4 universal rules

Anderson Business Advisors

Universal Rules for

Business Success

w w w . AndersonAdvisors . c o m


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A l i t t l e A b o u t


Anderson Business Advisors has been in business since 1993 and has worked with tens of thousands of businesses and their owners. Weve drafted and created, or been a part of drafting and creating, over 30,000 entities.

In that time, weve learned that there are certain rules business people MUST follow to be more successful. We call them the The 4 Universal Rules for Business Success. This book is dedicated to them and to your success.

Co n t e n t s

Rule 1 H av e a Pa s s i o n f o r W h at Yo u D o

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Rule 2 I d e n t i f y Yo u r M a r k e t

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Rule 3 F o l lo w t h e M o n e y

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Rule 4 O p e r at e i n a B u s i n e s s l i k e M a n n e r

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Rule 1

Have a Passion

for What You Do

he first rule is that business owners must have a passion for (or at least really like) what they

are doing. Why is this so important? In any business, there will be peaks and valleys. There will be times when you really love your business, especially when it is prosperous. On the other hand, there will be times when you are down in the dumps and not enjoying what you are doing at all.

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So, if you really enjoy graphic design and youve made it your business, when there are times that you are not making profits, you will be able to get through thosebecause youd be doing graphic design anyway, right? The whole idea is that you should stop and visualize something you really enjoy doingand then find a way to make money doing it. So, if you have a passion in your lifeartwork, computers, video games, trading in the market, real

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estate, building, carpentry, the law, architecture, or anything elsethen you should find a way to do that for a living.

For example, there was a computer programmer working for a large brokerage house who was absolutely miserablealthough doing O.K. financially but eventually realized that he was spending most of his spare time developing computer games.

Today, he develops computer games for a living. He is doing quite well, but even if he was not paid, hed still be doing itbecause he truly has a passion for it.

Weve also noticed that people who live, eat and breathe their business, because they like it so much they do not stop workingthey love what they do way too much. There is no such thing as retirement, because they are going to continue to do it, regardless. If they are prosperous, that is just an added benefit.

We worked with an individual who was a former NASCAR crew chief. His retirement? He is building cars shooting for land speed record. If people truly


enjoy what they are doing, it doesnt matter if it is part of their business; they are going to do it regardless and that is what carries them through.

If you are making money at something, you may think that you really like doing it. You need to be careful and make sure it is something that you really enjoy doingperiodwith or without money. Some folks realize that the part of their business they like is being around people and talkingschmoozingor whatever. For those folks, they could probably do just about anything so long as it involved being around people. Those are the types of business owners who seem to be successful at just about everything they do. The reason? What they really like is communicating with others, so any business that allows them to communicate with others will be a good business.

The old rule in business is that people tend to do business with people they likeThey do not care what you know until they know that you care. So the likeable, personable, business owner will get a

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ton of business regardless for the simple fact that they like others.

Now that will only works so long as the other rules we will discuss are followed, but the point is the driving force or passion of the business owner cannot be faked. Over time, the truth will come out.

So again, Universal Rule #1 for Business Success is to be passionate about what you are doing. You cannot fake this; it has to be something that you honestly enjoy doing. Otherwise, you will eventually get washed out like so much garbage.

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Rule 2

Identify Your Market

o whom are you selling? This is a reality check. You really need to determine the

goods and services you are going to be selling and identify the market to which you intend to

sell. Now, if you are selling toilet paper, you have a very broad market everyone needs

that, right? If you are an architect, though, you are dealing with a very narrow market, and you

need to be realistic about who can really use your products or services.

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Do not be misled; just because something was successful years ago does not mean it is going to be successful now. You need to stop and determine that what you are selling todayor the service you are providing todayhas a market. What is the value of that service? Is there enough demand out there to make it a profitable business? That is part of the planning process.

It is VERY important to meet with your accountant and advisors to determine if you

have a viable businessand to discuss what

type of profitability you are anticipatingso that the planner can put an appropriate

business structure around it to minimize taxation and make sure you are not bearing

any unnecessary risk.

So, again, the second rule is to identify your market. To whom are you selling?

You need to determine exactly what person, persons or companies will be purchasing. Whos the market?

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Is it something that can be targeted to a subset? For example, companies that are marketing to the Hispanic community have been doing very well. Or, you might be marketing to the elder community, baby boomersthere are lots of different markets out there. Are you being realistic about to whom you are going to sellare you developing a product or service that is going to be attractive to that particular marketplace?


