What is an S-Corporation?

If you work in the freelance or self-employed arena at all, you have probably heard of S-Corps, but I have never actually sat down and written out what an S-Corp is and why you need one. So here’s the quick version.

Disclaimer: This is a QUICK version. Almost every statement I make in here has some exceptions. It’s the Tax Code; it’s a mess. I am giving you a broad view and trying to create something useful for people, NOT teach you a class on entity taxation. Please use this as a guide and do not rely on this as a substitute for tax advice.

If you perform work as an independent contractor, whoever hires you is supposed to give you a 1099 telling the IRS how much they paid you. You report that income on Schedule C of your personal tax return as your gross receipts or gross income. Hopefully, you are smart enough to deduct from that income some expenses. Things like business use of home, auto miles, cell phones, etc., all those things you have heard about. After you complete the form, you end up with profit. You pay two kinds of tax on that profit: income tax and self-employment (SE) tax. Income tax is what you are thinking about when you typically think of taxes. But as a self-employed person you also pay SE tax. This is effectively both halves of the Social Security and Medicare taxes, which normally runs around 15%, but people that have W–2s only pay half because their employer pays the other half. If you do not have an employer, you are in fact your employer, so you pay the tax twice. Yes, it’s a lousy deal. I know. You want to decide you want to try this S-Corp thing.

Wait, what, exactly, is an S-Corp?

An S-Corp is a business entity (either LLC or C-Corporation) that has elected (under Sub-Chapter S- of the Internal Revenue Code, hence the name) to be taxed as a pass-through. “Whoa, that was a lot of words that I don’t understand!” you say. It’s cool. It’s not as complex as it sounds.

Legally, there are two (main) types of entities: Corporations and Limited Liability Companies. You need a lawyer to explain the difference, but suffice it to say that, legally, you have to have one of these to create a legal entity that is distinct from you personally. Corporations (referred to as C-Corporations) pay their own tax. This is where you hear about the double taxation problem. The company pays tax, then when you get the money out, you pay tax again. Yuck. We only use these in special cases. But at least you don’t pay SE tax on the money! An LLC can file as either a Corporation or a Partnership. Filing as a partnership means that it doesn’t pay its own tax, it “passes through” the income to the partners, who pay their own tax. This is the same as being self employed, so whatever you get from an LLC you also pay SE tax. The only difference between this and a Schedule C is liability protection.

But what if we took the C-Corporation “no SE tax” thing and combined it with the “no double taxation” of the LLC? That would be pretty neat. We call it an S-Corp, and it is neat. An S-Corporation is a tax election that says, “I am a corporation electing to be taxed as a partnership.” For the record, either legal entity (Corporation or LLC) can be an S-Corp.

In Summary:

Corporation or LLC? – legal question, nothing to do with tax

Pass Through or Corporation? – tax question, nothing to do with legal issues

Back to your own journey!

The main purpose of S-Corps is to manage this SE tax. Let’s go back in time. You work for a person or company, and they pay you as an independent contractor. But this time, instead of you receiving the money personally, you have it paid to your employer, You Inc. You don’t receive a 1099. You report that income on an 1120S. It is, for our purposes, the same as a Schedule C. You report the gross income. You deduct from it expenses like office rent, auto expenses, cell phones (sound familiar?) and arrive at your profit. That profit “passes through” to your personal return. You pay income tax on this number. You pay no SE tax on this number.

Simple, right? Same system, but running it through an S-Corp you avoid the SE tax. Now, let’s make it a little tougher.

You do have costs with an S-Corp. Most states charge a flat fee for it (in CA it is around $800), plus you have to pay to set it up and pay someone to do the second tax return you need. So do a cost-benefit analysis on this.

It IS more complex—keeping more money always is—you have to have books and another account for your company. It is a separate legal entity; you cannot use your own bank account or the IRS will get REALLY touchy.

You do HAVE to pay some SE tax. But this is OK because we still want to qualify for Medicare and Social Security when we retire. This just allows us to manage the amount.

The S-Corp generally has a MUCH lower audit risk than a full blown Schedule C. Which means you can typically deduct more things, saving Income Tax in addition to SE Tax.

That about sums it up. Yes, this is the short version. Give me a shout if you think this is for you!

Business Credit

Many new business owners mistakenly assume that because their new business (corporation, LLC, LLP, etc.) is a separate entity for tax and legal purposes, it should have its own credit as well, distinct from the owner’s personal credit. Financial entities (namely, banks and credit card companies) do not view new businesses as distinct from their owners, which means any debts of the business are also debts of the owner. This is what the term “personal guarantee” refers to. A corporation might get a line of credit to help finance purchasing or weather cash flow storms. A credit card company might issue a business credit card, linked to a merchant account with business-style features and benefits and the company name on the card. In essentially all cases, however, these are backed by the owner’s personal credit and will show up on their personal credit report.

