Okay. Sure. I get it. Starting your own business involves risks.
You end up, usually, with a big chunk of your personal wealth tied up in the business.
In many cases, you experience a roller-coaster income.
And then, of course, starting your own business also means you may forgo other opportunities such as a great job with a good company and that you lose freedom since you typically can’t just quit some afternoon if you find you don’t like the work.
In spite of these disadvantages, however, you have at least seven, really powerful reasons to run your own show. And here they are:
Reason #1: Earn an Alpha Return
A first reason to start and run your own business? Small businesses should deliver returns on investment that greatly exceed those available in big capital markets if you’re clever, you work hard and you make your own good luck.
You should be able, for example, to triple or quadruple the return you earn in a small business as compared to, say, a basket of big company stocks.
Tip: Check out the prices and profits of the businesses for sale someplace like www.bizbuysell.com. You will regularly see businesses that make $100,000 in profit yet cost maybe $200,000 or $300,000 to buy. How you finance the purchase of a business and the adjustment you make for the owner’s wages affects the return you earn, but a cash purchase might earn you 15% to 25% annually. And if you use leverage, you might even earn a multiple of this.
Reason #2: Control over Your Earnings
You know another reason to start and run your own business? You will exert much more control over your earnings.
In other words, own the business and you’ll be able to sculpt your job and your career so it meshes well with your income and family requirements. If you need more money, you’ll probably be able to figure out how to work harder or smarter and get that money.
On the other hand, if it turns out you and your family are fine with you making a little less as long as you get more time, hey, you should be able to do that.
Reason #3: Control over Exit Timing
A related point: You’ll probably also have more control over timing your exit from your business.
You probably won’t, for example, “lay yourself off.” Or have management decide you’ve become too expensive as compared to some younger, inexpensive guy or gal who’s just out of school.
Further, you probably can decide to go part-time and slowly fade into the background if, as you age, you want to work less but not stop cold turkey. (We’ve got a pretty good blog post here about how longevity can be a really powerful financial tactic.)
Reason #4: Maintain Upside Opportunities
Let me make a tangential comment: If you work for someone else and you encounter a windfall opportunity, you may need to pass on the opportunity. For one thing, the opportunity may, legally or morally, belong to your employer if you learned of it through your work. So that’s a roadblock.
But even if you don’t learn of the opportunity through work, you probably can’t easily with a job say to your manager, “Hey, I’m just going to dial back on work for the next couple of days or weeks or months… I’ve good a giant opportunity… Gotta go for it.”
If you’re working in your own business, though, you maybe will be able to pursue any world-class opportunities. You’ll surely have more flexibility to try…
Note: I started writing how-to books when, as an independent consultant, a publisher called me and asked if I’d quickly write a book about accounting software. That book become a modest little bestseller and started me down the path of writing. I’d never have been able to write it if I had a real job to work around.
Reason #5: Custom-tailored Tax-efficiency
A quick point: If you own your show, you’ll be able to structure your compensation in a way that optimizes your own tax situation.
You could, for example, provide children with jobs (see another post here about how this can save you money). You can provide a fringe benefits package that fits your situation like a glove. You can possibly combine activities in a way that sidesteps the rules for passive loss limitations or hobby losses.
Reason #6: Perfect-fit Pensions
Obviously, with your own firm, you can pick a pension plan option that works great for your retirement savings. This is especially true if you’re a one-employee or one-person operation.
Reason #7: Tool for Transferring Wealth
A final point: A small business often provides a great tool for legally and efficiently transferring wealth to your kids or grandkids.
Own your business, for example, and you can provide good employment to heirs.
And if you own your own business and want to transfer the operation to a son or daughter or a grandchild, you can do so in a way that’s fair to you, easy on your heirs, all while being extremely tax efficient.
Note: Mom or dad can often provide tax-friendly financing where a child buys the business over time using the profits.