Do not just rush into and think, If I make a better widget, everyone will buy. You just need to say, Im going to make a better widget, and because it is so needed, there will be a built-in marketplace for it. Or, perhaps it is Hey, there are four or five companies that really need this, and through some research, I know they would buy this if I created it. So again, identify that market.

If you are in a service industry, we need to be even more specific. You need to get a good idea of the demographic of your typical client and make sure your efforts are directed at those individuals. The old phrase fish in a barrel is worthless if you cannot find the barrel.

What about folks that do not deal with customers or clients? There are folks who do not deal with any particular marketplace except a marketplace. For example, commodities traders, stock traders, etc. For those people, your market research is, not surprisingly, true market research. The same rules apply. To whom are you going to sell? If it is the

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general market, you need to get more specific. Who are the buyers of the stock you are planning to purchase? Institutional buyers, other traders? You had better get an idea and find a way to measure that activity or you may find yourself holding onto something nobody wants to buy.

If you are already in business, you should make an effort to identify the customers and clients that make you the most profit and discover their demographic. You might be surprised. It may be very different that what you think.

So, Rule #1 is to be passionate and like what you are doing, and Rule #2 is to identify the market to which you are selling.

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Rule 3

Follow the Money

ou need to determine your funding source. This is important, because once you

identify how you are going to fund your business, you can determine the steps needed in the planning process. For example, if youve received an inheritance, and you are going to open up a small bed and breakfast because that is what youve always wanted to do then your business planning is going to be far different than if you are trying to get an SBA loan or trying to attract investors.

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If you are going after traditional financing from a bank, for example, they tend to be history buffs they like to look back and see your track record as a business. Typically, they are going to want to see financialsP&L statements, balance sheets, and tax returns for the previous couple of yearsbefore they commit to lending. You will need to meet their criteria before they will lend you a nickel. You would, therefore, need to engage in planning to make sure you qualify for that funding.

If you are going to the SBA, they are going to give you different guidelines, and you need to be sure that the business structure is appropriate, the types of financials they want are in place, there is funding in place, you have done your market research, etc. Lets contrast that with going to a venture capitalist who may not care where you came from or what your history has beenthey may only care about the future and what your potential is. They may say youve got a great product, there is a great market for it, and if you can build it cheap enough, you can take a larger market share. Or, maybe, you just need some

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money to advertise it and bring it out appropriately as opposed to nickel-and-diming it and bringing it out slowly. They may say, Hey lets get this thing right out to market. The planning process for that is going to be quite different than an SBA loan.

If you follow the moneyand identify exactly where the money is coming fromyou can plan and position yourself to take advantage of that. Ill use another example. As I write this, the government is talking about spending large amounts of money on alternative energy sources. If you are opening a business and planning on taking advantage of the proposed massive increase in spending in those particular areas getting some of those dollars for yourselfyou need to follow that money. If you are an alternative energy company, you should be looking at hiring grant writers for the type of government programs that are out there. If you are a minority or can be classified as a minority owneras long as you own at least 51% of the businessthen you need to do that ahead of time, or prior to asking for those monies, and make sure your applications are complete.


When you are following the moneywhen you are identifying what funds are potentially available you can make sure that you qualify by going through a pre-qualification process to make sure that you do not unintentionally get declined. We see this all too often, when you might go to a bank, and the bank says, We need XYZ, we need to see these types of ratios, we need to see two years of the P&Ls, we need cash-basis accounting and we need to see a strong balance sheet with shareholder equity. You have no idea what they are talking aboutand you put in an application that they decline, which is going to be exposed to every other bank at which you apply. You need to make sure you know exactly what is being requestedand that you know this information before you need to act on it.

So, that is the #3 Rule of Business Successfollowing the money and making sure you understand exactly what is needed to get funding for your business. Some of this goes out the window if you are running your business on a credit card or otherwise self-funding. But even if you are self-funding, you need to be

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realistic about how much it is going to cost. So, if you are one of those folks that goes out there, rents a location, opens up a shopwhether you are an architect or a retail store or a lawyer or whateveryou are out there and you start getting fixed overhead, but you only have four or five thousand dollars that you have dumped into the account (and you do not know where you are going to get the rest of the money), you are going to have trouble. Because if something can go wrong, it is Murphys Law that it will.