This can become especially troublesome when there are multiple partners, especially if one of them has less than stellar credit. An un-creditworthy partner can be a significant detriment to a business. Even if both partners are creditworthy, they might have made other business or investment decisions that leave them less able to support the additional credit the company needs. These are all good reasons to try to work toward a business having and maintaining its own credit.

Building credit will involve two main steps: building company equity and establishing credit reporting. No bank is going to grant credit to a business that has no equity. The owners need to have skin in the game before a bank will come to the table.

The second step is to establish a credit report for your business. Unlike with people, businesses do not automatically have credit reports that track their credit history. This has to be built purposefully. Let’s look at these in more depth, one by one.

Building Company Equity

Most banks will want to have the company build up its own equity to help support credit facilities. The general thinking goes “if you won’t invest your money, why would we?” When we say “equity” here, we are typically talking about retained earnings or partner capital on the balance sheet. Typically, this equity on the balance sheet has to be backed up with assets. (Hooray for double entry accounting!) Most commonly this is cash, but it can also be fixed assets like equipment, vehicles, inventory, etc. When building credit and equity, we are mostly talking about building up cash as banks don’t really want your equipment and inventory. They want cash.

Retaining cash/equity in your business can create two problem situations, one each for the C-Corp and the S-Corp. For simplicity, I am using S-Corporations as a proxy for all the various kinds of pass-through entities. So if you have an LLC or LLP, use the S-Corporation information.

S-Corporation Retained Earnings – Phantom Income

With an S-Corp retaining earnings, you create “phantom income” for the owners. For example, their K–1 taxable income will always be higher than their distributions, creating tax liability for money that has never, and might not ever, be received. At small scales this income can be absorbed by the owners without too much difficulty. But if significant reserves are needed, like the amounts that a bank would want to see to back up a substantial line of credit, it could create a burden for the owners that will need to be planned for and purposeful. Generally a multi-year plan is necessary to accumulate the earnings to mitigate the tax issues involved in doing so. The multi-year equity accumulation plan should be accompanied by a timing plan with depreciation and amortization. These non-cash expenses allow for the accumulation of cash (although not equity) inside the company without creating phantom income for the owners.

C-Corporation Retained Earnings – Double Taxation

The natural response to the phantom income problem of the S-Corporation retaining earnings is to use a C-Corporation. In this case, the corporation retains its own earnings, pays its own tax and keeps the money. This creates the classic double taxation problem, however, because the owners might want to take their profits out of the business to save or spend personally. Therefore, the double taxation problem is only relevant when and if the owners want to withdraw the equity. There are two scenarios where the problem may not ever come into play in any meaningful fashion. The first is in scope. If the total amount of equity to be retained is relatively low when compared to the overall value of the company, then it may not be worth the time and effort required to eliminate the problem.

The second is in form. If the net equity of the company will be held primarily in the form of depreciable fixed assets (and we assume that these assets primarily have value as part of an ongoing business and negligible value in the hands of the owners) then the double taxation issue may resolve itself over time with depreciation. This has the added benefit of allowing the owners to only pay tax at lower corporate rates on money they retain for equipment purchases. If the owners are expecting to generate cash profit from their business as the primary form of return on their investment, then the double taxation problem can be significant.

Both the phantom income and the double taxation problem need to be considered in light of the other activities of the owners. Maximizing lower tax brackets can have a large benefit on overall marginal taxation. Therefore, if an owner already has business activities that are “passing through” to them via an S-Corp, then utilizing a C-Corp for a new business might lower the overall tax. We generally want to maximize the types of business and types of exit strategies by entity type, as well. Asset heavy businesses that will be sold are ideal for ownership in C-Corporations. Cash flow heavy businesses with minimal exit potential are ideal for the S-Corporation structure.

Establishing Credit

Establishing credit for new entities can be very tricky. The process is somewhat hit or miss as the facilities in place are not nearly as built out as those for personal credit. But it is certainly possible for companies of even a modest size to establish and monitor their own credit.

Credit Monitoring

The first step to creating company credit is to establish the business with the major business credit ratings agencies. The primary agencies are Dun & Bradstreet (by applying for a DUNS number) and Experian. In both cases, the set-up process is fairly straightforward, requiring an application and identity verification. Some of these services involve fees, especially with respect to monitoring. It will be up to the business owner to decide if this is a worthwhile investment or not.

