the computer, go out there and try some ideas & things, get burned and learn from your mistakes. Once you have something to say maybe somebody besides your friends will listen. I think it's called getting some street credibility. Come back to the computer and your blog or forum entries will generate interest, respect, a following and then maybe a sale... way in the future. These are investments of significant time with no guarantee of a return. This is advertising in the pure sense. This blog is my attempt at that. I already mentioned my favourite forum.

6. Twitter. I haven't embraced this fully across all my websites but intend to in the near term. We added it to our vinyl wholesaling operation, Write On The Wall to start because there are new designs coming out daily. It seemed to make sense there. I think Twitter is here to stay as a medium. The mainstream media use it now as a source of late breaking news and information. The Japanese tsunami of March 2011 was a real eye-opener for me about the impact of Twitter. Again I think you need to have some credibility as a reliable or expert resource of useful information to gain any real marketing value. (i.e. what I would describe as being truly "followed"). You can blather on about nothing and tweet to a million followers but reflect no benefit to your business.

7. Of course, you have to bow down and feed the great Google. I don't necessarily like it but they are the keepers of the gate to search engine results for now. So start with an Adword budget you can afford to sustain and put time into managing that campaign. I plan to hire someone to do this for us as it is a daily tinkering chore and a never-ending job. It frustrates me that I have to continually change my websites to retain Page Rank when there is really no change in our business. It is really change for the sake of change. We have a perfect static website but Google diminishes it because content isn’t fresh. It costs me to fix something that isn’t broken.

One thing I would suggest you avoid. This is a personal preference because I'm a devout fan of unconventional wisdom. Don't put revenue ads on your site. It is short sighted income. If you are (or want to be) a quality business offering a professional business service with integrity and soliciting quality customers, then don't dress up like a Las Vegas tart.

Saturday, July 23, 2011

Small Business Owners and RRSP's

I was in Ottawa last week sitting on a shady patio looking at Parliament Hill. I overheard a conversation that got me thinking about RRSP’s. For those individuals who are unconventional thinkers (i.e. most entrepreneurs), I believe I have some food for thought. I have actually considered RRSP's, thought the concept through to completion, and discarded the notion. We have a few dollars left in a relic spousal RRSP from my days as an employee when I was getting my first part time businesses off the ground. I have since liquidated all my other assets in my RRSP's. They are much more useful to me for investments outside the RRSP, specifically to procure income generating assets such as new business opportunities or expansion of my existing businesses.

An RRSP is designed for the conventional thinkers (i.e. employees) who don't have any other significant tax deferral tool.

The first principle of an RRSP is that you will be in a lower tax bracket on retirement than during your working life. I find that is just a different way of saying you want (or should expect) less income in retirement than you do during working years.

Of course, it is true… the statistics that support that idea are derived from the conventional thinkers who make up 95% of the statistical sample.

Median Household Income according to Statistics Canada in 2009 was $68,410

This article from Statistics Canada using 2005 data indicates a median value of an RRSP was only $55,000 for people aged over 55 years (i.e. approaching retirement). That is not even one year`s worth of their current revenue. Naturally government programs and private pensions are income generating assets and will add about $20,000 of revenue annually. They are designed to bring you to about 35% of the median Canadain Household Income.

The conventional thinking says you should get an education, spend your life working for an employer, enjoy your existence, drift off into retirement and die. Conventional thinking does not encourage you to acquire viable income generating assets to support yourself permanently going forward (including retirement). And the statistics above support that... IMHO, that is not sufficient capital to provide any meaningful income. I don’t know about you but I have aspirations higher than that for my golden years. I am offended by that idea.

Personally I want more revenue & earnings in my retirement days than during my working life. I want to actually enjoy that time with travel & luxuries. Naturally, I also have to pay the health care costs to maintain all my bodily components that I've already "over-enjoyed". My intention is to make my last day on the planet my highest revenue day ever!

Here are three points that I would encourage conventional thinkers to consider:

i)With an RRSP you're making a contract with the devil and he can change the rules unilaterally without your consent... not a smart business contract!
ii) An RRSP strips away any benefits of investment management... all payouts from an RRSP are taxed as earned income (the highest)... there is no benefit of capital gains deductions or dividend tax credits or other strategies
iii) With a few exceptions, you can't use RRSP money for other purposes to greater effect within your business in the interim. An RRSP withdrawal incurs an immediate tax hit in the year it occurs.

Leave the RRSP’s for the employees and instead consider how you could deploy this capital to generate more perpetual business revenue instead.