The #1 killer of businesses is running out of cash. Cash is king in business; if you do not have it, if you do not identify it, if you do not follow it around like a puppy dog, you are going to have hard times at some point.

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Rule 4

Operate in a

Businesslike Manner

f all of The Universal Rules of Business Success, this is the MOST important rule of all. The first three rules are pretty much moot if you do not follow this one. You could love your business, you could have a great market, you could be well funded, but you are still doomed for failure if you do not follow Rule #4you need to operate in a businesslike manner.

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There is an old saying, Fake it til you make it, which really means do what other successful businesses do. If you do what successful businesses do; over time, you will achieve similar result. When you do not operate in a businesslike manner, then it is only a matter of time before you fail. I liken this to Las Vegas where the house (or casino) has a mathematical certainty of winning at least 2% more than a player. Eventually, no matter how good the player, the statistics and percentages will catch up and the casino will end up with all of the players money. You need to make your business the house and give yourself the highest likelihood of success over the long haul.

Even more importantly than how you treat your business will be how others treat your business. For example, when you read tax casesor cases in courtsthey are often focused on whether a company was operating in a businesslike manner when deciding whether a company will receive beneficial tax treatment. They literally use the exact term businesslike manner and go on to give various criteria. In just about all courtstax and civil alikeyou see

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the same verbiage used to discuss whether or not a business will be recognized and given the benefit of the doubt.

What does this really mean? It means you need to be engaging in some sort of planning. If you are a trading business, that means you need to research the markets. Typically, you will have software that is going to identify the stocks and bonds, and you may be going to classes, trying to educate yourself on the market. That is part of the planning process.

Or, if you are thinking about going to market with a product, you might perform product research or market research. A typical company, before they go out and decided to buy and sell something, should determine, for example, the price point for resale. Lets say you had a pen that you could sell for 50 cents and that you could buy it for 15 cents. Those numbers work. What if the 50 cent pen cost you 60 cents? That obviously does not work. That would be a good way to lose money. However, that is exactly what many companies do when they fail to make


a plan. They run on hopes and dreams instead of a business plan and are often times shocked that they did not see what would have been blatantly obvious had they engaged in proper planning.

What about venture capitalists and banks? What about other businesses that may be strategic partners? They will all want to see if some planning was involvedbecause that is what successful businesses do, and that is what YOU should do.

The next area that is looked at is whether or not the company is using professionals. The IRS, for example, likes to look and see if there were competent advisors that were hired by the company. Were lawyers or other professionals brought in to do what lawyers and professionals should be doing such as drafting business documents, handling filings, structuring the business, etc.? If not, was there a reason you did not retain lawyers or other professionals? The court, IRS, bank, or other third party will likely infer that the reason you did not hire professionals was because you were not serious. I see it over and over again


it is a common mistakeyou will lose the benefit of the doubt if you do not do what other successful businesses do. Let me explain.

Think of a successful businesswhat would they do? Would a company like Intel go to a cheap internet sites where you can download forms for $10or a $99 incorporation serviceor would they hire a lawyer? Think of any successful company that has been around for a while. Ask yourself What would they do? and then do that.

You do not need to hire the $500-an-hour lawyers that they might, but are you using a professional as an advisor? Are you using a professional accountantone that has more schooling than the folks at H&R Block? Be sure you are going to someone that has a professional designation so that you know someone is looking over them as well. Again, should you ever find yourself defending your company, the courtsthe IRS, the tax courts (wherever you may find yourself )and you make the argument that your business is separate from yourself and you have


managed to screw up all the paperwork, the judge is going to look and say, Did they operate truly separately? Did they operate in a businesslike manner? If you are going online and using the $99 incorporation, the answer is going to be a resounding No, and youve just wasted your money (and your time) on something you cannot rely on. On the other hand, there are tons of cases where the professional screwed things up and the court still honors the intent of the business and gives the benefit of the doubt to the business and its owners.

So, you MUST make sure you are using professionals where professionals are needed.

The next layers of professionals are in accounting. All businesses must keep books and records. Still, there are a lot of businesses out there that do not. Now, the IRS does not say that you need to keep QuickBooks it just says that you must keep books and records. What does that mean? A lot of businesses will keep a profit-and-loss statement, or some sort of tally, that lets them know on a monthly basis how much


they have brought in, and how much money they have spent. That is going to be sufficient for the most part, for keeping track of how much revenue is in and how much revenue is out. Especially if you are doing $100,000 a year or more in business, you should be keeping a monthly profit and loss statement. It is not that expensivein fact, here at Anderson Advisors, our bookkeeping packages start at $49 a month, and that includes a profit and loss statement as well as a balance sheet.