Credit Reporting

The major difference between business and individual credit revolves around the credit reporting process. Individuals are constantly applying for credit and all the banks and financial institutions involved in this are continuously reporting the activity. By contrast, there are only around 6,000 to 7,000 vendors in the country that report credit activity of their business customers to the business credit monitoring agencies. This requires a concerted effort to select vendors that can and will report their experiences to the credit reporting agencies. It also means that these relationships need to be monitored closely to ensure that positive things are being reported.

Credit Management

To begin the establishing credit process, it is common for owners to have to use their own credit to help the business get started. Think of this as “cosigning” for your business. You might do it now, but hopefully the business, with some up front help from you, can eventually manage itself without you. But that is a process that can take quite a bit of time. You should also understand that credit facilities are given to businesses that are profitable, and profitable businesses have to pay taxes. Weigh the value of the credit you are receiving against the cost of the increased tax bill that will be required.

Please remember that some business will never be able to establish credit. If you are sole owner company and the revenue of your firm is driven by your own personal work, no bank will ever consider that a separate entity from you. Establishing credit is going to be valuable mostly when you plan for the business to outlast you and your partners. Only then can it be viewed as a true separate entity and treated as such.

New Ideas from Dead Economists – Review

I just finished another fantastic book, New Ideas from Dead Economists by Todd Buchholz.

I really enjoyed the book and found it to be a great resource. For background on the book, Mr. Buchholz goes through every major idea in economics thinking of the modern world. There is a heavier emphasis on recent thinking, but he still provides good background on the factors that lead up to these modern concepts. The highlight of the book, though, was the structure. Most economics books that I have read are a study of one idea (monetary policy or Keynesian Economics, for example) or an analysis of one event in the context of one of these ideas.

New Ideas is different. It tells the story of all the major thoughts and how one leads into others. It primarily does this by telling the story of the main person who developed, made famous, or worked on each major new idea. I really enjoyed this structure because it helped solidify the concepts in two ways. The first, by humanizing them. It is easier to remember the esoteric ideas when you understand the person who was developing them, their life and their times.

Secondly, weaving the ideas one into the others helps them make more sense. When you try to grasp the ins and outs of the monetary versus fiscal policy debates from a standing stop it can be tough. But in this book we start with simpler ideas, ideas that modern people tend to take for granted, like supply and demand. From these simple concepts, more complex ideas are built. And even as someone who has a fairly solid grasp on modern economic thought, seeing how each built upon the other, and/or was a modification of the ideas that came before, made a huge difference in enhancing my understanding

The only thing that I did not like about the book was some political commentary. The first part of the book was fairly academic and focused on relating the facts of the ideas and the people. By the end of the book, when discussing the modern economists, Mr. Buchholz clearly colors his writing with his opinions on which things are right or wrong. This made the book more difficult to finish as I had to work to extract facts from the narrative and understand what was an accepted fact and what was an assumption made by the author.

All in all, however, I would consider this a great book as an introduction to economic thought and would encourage anyone who wants to understand these things to start here.

How to Bill for Consulting

A recent client was having trouble determining how to price a new consulting product that might be sold to a team or to an individual, so I wrote an email to share my thoughts on a strategy. If you are not sure how to price your consulting, here is my advice!

Most people, especially people who just left a job where they were paid for their time, try to bill their consulting or creative projects based on the time it took them to do it. This is a false metric and is a great way to hold back your potential.

Consulting pricing is driven by value, both the value produced and your ability to demonstrate that value.

What exactly are you promising? Is there a deliverable? Can you monitor someone before and after to demonstrate higher productivity? Or is this more an intangible “I feel better and learned some skills” kind of thing? If you have some way to monitor, say, a staff person’s output or a website’s traffic—or some other metric before, during and after you help—and can demonstrate that you increased productivity by 15% or whatever, that would be CRAZY valuable. In my world, where my staff is billing $75 to $100 an hour, that’s tens of thousands of dollars of value.

The key part of this is to demonstrate value. If you have a self-guided product or ebook or training program, it will typically be cheaper as compared to a consulting gig where you drive the project and accountability. You might think this is because the latter takes more of your time. While true, that’s not really the driving force of the value. In that scenario you are constantly demonstrating the value you are creating, which functionally creates more value. And more value equals more money.

This is what I mean when I say define what is the deliverable. You should drive pricing not just from the product itself and your time, but also from what the value of the result will be. If you can bill based on a percentage of the value of the deliverable, you likely have much higher upside potential than just trying to figure out a fair hourly rate.

Always bill for value and not time. Time is finite and value is not.

What Makes a Business Valuable – Part One

As an expert in wealth building and business management, I often consult with owners who are preparing to sell their businesses. We work together to identify areas of improvement that will ensure the best selling price in the market. My outsider perspective, high-level focus, and unique ideas all work to cut through the resistance that all too often prevents otherwise intelligent business owners from realizing maximum value on the company they’ve spent so much time and energy building. I make sure this transition really pays off.

