Business Assets: How to Manage Them
Bountiful Baby only sells supplies. Many (most?) of our customers operate their own business, using those supplies. This post is for them.
An asset is anything that puts money in your pocket on a regular basis.
A liability is anything that takes money out of your pocket on a regular basis.
Most people’s homes are liabilities— not assets. As Apple used to say, “Think Different”. Otherwise you’ll get the same mediocre results as everyone else.
Business real estate is the only asset that you can buy where you can simultaneously collect revenue on it’s business use, PLUS write the entire cost of the real estate off as a business expense, PLUS have that asset appreciate in value over time. This creates unparalleled wealth building opportunities.
Real estate is an example of a long term asset. Business supplies and website inventory are examples of short term assets. Businesses with high financial risk should only own short term assets, and should *lease* their long term assets that they use. Businesses with low financial risk should own long term assets, and not ever put their money into short term assets.
Any business that deals regularly with the general public is a “high financial risk” company. This is because of the litigious nature of the general public. Those businesses should not own long term assets. Instead, a separate company should be set up to hold the long term assets, and then that company should lease the assets to the first company. This is how to minimize overall risk.
My preferred state of incorporation for a company that leases long term assets is Nevada. Some time ago I researched the difficulty of a litigant successfully piercing the corporate veil, and discovered only one case where this happened in Nevada. It seems Nevada is quite protective of their businesses, probably because of the gambling (and other fringe activities) that commonly occur in Nevada. You can use that to your advantage. Create your leasing company in Nevada, and then register it within the state you reside in as a “foreign entity” doing business in your state. That is what we have done.
All expenses will always fall into one of three categories, or “levels”. They are:
Level 3: Spending money to buy assets.
Level 2: Spending money that is a legitimate business expense.
Level 1: All other expenditures.
An asset is anything that puts money into your pocket on a regular basis. The amount of return is your ROI (Return On Investment). If the thing you are buying with the money you are spending is not projected to produce an overall positive ROI, it cannot be considered to be an asset.
Whenever you spend money, seek to push it up to as high of level as you can. For example, if you like to occasionally go to Hawaii, trips there would normally be a Level 1 expense. But if you have significant business assets or investments in Hawaii, it’s not difficult to make your Hawaii trips be a legitimate Level 2 expense.
Wealth building means eliminating as many Level 1 expenses as possible.
PayPal requires you to have a bank account. So do all of the credit card gateways. So do the ecommerce platforms, such as Shopify.
Having a bank account for your business is mandatory. Here are twelve rules for that bank account.
#1: Your business bank account must be a checking account and not a savings account. You will need to write business checks for all of your Level 2 and Level 3 expenses, so it must be a checking account. There should be NO level 1 expenses EVER occurring in your business bank account. Never mix business with personal.
#2: Your business bank account must be solely dedicated to that business. It must be used solely for that business, and for no other purpose. Again, never mix business with personal.
#3: Your business bank account must be owned by the same tax entity as the business. In fact, I don’t think there’s a bank in the nation that will allow anything else. For DP Creations, LLC (i.e., “Bountiful Baby”) this is Nevin Pratt and Denise Pratt, since we are the sole owners of the company, and our bank required proof of that when the account was initially set up. All banks will require all bank accounts to follow this same pattern.
#4: Configure your PayPal account and your credit card gateway accounts to auto-sweep funds to your business checking account daily.
#5: If somebody issues you a check in your company name, you MUST deposit that check into your business checking account. In fact, I don’t know of a bank in the country that will accept such a check handled any other way.
#6: All business expenses must be paid out of your business checking account. This is either directly, via issued checks or ACH’s against your account, or indirectly to pay off credit cards that are in turn TOTALLY DEDICATED to the business. All expenses are now flowing through that same business checking account
#7: With the above, your bank account has now become the center locus of your accounting system, and it is easy to prove that ALL of your business income and ALL of your business expenses are flowing through that bank account, and that ALL of the transactions of that bank account are for your business and nothing else, and that you are the sole owner of everything.
#8: Get some accounting software, such as Quickbooks or Peachtree. Don’t think that you can track it with a spreadsheet, or some other such nonsense. Use real accounting software. We use Quickbooks.
#9: Configure Quickbooks (or Peachtree, or whatever you are using) to automatically download all of your bank account and your business credit card transactions. Download them on a daily basis. The accounting software will “learn” what the proper accounts each transaction should be booked under, but it might take some time up front to “learn” this. During that time, you might wish to hire an accountant to help you know the proper accounts to book each transaction under.
#10: Reconcile your bank account daily. This will keep you from issuing checks for money you do not have. Doing otherwise can easily turn into “check kiting”, which is illegal. Track it. Don’t break the law.
#11: If you have employees, use an online Payroll system to handle your payroll. With all of the tax regulations, it is too easy to get into trouble otherwise. We use Quickbooks Payroll. It automatically dips into our checking account to pay the payroll taxes, and automatically files the required payroll forms, and automatically calculates and prints all payroll checks. We just enter the employee time and then hand payroll checks out every two weeks. Quickbooks does all the rest.
#12: Have a tax accountant do your yearly taxes. Preferably a CPA. It’s well worth the money. Business accounting is a continuum with the left side representing the things that are totally legal, the right side representing things that are illegal, and some amount of gray area in the middle. Stay out of the gray area. Stay firmly on the left, and keep things firmly and unambiguously legal.