The next item is the balance sheet. It is a tally of your assetsif you have buildings, if you have equipment, furniture, even intellectual propertyall of these things you ownboth tangible and intangiblego onto your balance sheet. You are going to have a tally of these on your asset column. Say you go out and


buy a computer; you will have a computer sitting on your asset columnand if you bought it on credit, there is going to be a liability on the other side. So a balance sheet has assets on one side and liabilities on the other. There is another little piece that gets added on the liability sideand that is the owners equity. Here is the equation:

Assets = Liabilities + Owner Equity.

In English, that means if you buy equipment worth a million dollars, and you have liabilities of half a million dollars, your owners equity is going to be half a million dollars.

Now, here is where it gets tricky. You are going to be depreciating those assets. So, whenever you look at a Fortune 500 company, or any other company, keep that in mind in determining what your assets are. There may be tangible items owned by the company that are worth millions, but the balance sheet says they are valueless. It pays to know how to read balance sheets and see historical trends.


If you are keeping a monthly profit and loss statementor, if you are not big, maybe a quarterly, half- yearly or at least annual profit and loss statement that says what came in and what went outyou are essentially taking your gross revenue minus your expenses. That is going to give you your net profit. The bottom line.

From a businesslike standpoint, if you are keeping a balance sheet of your assets, liabilities, and owner equity along with a profit and loss statement at least annually, then, you are going to be fine in terms of treating your business in a businesslike manner at least 99% of the time. The bigger the company you own, the greater the frequency the reports (Balance Sheet and Profit and Loss) should be. Most companies over $1 million in annual revenues should keep monthly reports and may be required to file an annual balance sheet with the companys tax returns.

The next area they are going to be looking at is keeping adequate records. When we look at books and records, we are not just talking about taxes; we are talking


about keeping a paper trail. If you are a corporation, there are going to be the state requirements that you document shareholders meetings, Directors meetings and committee meetings, so you are going to want to be sure that those are documented. If you are an LLC, we still suggest that you do this. Even though there might not be a state requirement for it, most courts look at it, and again, they apply this broad test of whether you are operating in a businesslike manner.

Lets go back to comparing what Intel might be doing. Do you think they document their important meetings and their important decisions? Of COURSE they do. It does not have to be on any magic form but then again, if you use BOSS Business Services, part of our service is tracking 100% of your corporate or LLC paper trail via our Business Protection Plan.

We document these things in a formal fashion, but you just need to write them downlike on a check register. Then, with any important decisions you are making, you are going to be fine. Again, what you are doing is creating a paper trail of the decisions


made, so that in the future, you can see what was decided and why. That is a big one, and successful businesses do that.

The last area we want to look at in terms of operating in a businesslike manner is: Are you treating it as a separate, formal business? What this really comes down to is structuring your business appropriately. Lets contrast two things.

Say we have Joe the Plumber, who is out there operating as a sole proprietor, which means that he is doing no business filing with any stateHe is no corporation, no LLChe is just Joe himself personally. He and his business are indistinguishable. Maybe he files a DBA, which is a Doing Business As statement with the countyor with the state, depending on where he is, that says, Hey, Im going to do business as Joe the Plumber. He doesnt even have a separate bank account; he just adds another name on to his personal checking account and he intermingles everything.

Do you think the courts are going to honor the separate-ness of that business? The answer is no


absolutely not. The amount of respect you show your business is typically the amount of respect that the courts, the IRS or any other third party will show your business. You are never going to be able to do real businessor if you are, you will be defying unbelievable oddsas a sole proprietor.

Successful businesses will almost never operate as a sole proprietorship, because it is tied to the owner,


and there is no differentiating the owner and the business. So, if something bad happens to your business, they will take everything the owner owns.

Think if you were lending money to a businessand something that the owners child does could cause you to lose out and not be able to collect on your loan. Would you loan to that business? Absolutely not!

Banks do not want to loan money to non-formal business structures because there is another layer of riskand that is that the owner and the business are all treated as one. Now, if something happens to the ownersay they are disabled or pass away what happens to the business? If it is not a separate business structure, it is going to get tied up in the probate court, and 99% of the time, it is not going to leave the court. It is going to be caput. That business is cooked. It is over and it is not going to continue on. If it does, it is defying immeasurable odds.