These consulting engagements have a very simple purpose: to increase the value of the business. Increasing cash flow to the owner and increasing enterprise value are the two primary ways to increase the business’ value. Of course, increasing cash flow to the owner also typically increases enterprise value.

Each engagement is defined as a quick or a long engagement. The process is the same either way, but in a long engagement, we might spend months or years going over every item, focusing on just one item at a time to produce maximum value.

Since the value of the company is most commonly calculated as a multiple of cash flow, we’ll spend much of our time focused on increasing the amount of cash available to the owners, which increases the amount of value received by the owner when selling.

There can also be significant strategic value extracted when negotiating the multiple upon which the selling price is calculated. The multiple is based almost entirely on soft factors or intangibles. Most owners ignore the effect these items have on their business and leave money on the table. Improving operations, culture, and general competitiveness, while not increasing the bottom line, can increase this multiple, thus bringing significant amounts of cash to the owner during a sale.

Is the business a good fit?

The first step in a consulting engagement is to determine if your business is a good candidate for a sale. Not all businesses are. We also spend some time learning what factors are present that might detract from or increase the value of your business.

Three items drive the value of your business: profit, growth, and risk. The first two increase and the third decreases the value. Before discussing these items, there are a couple assumptions we make for our overview and initial conversation:

  • We assume that we are selling 100% of the company and not taking minority, partial, or restricted sales into account.
  • We are ignoring “strategic” acquisition opportunities. We assume that all value has to come from the business being sold and not its value after being combined with another business.
  • We are assuming these are “arm’s-length” transactions of privately- or closely-held companies.
  • We are agnostic to the various valuation models (income versus market approach) and assume that increasing profit or growth increases value and decreasing risk factors increases value in all cases.
  • Finally, a comparison of the subject firm’s numbers to peers is appropriate.

Areas of the Business to Review

After determining that a business is a good candidate for a sale, we collect a large amount of data that we then analyze, looking for opportunities for improvement. Below are the areas we look into and some details about the type of information we’ll need and why it’s important.

Financial

A discussion and analysis of financial trends is first. We track two to three years of changes in:

  • gross sales
  • gross margin (where applicable)
  • net margin or cash flow (as appropriate)

We also look at the leverage in the company. There are two types of leverage to consider: operational and financial. With operational leverage we are looking at the overhead structure of the firm. How easy is it to scale expenses up and down with changes in revenue? We attempt to determine minimum operating levels and the cost of growth.

When looking at financial leverage we examine the past growth or decline of debt levels and consider what the optimal capital structure might be, based on consistency of cash flows, levels of fixed assets required, and credit worthiness.

Leverage will be intertwined with the customer analysis, looking at the company’s leverage risks as they pertain to customer or sales concentrations and asset needs.

Sales & Customers

A variety of items needs to be looked at as they pertain to sales and customers. Almost all the analysis of sales and customers revolves around the risks of losing business. An analysis of customer concentration is always important to understand the risk exposure of a single customer or group of customers leaving. For example, high operational leverage combined with a large customer concentration can be a highly risky business. But many other factors can also come into play:

  • presence of sales contracts
  • switching costs
  • length of relationships

We will also look at customers from a growth opportunity standpoint when analyzing the company’s growth and opportunities.

Strategic Analysis

Analyzing strategic factors can be both the most difficult to do and the most rewarding. It is here where significant values can be created by demonstrating to a buyer ways in which they could grow the business. We look at factors that include the market a business operates in, the channels through which it sells, and the effect that current market share has on the company.

Costs & Vendors

A brief review of the risk and opportunities involved in the purchasing side of the equation will involve reviewing vendor contracts, concentration, and how the lead times and purchasing requirements affect the way the business operates.

Assets

While most companies do not have significant value attached to their fixed assets, reviewing those assets can add significant value to the business. A buyer will also want to understand the schedule of capital investments that have been made and will need to be made. Aging and old equipment can be a detractor from value.

Intellectual property is a popular way to try to assign more value to a company. Our analysis will challenge the often over-valuation of ideas and goodwill. How well protected an idea is, how executable it is, and the ease of substitution all need to be looked at before trying to determine a value.