Saturday, July 16, 2011

Income Splitting, My Kids Tuition and RESP’s

One of the beauties of running your business under a corporation is you get to issue dividends to yourself and your family members. It is the foundation of income splitting. Minor children can be shareholders of companies, but can not be named as directors until they reach the age of majority. There is no tax benefit in issuing them dividend cheques until they are adults because the tax will be attributed back to you in any event. However, they should be set up as shareholders at the outset to prepare for the day when they become adults.

The big benefit though is, as each of my two daughters turned 18, I began making payments to them that would be designated as their dividends by my accountant. I wonder if it is coincidental that as soon as your children turn 18 and you can pay them legally that they go off to university at the other end of the country and the Bank of Dad is no further ahead!

Back to the story; with the personal exemption tax deduction now over $10,000 for everyone in Canada that meant I was able to pay them more than enough to cover their university tuition and living expenses. On which they paid no tax! Personally I view it as a parent’s responsibility to provide your child’s education, including university. I don’t think student debt is ethical! So since I was going to be paying that money anyways it was good to make it tax deductible. Of course, the dividends were always well under the personal exemption so that they were still able to transfer the Tuition Deduction back to apply my wife’s earned income for even more tax benefits the following year.

I should also comment that an RESP is a good vehicle and back in the days when I was an employee I tried to deposit the maximum each year. However, it was a challenge on an employee salary. I’m glad I started my businesses because my kids would be carrying serious student loan debt today if I hadn’t. An RESP is basically a smart idea because you are getting the 20% Canadian Education Savings Grant (CESG) federal grant contribution to the fund. I don’t feel the same about RRSP’s but that is another story.

The one experience of regret for me was my investment management. I was using a self directed plan with mutual funds. That isn’t necessarily a bad thing in itself. However, when I was young I believed I was a self-styled investment guru and I was chasing the big returns. It was me against the world; John Wayne & Rambo-style. Only unconventional wisdom teaches you that is not the smart approach! Over the life of the plan my overall return was probably just above zero. If I had to do it over again I would just buy some big bank shares in the RESP and add to them every year. Don’t chase the return; just keep adding to the fund in a boring dividend paying stock. Regardless I still think the RESP was a great plan because it was forced savings. We saved about $45K in it. Unfortunately that wasn’t enough to pay for two 4-year degrees at a non-local university. So my businesses came to the rescue.

One little interesting tidbit I discovered is that once the first child heads off to university you are able to start withdrawing from the fund. I used those withdrawn funds to make additional contributions back into the fund for even more CESG in the name of the second child. It seemed like double dipping but when I asked CRA it is legitimate.

Monday, July 11, 2011

Paying Yourself with Dividends

Do you take out all dividends out of your small business to pay yourself?

I keep getting asked this question a lot. As a general rule "Yes", I use all dividends. I've had two accountants for my IT consulting business and both are fans of dividends so I guess I just "go with the flow". However, your accountant may want you to do payroll and it is important to be on the same wavelength as your accountant.

From a “no-lose” perspective, you should at least set up the share structure in your corporation to accommodate the payment of dividends to all of your family members if you ever change accountants. I’ll cover those details in another posting. I talk about this in great deal on my consultant mentoring website; Brock Consultants.

Basically the cash flow works like this. I just merrily spend money out of my own pocket all year; including cash, personal credit cards, and personal cheques. Of course, as any seasoned business person will tell you, it is necessary to ask for receipts for everything you purchase. I don't have any concept of getting "paid" on a regular schedule. Whenever I need money for any reason, I just write a business cheque for the desired amount. It is recorded by my bookkeeper as a draw, and detailed as an advance on expenses. I simply deposit it in our personal account (joint with my wife) to replenish my personal money.

At the end of the week or the month, I sort my receipts into two piles; business and personal. Naturally, I try to have the business pay for as much as possible, so that pile gets anything even remotely business related. After all that is the purpose of operating your own business… to generate funds to support your lifestyle! The personal expenses of course are a dead loss from a tax perspective.

I give all my collected business receipts to my bookkeeper who dutifully records them as expenses. Sometimes she throws them back if I’m trying claim something ineligible. At the end of the year the eligible expense receipts are totalled up as one giant expense claim for the business. My accountant then handles them from a tax perspective on the annual T2 return. Ultimately he decides what is deductible.

Of course, I have my finger on the pulse of my business revenue, earnings and cash flow on a daily basis, so my businesses aren’t just an endless supply of cash like a golden goose. The business obviously has to have the earnings on hand to pay me; I’m just explaining the process. Sometimes, we have cash flow squeezes and I need to remind myself it is my responsibility to grow the business to pay for that lifestyle.