That is why you see almost no successful businesses set up as sole proprietors. They are almost always


going to be set up as a corporation or an LLC. That is because, from a businesslike manner, the owners recognize there are benefits from putting together a formal business structure. There is something that all businesses wantand that is consistency. They need to have predictability and consistency in the way that business is treated.

What if Joe the Plumber had said, Im going to go out there and set up Joe the Plumber as a corporation. Say he operated as something called an S Corporation, which just means that the profits flow down to Joe, but he takes a salary out, and he is able to build up his business. He is going to be far more likely to have people take him seriously, and he is going to look like a bigger businesseven though it may be just himjust because it is named Joe the Plumber, Incorporated.

Now, if Joe is the sole owner of that S corporation, the bank or lender might say, O.K., Joe, now we need to make sure that you are insured, that you have adequate coverage, or we are going to secure it with


(you guessed it) something off that balance sheet. They may say, Alright, you have some equipment, and all we want is a secured interest in that, so if you never pay back your loan, at least we can get the equipment. Now, if you do not have the balance sheet, and if you do not have good books and records, if you do not have the structure, if you do not have well-drafted documentsbecause they will ask for themif they see something that came off the Internet and it is five pages long, Im sorry, you are going to get denied right out of the gate. It is not going to address what they need it to address there is no physical way it is possible, unless it is on microfiche, that it is going to be sufficient. But if you are doing all those things, then you will meet their criteria, and you will get business funding and you will be treated as a successful business because, chances are, if you are treating your business in a businesslike manner, they will take care of you. You are not going to be able to hide weaknesses and you are not going to be able to fly by the seat of your pants if you are operating in a businesslike manner.


We used to joke of the Ready, fire, aim mentality. A lot of people are just so excited about what they are doingthey have the next greatest ideathat they just jump in without looking. If you do that, you are almost guaranteed to be doomed for failure. In business, you have to take careful aim. Then fire at will.

Here is another great example of why you must operate in a businesslike manner (or Rules #1, #2 and #3 are out the window). When the real estate market was really starting to heat up, we had some clients who went out and bought a piece of property. When they bought the property, their intent was to develop it. They were going to potentially build on it. Someone else came up and said, Hey, Id like to buy it, and they offered them a very large amount of money. Our clients said, Wed be crazy not to sell to these folks on these terms. But, of course, the folks that were buying it were speculators and they did not have all the cash they needed. So what did they do? Our clients said, Hey, pay me on installments. There was a small down payment and rest of it was going to be paid over time.


For those of you who know real estate taxation, you know whats going to happenall of that money that they made on that sale is going to be taxable in the year it was soldeven though the client never received the money. That is because they were deemed a dealer or a developer and all the gain is ordinary incomeplusas an added bonus (sarcasm) they are not allowed to have installment sales. It is just like they sold soap as a grocery storeyou do not care whether you are extending credit; you are recognizing the sale when sold. You say, I am going to sell it to you for a hundred bucks and you get to recognize the hundred bucks. Now you have a promissory note you have an asset that you are going to have to collect on. You have been deemed paid and it goes over onto the asset sheet. Now you have a note, and you are going to be recognizing that full amount as revenue.

That is exactly what occurred here, except, adding injury to insult, the other side defaulted and never made payments. The sellers have one year with a massive tax hitthe year that they sold itand then they had to try collect in future years. Eventually, they were able to


take a large write-off, because there was a portion that they were not able to collect. Still, we are talking about a pretty major debacle. Now, if they were operating in a businesslike manner, they would have had their accountants take a look at the tax implications PRIOR to selling that property, and they would have known what was going to happen. This is the old ounce of prevention.

In my example, the clients met rule #1: they loved real estate. They met #2, they had a great market; in fact, there were a lot of people that wanted to buy that property. They could have developed it and sold it to people who were buying condos all over the place. They had a great market at the timeeven though it is in the toilet nowthey had a great market, they had funding. They were able to buy the property and they knew where that money was coming from. But in the end, their great undoing was that they did not operate in a businesslike mannerthey did not structure it appropriatelythey did everything in their individual names and it was not even a formalized business partnership. From a tax standpoint, they were just folks getting


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together trying to make a profit, and BOOM, they got hit with a tax hammer that they never saw coming. Ouch. The punch line is that most accountants would likely have missed the issue as well. Unfortunately, the bulk of tax preparers are really set up for individuals and have no particular expertise in real estate or business (regardless of what they may advertise).