Operations

Operational issues tend to be the most neglected area of a business. Many businesses grow out of smaller operations and their workflows have not kept pace. Or worse, the way in which people work has been completely ignored. A business that relies heavily on the owner destroys significant value for the buyer. A variety of areas need to be documented and understood:

  • the workflows of the company, including how people do their jobs
  • the internal controls that empower employees while protecting the company from fraud
  • staffing issues, including turnover, training, and efficiency
  • management issues, including non-competes and the experience, skills, and ability of the company to continue in the same manner after a sale
  • the information technology supporting the business and its investment and maintenance requirements
  • the culture of the company and its effect on the operations and growth opportunities

Growth & Opportunities

As with strategic analysis, this can be a significant source of value. Just a few of the ideas that we have seen add value include:

  • Customer saturation: What is the opportunity to increase the size of each relationship?
  • Operational improvement: Where are the demonstrable increases to margin that can be realized?
  • Market opportunities: What complementary markets can our products or services be expanded into?

We collect all of this data, looking into each detail as it relates to increasing cash flow or improving the often-overlooked factors that can increase the multiple used to calculate your business’ selling price. The next step, which I’ll cover in an upcoming post, is to formulate a strategy that deals with four overarching areas within a successful business: strategy, operations, revenue, and culture.

Business is simple, but it’s easy to forget that when you’re caught up running one. I’m here to remind you of that and to cast a light on the details you’ve overlooked by being so close to the action. I’ll help you overcome your resistance.

The War of Art Translation – Part Two

This post is a continuation of my first War of Art Translation post, where I examine how Steven Pressfield’s thoughts about Resistance to creating art also apply to business. Pushing forward often seems impossible, as seen below, but it’s the only way to achieve the goals you create for yourself.

Resistance obstructs movement only from a lower sphere to a higher. It kicks in when we seek to pursue a calling in the arts, launch an innovative enterprise, or evolve to a higher station morally, ethically, or spiritually.

When you started your company, did you envision yourself in a corner office? Not right away, sure. But did you ever think that you would have lots of employees and you would be focused on solving the big problems that your big company had? Probably. Maybe you even had some measure of success. You don’t quite have the corner office in a high rise now, but you are certainly beyond the single room you started in. You have learned a lot by this point.

To grow like you have, you had successes and failures. You still imagine yourself in a corner office, but the difference now is that you actually know what it will take to get there. You might have to fire that family member you hired, to make the department function the way it should. You might need to change cherished policies, or enforce them, to get the kind of systematic business that can grow very large. You might have to expand into other types of products that will make your business more valuable in a sale, even though they aren’t the ones you’re passionate about.

Maybe, at this time, you start thinking back to why you got into this business. Was it really to have a corner office? Maybe it was just to be your own boss, which you are! You start thinking that maybe you are fine where you are, that your dreams of a big business weren’t really valid, that it was naive and stupid. If you had known then what you know now, you would have set your goal a little less lofty. You would have set it, in fact, right where you are now. Which, convientenly, means that you are done!

Is that really true? Or is that just a very insidious and tricky form of Resistance? I think this is Resistance using your own experiences against you. How do you know if you have really changed as a person or if Resistance is trying to get you to slow down or even scale back? Easy: Resistance opposes in one direction. If you decided to cut your product line, scale back staff and go back to the two-room office, how easy would it be? Could you start it tomorrow? I bet so. But if you wanted the corner office in a high rise, how much more work would that be? Your fear of this extra work is Resistance.

Pretty powerful stuff, that.

Resistance by definition is self-sabotage. But there’s a parallel peril that must also be guarded against: sabotage by others

Are you afraid of success because your friends will look at you differently if they knew? They will. Success and money come with lots of baggage. Entitlement is rampant. Not in the over-politicized way that a Republican will accuse a Democrat, but in the much more subtle, insidious way. Your becoming successful will serve to point out others’ failures, even though that’s not your intent. As a general rule, people tend to associate with people like themselves. So if you have a two-room business, you likely know lots of other two-room business owners. You likely don’t know many high-powered executives because they hang out with, you guessed it, high-powered executives.

This isn’t a problem, it is just an inherent characteristic of being human. But Resistance uses that against you. If you sell your two-room business, or move it into a high-rise building, it is unlikely that your friends and family will stop liking you. But they might resent you. If they haven’t overcome their own Resistance, your growth just demonstrates how they are failing.

People love Resistance. Most people work together to maintain it.

Sometimes entire familes participate unconciously in a culture of self-dramatization. The kids fuel the tanks, the grown-ups arm the phasers, the whole starship lurches from one spine-tingling episode to another. And the crew knows how to keep it going. If the level of drama drops below a certain threshold, someone jumps in to amp it up. Dad gets drunk, Mom gets sick, Janie shows up for church with an Oakland Raiders tattoo.

Anyone that has worked for a company larger than a certain size has seen this. Department A all of sudden is overwhelmed and needs more people. By the time Department A is stabilized, Department B has an issue. Then Bill in marketing quits because of the “drama.” Then Management starts a new initiative to help stop, once and for all, the problems and issues that Departments A and B have had. And everyone hates the solutions because they weren’t fully consulted.

