Build a profitable business- the baby steps part 28

Know your taxes. Taxes are one of the biggest costs, if not the biggest cosst of your enterprise. While we certainly don´t advocate any illegal or unethical tax dodging we aer 100 percent in favour of any legal tax planning activities that will help you keep a larger percentage of the fruits of your labour. And that is why we advice you to know your taxes by heart. Seriously. Learn everything there is about them. Now, we are not talking about nitty-gritty book-keeping minor details here. Rather we are talking about knowing how the system works, how to operate most effectively within that system, and how to make the smartest most rational moves in order to minimize the taxes you and your company pay. We know how the corporate tax system works like the back of our own hands. In fact we know how the tax system works in a number of countries and regions around the world. In some countries it pays a lot more to know how your tax rules than others. Unfortunately for us we are living in just such a country. If you are living in a country with a very high tax pressure you have to learn all you can about taxes. If you do not plan your taxes in these countries, chances are there will be very little left for you once the government has taken their share. Another aspect is that countries with high taxes in general have very harsh punishments for those who try to evade taxes or fill out a tax-related form incorrectly. If you are living in a high-tax country the penalties in those countries make it even more important to know your stuff thoroughly.

But regardless of where you are living we encourage a good understandiing of the tax rules that apply to you and your company. In general there is always something you can do in a better way, and all these small improvements add up handsomely over a number of years. Keep in mind that you are not really receiving anything for your taxes, not on an individual basis anyway. Being an entrepreneur you are more probable to pay for other elements in society as well. While we encourage you to play by the book at all times and always pay the taxes that the laws of your country tell you to, we also acknowledge that we believe that it is your duty to yourself and those you love to try to minimize those same taxes as much as the law allows you to. Everybody else is doing it. You don´t believe us? Let us give you an example. Most european countries have fairly high tax rates in general. At least compared to countries in other regions. The political class has been raising taxes in the Euro-region for the last couple of decades. And they have been justifying it by talking about solidarity and the need for those with a higher income to support those of lesser means. Now the interesting thing is that those same politicians and their helpers have extraordinary good salaries. What is even more interesting is that every politician and bureaucrat working for the European union is paying taxes that are a lot lower than almost any of the membership country citizens. Why is that? Because they make the rules and nobody likes to pay high taxes. What happened to the solidarity and the need for those with a higher income to support those of lesser means? We have said on numerous occassion so far never to listen to what somebody is saying, but instead look at what they are doing. If the very people in charge of the system are trying to minimize their taxes, why shouldn´t you. They do it by cheating the system. Or rather, they do it by changing the syetm to their benefit. You don´t have that luxury, but you can at least give yourself the best possible chance to legally attempt to pay as little tax as possible. We told you everybody was doing it. We showed you that politicians and bureaucrats representing one of the biggest economical areas of the world are doing it systematically. Why shouldn´t you?

Over the years we have found ourselves in situations where our tax expertise has helped us immensely since serious money was at stake. Whether it´s a corporate takeover, setting up holding companies or planning your pension plan (this one can be very profitable, since most countries encourage retirement planning by granting tax reductions of various sizes and constructions. Check it out.), it can be very lucrative indeed to know and understand the tax rules of that specific situation. As we pointed out before, it´s not neccessary to know all the finer details. You can hire someone to help you with that, and you should. But you want to be aware of the different possible solutions that you have at your disposal. You should know all of the major rules by heart and you should know some of the finer stuff as well. You don´t need to learn this overnight. We have aquired our knowledge of the tax system of our country over several decades. Just use every opportunity to learn something. If you are about to call your accountant or a tax specialist to discuss something, by all means look it up first and learn as much as you can about it. That way you will get that much more from that meeting, you will be able to ask important and relevant questions and you will learn a lot and internalize those learnings. We are still learning new ways to improve to this very day.

At a dinner party with a group of entrepreneurs many years ago the topic of taxes came up. One of the dinner attendants was a renown tax specialist who had recently decided to open up his own shop. Naturally I saw the opportunity to ask some questions free of charge. He was kind enough to explain some very fine points and details to me, and he later complimented my knowledge by saying that at first he figured I was a tax specialist as well. I told him that I was an entrepreneur but that I had found it very profitable to learn as much as possible about the tax system of our country, especially since the tax rates were so high. We continued talking for a while and I asked him for his best advice on how to minimize taxes. Maybe there was something I had missed our some small detail I had overlooked. The tax specialist gave me a beaming smile and told me: “That´s easy. The best possible move you could make in order to minimize your taxes is to move to another country.” I found that very witty and clever at first, and very disheartening and sad on a second thought. We know several entrepreneurs who moved abroad almost exclusively because they no longer wanted any part in the tax system of our country. Sadly, these entrepreneurs were wildly successful and were also good members of society. It´s a shame they left because they felt they cheated by an unfair system. They all left for countries with considerably lower taxes, and if you are living in such a country you probably won´t understand what we are talking about. Suffice to say that in some countries an entrepreneur will pay 75% of his/her gross takings in tax. In other countries that same tax rate will be close to zero. So if you are living in Singapore or Switzerland, chances are you are not going to fully appreciate the problems of being an entrepreneur in high tax countries. It takes even more hard work and persistance to make it since the government takes such a large part of it all. And it takes a solid understanding of the tax system and how to interact with it in the best possible manner. Every step of the way.