You also need to make sure you leave enough in the business account to be able to pay yourself this way and still meet your taxes and other commitments. I also like to leave about 20% of revenue in there for contingency.

By the way, all these business cheques are made out to both my wife and me. That is so my accountant can decide at the end of the year how much of the cheques were recorded as paid to me and how much to my wife. It is just an accounting entry in his books at the end of the year.

Saturday, July 2, 2011

About 1 in 10 for Unconventional Health Benefits

About 1 in 10 small business owners know about Private Health Services Plans (PHSP).

I should let you know I have some blatant self interest in this post. Brock Health Administration Ltd is a major low cost provider of PHSP’s across Canada. I happen to own it, so I have some expertise on the topic.

In September 2010, Tom McFeat of the CBC contacted me about an interview on Private Health Services Plans. I was naturally flattered and excited… who doesn’t like quality exposure. You can read Tom’s article at this link on cbc.ca. I won’t go into details about the interview, the article or the functioning of a PHSP, but I will relate it to unconventional wisdom.

A Private Health Services Plan (PHSP) is for small and medium sized businesses to provide health benefits to themselves, their families and their employees while enjoying 100% tax deductibility. A PHSP is a low cost alternative to Insured Plans.

The average healthy family of four in Canada spends about $2,000 on unavoidable health expenses every year. You’re going to spend that money whether you like it of not. A PHSP will simply make it tax deductible. What amazes me is that only the 1 in 10 small business owners arrange their affairs so they don’t pay tax on it. The other 9 conventional small business folks simply hand over $500 or so in extra tax. I’m sure you can imagine the savings if you have a large health expense of $10,000 or $15,000 in a year.

These plans have been around for over 20 years. They aren’t promoted heavily by the large insurance companies because they don’t make much profit on them. That should be a clue why you might want one.

Small family businesses whether incorporated or not should open a PHSP as soon as your business is established and stable. While you can open one immediately, there are often other more pressing expenses in those early start-up years. Those start-up expenses are usually enough to offset any taxable earnings. But once you are generating stable revenue, a good businessperson is always looking for ways to minimize tax. At that point a PHSP makes sense for every business.

Thursday, June 23, 2011

Three Kinds of Work

Amongst other adventures, I spent a good chunk of my career as an Information Technology (IT) consultant, eventually ending up as the managing principal of Brock & Associates. Taking that in context, I made this general observation. Maybe you can relate to the descriptions and consider what unconventional wisdom would suggest.

There are three types of players in the game that we call gainful employment; employees, contractors and consultants.

A contractor lands an IT contract, sits at a desk, and delivers his service. Now while he is handsomely paid for his skills, they are getting obsolete by the day. He always hopes for a contract extension and feels entitled to all the perks of an employee. When the easy times come to an end, he gets caught complaining over his contract termination. All he has is one reference from a client that just terminated him. And that termination usually comes at a time when the economy is in the basement and any kind of replacement utilization is hard to find. The financial transition back to employment is uncomfortable. The expenses are high, the revenue stops immediately, jobs are scarce and it costs to unwind his corporate activity. Any financial benefit he gained as a contractor gets wiped out, so we hope he didn’t live high during the good times and actually saved a big chunk of his revenue. He’ll need it!

An employee, is exactly the same as the contractor except, he doesn’t receive a high hourly rate in cash. Instead he got promotions, vacation, benefits, and is entitled to the perks. In the end he gets caught by the same economic downturn and layoffs as his colleague the contractor. Unfortunately, he discovers that he can’t eat his vacations, the benefits don’t pay living expenses and the stock options are now worthless. And the 3 or 6 month termination package foe which he qualifies barely covers getting another job to start all over again. Finding a new job is extremely difficult because he doesn’t have any practice at doing it. He, too, has one reference in a single industry from a former employer that just terminated him.

A consultant thinks of himself as a small business, not just a contract worker. A small business-person puts effort into marketing & advertising, managing expenses to smooth the cash flows, builds networking references through positive over-delivery of services, assessing tax implications of everything, hiring experts in their fields like accountants to provide corporate guidance, developing multiple income streams, observing industry trends and proactively adjusting for change by taking on frequent new contracts to keep the resume current, fresh and in a variety of industry verticals covering different functional roles. All of that takes effort, time and sometimes cash investment. It is this investment that sets him apart. When he is out of a contract at the same time as his two friends above, he has a resume with a page full of positive previous references. Strangely, he lands another one without much effort or delay.