Ever try to change a workflow in a company with more than five people? Then you have come to face to face with Resistance, my friend. “Boss” is just a title. If you think people will do what you say just because you are in charge, you have been listening to Resistance too long. They will find a hundred ways you never dreamed of to stop the changes. Why? Because Resistance has convinced them that change is bad, that they are happier in the suffering than they are about making changes and trying new things.

The danger is greatest when the finish line is in sight. At this point, Resistance knows we’re about to beat it. It hits the panic button. It marshals one last assault and slams us with everything it’s got.

I have seen this more times that I care to remember, and it is always sad. I have seen more business deals fall through than go through. People who started with nothing in this world and screwed a deal that would net them $7MM because they thought the business was worth $7.5MM. The truth is, they didn’t know or care what their business was worth. Resistance had them so scared they wanted to do everything themselves, they didn’t trust anyone, they couldn’t understand how these kinds of things worked.

But they understood the suffering. They understood the long days, the stress, the tension, the constantly being behind and scrambling. They understood all that it took them to get where they are now. And Resistance convinced them they were more comfortable in the suffering than taking the leap to being independently wealthy and having the freedom to do whatever they want. Resistance convinced them that freedom is scarier and harder than the suffering of building a successful business from nothing.

Are you starting to see what Resistance is and how it can affect your business? Resistance is, at its core, unhappiness. But you know what makes you happy. If you are a true entrepreneur, then happiness comes with the success of your business. Sure, that great meal out and bottle of wine probably make you feel pretty happy. You are also likely to be pretty happy sitting on the couch on a Sunday afternoon with a bag of chips.

But none of these compare to the wins in your business. When you make that big sale. When you cover payroll with cash to spare. When you hire your first employee. When you hire your tenth. When you walk through the halls of your office and realize that everyone is working and knows their job, without being told, because of the systems you designed. When you realize that you could walk away for a week and everything would run just fine. In those moments, Resistance is defeated. You did the work that you were meant to do.

Keep an eye on this site for more information on overcoming Resistance in your business. Bookmark the home page, subscribe to the RSS feed, or get in touch with me, and I’ll let you know about new resources as they become available.

All quotations are from The War of Art by Steven Pressfield.

The War of Art Translation – Part One

Steven Pressfield’s The War of Art addresses writers and artists as it talks about Resistance, understanding it and overcoming it. As I read the book, I could see how those same principles apply to running a business. The post below is part one of two where I share my thoughts from reading the first section of the book, Defining the Enemy. Grab your copy of the book and join me in examining what it looks like to encounter Resistance in your business.

Most of us have two lives. The life we live, and the unlived life within us. Between the two stands Resistance.

Why did you start your business? It certainly wasn’t to file quarterly tax forms. It wasn’t to worry about resolving employee disputes. But this is the life you are living now.

Let’s think back to that reason you did start your own business. Was it to grow a large company and become wealthy? Was it to be able to have freedom, both the freedom that comes with monetary goals and the freedom of destiny? Or was it to create something larger than yourself, something that would outlast your short time in this world? The answer is different for everyone but likely contains pieces of all of these.

Are you there right now? I didn’t think so. That is your unlived life. How did you end up stuck worrying about tax forms you don’t care about on the way to building a legacy?

You guessed it: Resistance.

Those tax forms are Resistance. Those employee problems are Resistance. That new marketing plan that you haven’t launched yet? The new product you have in the back of your head? The great new app? All the ideas you have to improve your company that never seem to happen? Resistance. Resistance is the reason that you have failed. And no, just because you’re bringing a few bucks home does not mean you have succeeded. Success, for the purpose of this guide, is living up to your potential. Living your “unlived life,” if you will. Because make no mistake: Anything less than that is a failure, no matter what trappings of success you have managed to pull together.

Resistance arises from within. It is self-generated and self-perpetuated. Resistance is the enemy within.

Why is your business not the success you envisioned? I bet it’s because of the economy. Just surviving in this environment is a success, right? Or maybe the bank wouldn’t give you the loan you deserved, those greedy bankers. Perhaps your employees are underperforming. You know how employees can be. Or maybe it’s the government with their meddlesome taxes and regulations.

The answer is that not one of these is the actual reason you fail.

Successful people think of creative ways to work with, or around, regulations.

Successful people consider taxes, have strategies to minimize them, but never worry about them.

Successful people take advantage of economic downturns to snatch up or eliminate the failures that will compete with them when things inevitably turn around.

Successful people have the ability to make any of their staff members successful right alongside themselves, with no hesitation, comparisons, or envy.