Be a precious few. One of the rules of starting a business is one that we have learned the hard way: do not start out with too many owners. This is especially true if you are all going to work together, as opposed to some of the owners being passive. Starting a business requires a lot from the entrepreneurs. While it can be great to have many minds at your dsiposal when you run into problems, there is a flip side of the coin. There are going to be a lot of decisions to be made and strategies to be decided upon. The more you are, the more difficult will it be to reach decisions and agree on future courses of action. Another problem that we have experienced is tha incintive problem within a larger group of people. For instance, if there are 5 of you starting a business (please don´t do it) we can tell you with 100 percent certainty that not all of you will have the same incentive. Why is this important? It´s extremely important because incentives are what makes us tick and apply ourselves in a certain direction. So how can the incentives differ between a group of people, you are asking yourself. Isn´t the goal of the entire group to start a successful business and make lost of money in the process? You´d be surprised at what you would find if you had any substantial experience in this particular department.

Not only do different individuals have completely different incentives (in many cases a lot more irrational ones than you might assume) there is also lots of issues to be resolved regarding what position each individual has in the company. Why is the position in the company important? Well, if one of you is a sales person perhaps that person will start making claims to some sort of sales bonus. After all he/she works longe hours than the individual doing the administartive tasks. Some of you might want to invest most of the surplus right back into the company (a smart long-term move indeed) while others need a pay check to be able to pay for their bills and lifestyle. Some of you will put in grueling work and go at it 24 hours a day. Others will stroll in late in the morning and immediately go grab a coffee and a doughnut. Some of you will want peace and quite while others will want to be a lot more social. Some of you will want to go for a prolonged vacation, while others feel there isn´t enough time if the job is to be done in a proper fashion. Some of you will want to splash around your cash on fancy offices, business cards, and technical gadgets. Others among you will want to save every penny and reinvest it only when you find opportunities that are truly valuable for your enterprise. We could go on and name hundreds of different situations where you are likely to face opposing wills within your organization if there are too many of you. You are likely to experience some of these issues even if there are only two of you, but in that scenario the problem will be a lot easier to contain and a solution is in most cases more readily available.

Also there is the issue of personal incentives that are a function of what makes each individual tick. Some people thrive if they get a lot of publicity. This might be good, but if the race for publicity overtakes the willingness to perform profit-enhancing activities that will become a problem. Some people are obsessed about being in a certain position in the company although it may be painfully evident for everybody around them that they don not have the neccessary skills. What do you do if one of you is obssessed about being a sales person, yet that individual can´t even pitch a glass of water to a man stranded in the middle of the Sahara desert? What would you say if you found out that one of your pertners used his cost account to help out his wife´s and father´s businesses? How would you react if the one who deeply desires to be CEO lacks all forms of leadership qualities, is terrified of holding presentation, negotiations or any type of situation where there is a potential underlying conflict?What would you do if you found out that one of your partners owned a competing business that he had secretly been working on for the past year or so while simultaneously taking a salary at your company?  You think we are making this up as we go along? Not at all. All of it is based on our very own experiences. There is no fiction in any of those statements. In fact, there is a lot more where that came from.

So do take our advice on this matter. Don´t start a business with too many active partners in it. In a perfect world, there should be two of you. Period. In exceptional cases three is alright. But never more.And our advice is not just based on our own experiences. Our advice is firmly seated in emprirical evidence. We have found that a significant amount of the successful entrepreneurs we have come across are 2 or 3. Many are brothers or best friends for many years. We are not surprised. All entrepreneurs will face a variety of very difficult and emotional situations to deal with. When those situations come knocking on your door you want the person(s) sitting right next to you to be trustworthy, have the same incentives and hold the same kind of values that you do. Since money is often involved in these situations, and on many occassions lots of money, the importance of going at it with someone you can trust is paramount.

There is also another matter that comes into play here. When those inevitable backlashes hit you (and they will) from time to time, you will find strength in your partner. If you are at it by youself, you will end up feeling loenly and disheartened. If you are too many, any difficulties will likely trigger internal differencies based on alternative incentives to come to the surface. But if there are 2 or 3 of you, you can become a tighter unit and help eachother through the dark times. We know we have. Far too many times. If you are 2 or 3 you will be able to complement eachother effectively. Put those egos aside and look at the strengths of each one of you. Then assign each individual to the tasks that best correspond to the innate abilities. And outsource the rest.

We hope you pay attention to or advice. Don´t be too many. Running a business is diffucult enough as it is. Why complicate matters even further? Go for quality over quantity. Go for a small ultra-tight group of people. Two or three should do the trick in most cases. And two or three entrepreneurs is what is statistically most likely to make you rich and successful. And in the end that´s what it´s all about.