Make sure that your advisors do what you

are doing, have run businesses and understand the nuances involved with your

particular endeavor. Never go to someone who doesnt understand your businessit

can lead to harsh, unintended consequences.

The last example well use from our clients is that of some builders. They engaged in no planning; however, they were very passionate about real estatethey loved what they were doing. They had a great market, they were making a ton of money and they had great financing, butin terms of a businesslike manner they did not do forward planning. They did not have


an advisor that was trying to look into the future, or, if they did have an advisor, he or she was not able to get through to them, and in the end, the client did not engage in a lot of forward planning.

Success business owners look at the future and they try to make their business into what they are visualizing. At the end of the day, the builders ended up with a massive tax liability because they were not


engaging in appropriate planning. In their case they were taking most of the money they were making and reinvesting it. They were buying properties, fixing them up and selling them. They were doing it on a massive scalebuying 10 or 15 properties at a crack. What they DID NOT realize is that they could not write off the money they had spent. Let me explain.

Lets say they brought in a million dollars in a particular year and they spent a million dollars. Most people would say, Well, I guess we are zeroed out, and we do not owe any tax. That is not how it works when you are buying assets like real estate. The investment is called Basis, and you do NOT get to write it off. You get to subtract it from the sale price. In some cases, you can depreciate the asset, depending on what it is. In this particular case, they were a dealer in real estate, and the only way they would be able to take if off would be as if you were buying items for a grocery store. They were buying homes just like a grocery store would buy soap. You do not get to write off the soap when you buy itit is called cost of goods sold when you sell it. In the


real estate world, that is your basis, but you do not get to write it off until you sell it.

In other words, if I buy a piece of property for $100,000 this year and sell it for $200,000 next year, my gain is going to be $100,000. The taxable event occurs when I sell it. Im not able to write off that $100,000 that I spent at the purchaseit is subtracted from the sale price when I sell it. That is exactly how they got themselves in troublethey spent all the money on investments and they ended up with a huge tax liability as they could not deduct the money spent on those investment. Lets walk through that.

They made a million dollars. They spent a million dollars. The million dollars they spent was non-deductible, so at the end of the year, they had a $300,000+ tax bill with no cash. So, they met the first three rules, but the fourth rule was their great undoing.

Fortunately, there are very few situations in which we are not able to do something to help. It just took a lot of creative planning to create losses the following year. The money was being spent, they had the


cashit was just a matter of making sure it was in the appropriate vehicle so that they could get some tax relief (if possible). We were able to create some losses and carry it back to wipe out that tax liability. It took a couple years to do it, but that is where operating in a businesslike manner really makes sense.

Im going to give you one last example of someone who is passionate about somethingwho has a great marketwho follows the moneyand can still be undone by not operating in a businesslike manner.

There was a group of investors that had great success in one business. They made millions of dollars in one business, and they were taking that money and funding several other businesses on the side. Now, just like real estate, when you invest money, you do not get to write it off. So, if I buy property or I put the money into a businesslets say that Im going to go out and start Tobys Plumber Shopand I go out and buy someone elses business and just dump it into an LLC, that is not a deduction for me (for you accountants I know if I buy assets I may be able to depreciate and/


or deduct somebut I am referring to a traditional purchase or the business interest). If I buy stock in a company, that is not a deduction (think about if you buy stock in Microsoft and hold itit is not a business deduction). If I loan money to the business, that is not a deduction to me. You get the idea.

In this particular case, they made millions of dollars, and they were reinvesting it in all in different endeavors. At the end of the year, they made over $10 million. They had reinvested $9 million of that amount over the year in other endeavors. They had a cool $1,000,000 sitting in their account at the end of the year. They were happy because they hadnt changed their lifestyle a lotthey were making money and they were excited.

Now here is the quiz. What is the tax liability on the $10 million they made?

Lets just say it is over $3 millionor closer to $4 million in the state they were in. Do you think the IRS says, Well, that is O.K., you invested it in other things?


No, they say, You owe us $4 million. You have $1 milliongreat, well take that as a down payment. Pay the rest. You have a huge tax liability.