Resistance is like the Alien or the Terminator or the shark in Jaws. It cannot be reasoned with. It understands nothing but power. It is an engine of destruction, programmed from the factory with one object only: to prevent us from doing our work.

Just when you finally, finally, fix the one issue that was holding you back, lo and behold, a new problem even stickier than the last crops up. Now, if we can just get this one thing fixed . . .

But you never will. Things will never be completely fixed. Sometimes you have to make do with the imperfect. Sometimes you have to find workarounds. Resistance will always find a reason. Success does not suffer fools and doesn’t care at all about your excuses. So if you want to run with Success and avoid Resistance, you had better do the same.

Like a magnetized needle floating on a surface of oil, Resistance will unfailingly point to true North—meaning that calling or action it most wants to stop us from doing.

We can use this.

You know that task at the bottom of your list? The one that could change the face of your company? That one you are going to start as soon as you get your plate clear so you can really, truly, honest to God FOCUS on that big idea?

You should probably start it now.

Resistance’s goal is not to wound or disable. Resistance aims to kill.

Success takes time. Just like every bit of stress takes time off of your life, every minute delayed by Resistance reduces the Success you will have. This is it. Every dollar you don’t make is a dollar lost. Resistance is the sports team in the lead; all they need to do to win is run out the clock.

The warrior and the artist live by the same code of necessity, which dictates that the battle must be fought anew every day.

Who or what do you use as your measure of success? It likely depends on your motivations and how you define success. Maybe it’s the person who owns the business just like yours but is ten times the size. Maybe it’s the guy who has retired and plays golf three times a week. Maybe it’s the woman whose app changed how people look at the world.

But only someone who is listening to Resistance thinks that Success is an end point.

All quotations are from The War of Art by Steven Pressfield.

The War of Art – Review

I recently read another Steven Pressfield book that I really enjoyed. The War of Art is the first book in Pressfield’s series of books about overcoming “Resistance.” It is a fascinating book to read because we get to see him working through the process of developing his thoughts about Resistance while he shares them with us.

The War of Art is broken into three books: Defining the Enemy, Combating Resistance, and Beyond Resistance. As with Pressfield’s other books, I sometimes wondered how a portion applied to the higher message he was getting across. But, all in all, it is a great book with a wonderful message: You can take steps to defeat those feelings and fears that try to stop you from succeeding.

Even though The War of Art is written in the context of artists creating their art, I couldn’t help but think about it in business terms. We always hear stories of business owners achieving success and becoming wealthy. However, there are many more stories of business owners struggling to make ends meet, stagnating in their business, or working long hours for not enough pay. Why is this? Why are so many people misguided in their time and effort? How do so many people have failing, or worse yet, mediocre businesses when the principles and examples of success are so clearly laid out for them? I think Mr. Pressfield nails the reason on the head: Resistance.

I decided to write a guide to translate his ideas into the context of small business.

I believe that for true practitioners of this occupation I call business, there is an inherent art form to it. This is not a mainstream or well-understood idea. I’d like to help you see that the Resistance impeding the creation of art that Mr. Pressfield discusses is immediately and directly transferrable to the practice of running your business.

Sure, you might think a book about overcoming obstacles to writing the great American novel might have nothing to do with your business making large metal things to sell to other businesses making even larger metal things. But if you thought that, you would be fundamentally missing what drove you to start your business in the first place. The same energy (muse?) that inspires a writer or painter is what makes you the owner of a metal stamping company, instead of one of the dozen people working in it. There is much more art to business than there is science.

My next two posts will take a close look at the principles discussed in The War of Art and how they apply to operating a small business. If you haven’t read it, yet, I encourage you to pick up a copy of The War of Art, so you can read along while I discuss how it all relates to the world of running a business.

The War of Art Translation – Part One
The War of Art Translation – Part Two

Minimum Wage Laws

The mayor of San Francisco recently announced a new measure to bring the city’s minimum wage up to $15 per hour. Setting a baseline living standard for all members of our society is a reasonable, just, and valuable thing to do for a society as prosperous as ours. I totally understand setting a floor for livable wages.

The problem is in applying these kinds of solutions in a blanket manner. Not everyone who is working is trying to live on their wage. I don’t know anyone that would not support a “living wage” for full-time workers. But there are two other types of workers that are very common and critical to businesses: part-time/seasonal workers and interns/students.

The minimum wage cuts these people out by assuming that everyone needs to fully support themselves. Is it so crazy to think that there might be someone who wants to pick up a few extra bucks on weekends, or between classes, or while the kids are at school? I think it is wrong to assume that every task that needs to be performed at every company is worth $15 an hour.

Let’s talk about my company, because I use both of these types of workers.