Again, they were passionate, they loved what they were doing, they were helping people, they were very excited and they had a great market for what they were doing. Making money was not the issue. They had fantastic funding for their business, but at the end of the day, their great undoing was that they did not operate in a businesslike manner because they did not have a plan,


they did not have good advisors around them helping them out, they did not have accountants saying, Do not spend all that moneyput some aside for tax liability. They did not address that and so they ended up being an unsuccessful business.

Lets look at small businesses. A lot of them say, I do not need to engage in any planning. Here is what happens when you do not:

Say you go out and you are going to sell something door to door and you say, There is not much of an investment here. I really love health products, so Im going to be a representative for a health product. You go out and you have vitamin parties or whatnot whatever the big fad is these days. And everybodys showing up, and you are making money, and you just say, I do not need to do a lot of planning.

Well, there are a lot of things going on here. Lets run your business through the 4 rules. You may meet the #1 rule, which is liking what you are doing. Number two, youve identified a marketthere are lots of people who need vitamins. Number three, it


does not cost a lot of money; you were able to do it on a shoestring, so there was not a lot of outlay. But number four, you have all this money coming in, perhaps you are carrying inventory, and you are not necessarily putting the money aside for taxes.

A year goes by and you have done fairly well. You have managed to cash flow $500 a month. However, there is a big tax bill coming due because you have been investing so much of your money in inventory for your parties. You may say What are you talking about? I spent my money on my business!

The money that you are investing into your business is not deductible. Voila!you have gone from becoming a viable business to drowning in debt because you owe money in taxesmaybe you also owe business taxes, payroll taxes, federal taxes, state taxes. Who knows? You have been too busy running your business. If you have no plan, it is just going to wipe you out.

Now, lets say that you are driving to one of the vitamin parties and one of your friends who is helping you says


You know what, you should just be a sole proprietor because it is easier, it is bestthey probably do not even have to pay taxes . . . You are so dumbfounded at the stupidity of this statement that you swerve and cause an accident. The person you hit sues your business. The person riding with you is also hurt and sues you. You say, Hey, I had ABC Vitamins on the side, I was operating on behalf of my business. You cannot go take my savings account, you cannot take my house. Lets say you are married and your spouse has a great job, and you work full-time or part-time on the side as wellthey can garnish your wages, they can even take your spouses property (especially if you are in a community property state or you have been married for a long time and everything is co-mingled). They are going to be garnishing you, your retirement plans are at risk, your savings are at risk, everythings at risk because of this Hey, it is not a big deal attitudeas opposed to if you had separated itif you had just set up the appropriate structure with a good business planner or a good asset protection planner. You could have addressed this issue right out of the gate.


If you had operated your business in a businesslike manner, you would not be running into these issueseven if you think it is such a small deal. Even more important, Congress actually gives you favor- able tax treatment for setting up your business correctly. They even let you deduct the cost of setting up your business.

Here is one last example of what can happen with poor planning. I will start it with a question: What is the worst-case scenario if you go out and buy a rental property?

Right now, that is all the rage. If you go out and buy a rental property, you might say, Well, if it is not successful, Ill go ahead and give it back to the bank. You go out and you buy it in your nameyou love real estate, youve identified a market that is strong in your area, maybe youve done some statistical analysis and you know you can buy a house for $100,000 and rent it for $1,000 a month. You have funding. You have a banker that says, Hey, Ill take care of you, and you go out and buy the rental.


What is the worst that can happen? What if somebody slips and falls on that property? What if the property gets black mold? What if a tenant destroys the property? What if a tenant or someone invited onto the property by your tenant gets hurt? Maybe you get a bad tenant and you get a notice that you tenant is misbehaving and you do not do anything about it? Maybe somebody walks onto that property and falls into a hole and you or your property manager should have done something about it? What if your property manager gets into a physical altercation with the tenant and hurts them? With all those things, you have exposure to liability. And guess what? It is not just tied to that rental propertythey could take EVERYTHING from you.

Lets say that you do have that black mold (very common nowadays). I can even use a real-life example that happened to a client. The client received a letter from an attorney saying that that he believed that they had discovered black mold in the clients rental property. The attorneys client, the tenant, was feeling ill and that they did not know the effects on


her unborn child at this time (the client did not even know the tenant was pregnant). Experts, of course, would be needed.

That is the type of thing where you are going to have the hairs on your neck sticking out because now you realize, Im in for it. And guess what? There are TONS of lawyers who make their living off of mold cases and landlord/tenant issues. It is the new asbestos of the legal profession, this black-mold litigation. Chinese drywall is another one. There are a bunch of these out there, and what you are at risk for? Even if you have insurance, you are talking about an insurance company that is looking out for its best interests. What if the insurance company says they are not going to cover you because it was in the disclaimer that you said you did not have these sorts of things? That you did not keep the home in reasonable repair? Or any of the other myriad of reasons the insurance company may be able to get out of the deal? What then?

So you say, Well, they cannot come and get my stuff, but ABSOLUTELY they can. Even if you try


to bankrupt it, you may not be able to get away from it depending on what the judgment is for certain things cannot be bankrupted away. You may need to pay it over time, or you may need to liquidate all your other assets. But at the end of the day, you are stuck with a judgment that is going to be renewed every 10 years, and they are going to continue to pile it on you.

And soif you had JUST operated in a businesslike manner, if you had just gone in and talked to an attorney ahead of time or engaged in some sort of planning with an asset protection planner or a business planner, they would have caught this thing right out of the gate and said, Hey, the appropriate way to structure rental property is not going to cost an arm and a legit is just to put it into an LLC and isolate your other assets, so if anything bad ever happens, you do not lose that asset. And vice-versa.

Lets say you buy a piece of property with a friend of yours, and you think, Hey, Ive always known this friend, they are great. But if that friend gets ill, or


passes away, now you are dealing with that friends heirs, or their spouse, or their kids. Or, better yet, lets say that your friend gets suedor their child gets into a massive car accidentand they end up losing their part of the property in a judgment, and you end up with someone you do not even know as your partner in that property?

Ive been involved in these. There was one matter in particular where many years were wasted in litigation in a probate matter over property where two friends bought it and did not do any planning. Three years after the passing away of one of them, it was still being litigated. Hundreds of thousands of dollars wasted because the heirs are fighting over the value of that property. They actually sued the other partner because they said, You did not get the best use out of that propertywe did not like what you did with it, we did not like the way you developed it and you did not spend enough on it. This is not a joke this happens every single day and is probablemore than likelythat it will happen to every single one of us who owns investment property or a business. It


is equally easy to remedy if you go to someone who knows what they are doing and you structure your affairs properly.

My examples are all great examples of how NOT operating in a businesslike manner can unravel your businessand why it is so important operate in a businesslike manner.

So, lets just go through and review the 4 Universal Rules of Business Success.

Number OneBe passionate about what you are doing. You really need to like what you are doing.

Number TwoIdentify your marketknow to whom you are selling. Have the appropriate research done to know who you are selling your product or service to or how you are going to make money. If you are doing trading, what are the types of volumes, what are the expenses involved, etc., so that you know you are able to make money on your particular endeavor.

Number ThreeFollow the moneymake sure you know how you are going to be funded and plan


accordingly, whether you are going to self-fund, borrow money from relatives, a bank or through the SBA, venture capitalists or angels. All of those things will determine how it is that you are going to be planning for your business.

Number FourWith a big star next to this one, because it is so importantyou need to operate in a businesslike manner. You need to make sure you are engaged in adequate planning, make sure that you are using good professionals, such as attorneys, accountants, CPAs and asset-protection planners folks that know what they are doing in their particular field. Make sure that those people are true business professionals and have run businesses and understand how they operate. Make sure that you are keeping good books and records, that you are keeping a paper trail of important decisions, and make sure that you are structured appropriately for the type of business that you are working in so that you can address lawsuits, taxes and estate planningand make sure all those things are addressed in a comprehensive plan.


If you do those four thingsif you are passionate about your business, if you know to whom you are selling, if you are following the money and you are operating in a businesslike manner, then you have a tremendous chance for success (or at least business success) as opposed to failure.

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Unlock your potential and maximize your business success. The Universal Rules of Business Success should be read by anyone involved in owning and operating a business or who is considering a new venture. Written by a team of successful business owners who has been involved in thousandsyes, thousandsof business start-ups, you will be given the 4 rules that all business MUST follow to achieve success.

The result: it is like finding free money. You will have clear- cut, concise rules to follow that virtually guarantee the success of your business.

Do what other success business owners do. You will find that success will come to you much easier and with less stress when you follow the 4 Rules of Business Success.

2009 Toby Mathis, Esq.

Anderson Business Advisors 888-969-2677

www.AndersonAdvisors.com

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