Part-time Workers and Seasonal Help

We send out 1,800 tax organizers every year. It takes about a week to do it and we bring in temporary workers to staff the printers, stuff envelopes, and prepare the mailings. We most commonly recruit friends of our current employees for these sorts of temporary projects. Tax season is our other peak time. For about 12 weeks we are a flurry of activity. There are huge amounts of paperwork that need to be scanned and stored and then later shipped back out. We have a couple stay-at-home moms who only work with us during this season for the hours their kids are in school. They love it because we are flexible with the schedule, it is easy work that doesn’t really add any pressure to their already stressful lives and they can start and stop without any difficulties. The season starts after the kids have gone back to school and by summertime they are done. They also pick up enough extra cash to cover their family vacation or pay a property tax bill.

These flex workers are critical for businesses to help with peaks and valleys in workload. We love these folks because they are reliable, hard working, and are not competing with other staff for hours or career spots. Win/win, right? To say that we are an unfair employer by not providing a “living wage” because we only pay these folks $10 or $11 an hour seems a bit far-fetched. They aren’t trying to live on the wage, just meet some smaller financial goals on the side.

Interns and Students

While this living wage may be an inconvenience for businesses, and will result in higher prices for our customers, the real trouble comes in the form of interns and students (or any worker, really, who is developing a new set of skills). Ask any business owner what their top five challenges are, and I guarantee that one of them will be finding and retaining good workers. Add to that an unemployment rate that is still too high and hundreds of thousands of people underemployed, and you realize that we have a major problem in skills and training mismatching. There are people who want to work, yet businesses can’t find qualified people. This is a complex problem with lots of facets, and I won’t pretend to solve all of those here. But I can tell you how my company deals with it.

At our firm, we never hire for career positions externally. We only promote from within. We do this because cohesive culture is the key to quality and success in a business like ours. We hire bright students while they are in college and have them work as interns for a year or two before we slowly move them up the chain to being a partner. They learn the skills they need to succeed alongside their “book” education at the local university. For us those dollars are an investment, not a cost. We are overpaying those people because they don’t actually know how to do anything valuable, yet. We are willing to invest the money in them, hoping that we reap the benefit of their being productive employees later.

This is one of the single best solutions to the skills mismatch. Encouraging businesses to invest in the training of their employees will get employees the skills they need to have good jobs and will allow businesses to shape the training they want. But it is a two way street. Employees need to understand that they have a stake in this training as well. Forcing up the cost of that investment is exactly the opposite way to encourage more of this investment to happen!

After a person has fully developed their new skills, they should be entitled to a living wage. But to assume that every student needs to fully support themselves, regardless of whether or not they have the skills and knowledge to do so, compounds the already serious problem in our economy of mismatched skills and training.

Let’s make sure the steps we take to provide for all members of our society are best for the long term, not just the immediate future.

Taxes on Kickstarter

I know, this is boring. Kickstarter is supposed to be a fun, exciting dynamic place. Full of new ideas and concepts and people making things and making money.

No one wants something as boring as taxes involved.
But, before you start your Kickstarter you should know the ramifications of using it. They might surprise. Don’t set yourself up to get screwed.
Let’s pretend that you want to Kickstart your cumin waffle maker (hat tip to Evernote Essentials). You set a funding goal of $100,000. You know through your research that it will cost you $75,000 to produce said waffle makers which should net you a nice little profit of $25,000 less some overhead expenses. Sounds good, right? You make $25,000 and you pay tax on that number, fair enough.
The trap of Kickstarter, however, is in timing.
Once your campaign is funded, Kickstarter will release all of the funds to you. That’s one big deposit of $100,000 (I’m ignoring their cut and other issues to keep this simple). If you are an individual you are, by default, a cash basis tax payer. So what? That means that you have income of $100,000. Once you spend the $75,000 to make the cumin waffle makers, you will have expenses of $75,000 giving you the taxable amount of $25,000.
What if your Kickstarter funds in December of year 1? In January, you make your first payment to the manufacturers making your waffle maker. This means that, in year 1, you have $100,000 of income. You tax on that number. Which will be about $30,000. Which means when you have to come up with $75,000 to build your items, you are out of money.
Sure, it will all even out in the end. In Year 2, you will have $75,000 of expenses, no income, for a loss of $75,000. When you carry back that loss to year 1, you end up with a net result of $25,000 profit. Who cares? Cash flow cares! April of Year One you have to make a $30,000 payment to the IRS. Sure, you will get most of that back. But not until April of Year 2. Well after your cumin and waffle loving backers have stormed your castle with pitch forks.
There are lots of solutions to this problem, but they usually need a competent CPA to help you. Feel free to contact me if you have questions.
Don’t let your Kickstarted dreams get crushed because of bad timing!