Buy Equity in Your Startup or Loan it Money?

July 18, 2013

David Cummings on Startups

Most information on bootstrapping and self-funding a startup revolves around capitalizing the business by buying equity (e.g. you and a cofounder each put in $5,000 to start it). I know one entrepreneur that insists on loaning his business money instead of buying equity in it (after an initial nominal amount).

Here are some ideas on loaning your startup money instead of buying equity:

  • Money loaned is easier to be reimbursed, assuming the business does well, compared to the effort of having the business buy back equity (e.g. it’s easier to get your money back)
  • If other shareholders are involved, it’s easier to decide on a loan interest rate rather than an equity valuation
  • If other shareholders are involved, and a loan is in place, interest on the loan takes precedence over dividends, thereby providing an income stream to the shareholder that loaned the money, in addition to being a more…

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About Personal and Business Credit Scores

December 19, 2012

A personal credit score is a three-digit number calculated from your credit report to gauge your reliability as a borrower. It can be used to predict whether you’ll pay back your loans or pay debts on time, and it also helps to determine whether you are generally a good risk for lender.[i]  Credit scores are also used to decide if you are a bankruptcy risk.

Credit scores have several factors including:

–        The number and types of accounts you have

–        Your available credit

–        Your length of credit history and payment history

–        The number of recent inquiries about your credit, e.g. credit reports requested

credit

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What is Passive Income?

December 13, 2012

In the post on submitting photos online to ShutterStock and iStockPhoto, I claimed that revenue generated was passive income.  That was incorrect – income generated is actually residual income.  Many companies lay claim to earning passive income using their methods or systems.  I became curious and wanted to research and report accurately.  The U.S. Internal Revenue Service (IRS) has strict definitions for passive income as follows:

  • Passive income has only two sources:  net rental income and income from a business in which the taxpayer does not materially participate.
  • Interest, dividends, royalties, annuities and gains on stocks and bonds are not passive income.
  • Net rental income from property leased to a business where the taxpayer materially participates is non-passive and should not be reflect on Form 8582.
  • Income from land, whether leased land or property held for investment, is non-passive.  Stated differently, net income (but not net loss) from the leasing of nondepreciable property (such as land) is treated as non-passive.[i]

Royalties, for example, according to the IRS guide, are generally non-passive in nature.  Ditto for interest, dividends, annuities, and gains from stocks and bonds, lottery winnings, salaries, wages, commissions, retirement income, and guaranteed payments for services.

The next time a business claims to offer big passive income, perhaps an MLM or network marketing company, it is probably residual income, FYI.  Do your homework and consult a professional.

I am not an accountant, CPA, financial or tax expert in any way and do not claim expertise in any of the aforementioned areas.  Check with your tax professional for specific information about your own tax and financial situation.

Dion D. Shaw

Dion D. Shaw is the founder and owner of Homepreneurs


[i] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG—-Chapter-3,-Passive-Income-

Disclaimer

Homepreneurs does not endorse nor have any relationships with any of the services listed.  Homepreneurs receives no compensation or consideration for its suggestions.  Homepreneurs claims no expertise, education, experience or certification in financial or tax-related areas.  Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.

© Homepreneurs 2010 – 2012, All Rights Reserved


Calculating Home Business Income

June 14, 2012

From previous posts, you’ve learned that starting a home business is not expensive, competition is easy to research, and help is available from many sources.  But what about revenue?  I need to make money too!  In this post, we provide a simple way of roughly calculating what your income needs are and compare them to expenses.  Thanks to Jeff Williams of bizstarters.com for providing the general calculation example.

1) As with any budget, the first step is to write down minimal personal income needs.  Take this figure and multiply it by 1.5 to cover taxes, expense, and the unexpected.  A great free source for budgeting and related tools is http://www.mint.com.

2) The next step is to figure out how much money is gained per sale of product or hourly fees from consulting.  This exercise requires personal experience, market research, and contact with industry peers and colleagues in similar positions.  Search engines such as Google and Bing are great resources for general wage or sales ranges.

3) Take the above amount per sale and divide it in half to account for taxes, benefits, and any other miscellaneous expenses related to receivables.  The extra expenses might include travel costs, subcontractors or technology.

Compare #1 above to #s 2 and 3.  This will provide a rough estimate of how many sales are required – or consulting hours worked – to determine if the business idea is practical.

A Simple Consulting Example:

Monthly Expenses:   $2000 (personal and business)

Multiply by 1.5:         $3000 (ongoing total monthly cost)

Consulting Fees:        $100/hour (we will use 30 hours per week)

Total consulting:       $3000/week

Divide by 2:                 $ 1500/week or $6000/month (income after taxes)

= $6000 (income) – $3000 (expenses) or $3000/month after taxes and expenses to live on.  Is this doable for you?   It certainly can be for many!

We assume many numbers here, expenses, income, number of hours worked, etc.  Each situation, position, and individual is unique.  Run your own set of numbers to determine if self-employment is feasible.  This rough estimate is also useful for part-time work.  If a “regular job” covers living expenses and a desire exists to supplement income, use only business expenses in step 1.  You may determine that an extra $200 per week is adequate for a nice safety cushion or extra toward retirement income.

Remember too, that benefits – medical, dental, IRA – are not included in this basic calculation.  You might consider a part-time job with benefits in addition to the business you are planning!

By Dion  D. Shaw

Dion D. Shaw is the founder and owner of Homepreneurs

Homepreneurs.  New Day.  New Opportunity.

Disclaimer:

Homepreneurs does not represent itself as a professional finance or accounting entity.  The numbers and examples provided above are for illustrative purposes only.  Actual figures may vary significantly and research for each situation should be performed in all cases.  Homepreneurs accepts no liability, assumed or otherwise, for statements made above.


Why to Consider a Home Business

April 29, 2012

The information below issue is quoted directly from a financial planner’s – Robert Mecca – weekly newsletter.  Why quote a financial planner in this home business blog?  Mecca points out several problems in the U.S. and European economies, currently and in the future.  Expert opinion like this is additional support for starting a home business.  A home business does not always replace a full-time job but may provide extra income or serve as a safety net, in case of lost employment.

Mecca’s last line is important: “I feel sorry for American workers under age 50 who will pay more into the social security system, work longer to get benefits, and be taxed heavier on the benefits.”  Social security benefits aren’t great anyway.  Also, today’s youth can expect to have many jobs throughout their careers.  Pensions are rare and many existing ones are woefully underfunded.  The answer?  Get that second personal income, own a business, and prepare for future financial problems.

“The FOMC led by Ben Bernanke reiterated that our US economy is moving forward at a slower clip than he would desire. Continued stubborn high unemployment and housing problems are a major drag on recovery efforts. I am convinced we do not have hyper inflation on the horizon. We see pockets of rising living costs. And there are some signs the housing market is improving. Europe, meanwhile, continues with their problems. Spain’s credit rating fell for the second time this year. England has fallen back into a recession. And social security is expected to run dry three years ahead of expectations. The latest projection is 2033 or only about twenty years from now. In previous news and commentaries, I predicted there will be an overhaul of reform and stick to my prediction. I feel sorry for American workers under age 50 who will pay more into the social security system, work longer to get benefits, and be taxed heavier on the benefits.”

By Dion D. Shaw

Dion D. Shaw is the founder and owner of Homepreneurs

Homepreneurs.  New Day.  New Opportunity.

Disclaimer

Homepreneurs does not endorse nor have any relationships with any of the services listed (Robert Mecca is a friend).  Homepreneurs receives no compensation or consideration for its suggestions.  Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.

© Homepreneurs 2010 – 2012, All Rights Reserved

image credit: stage2planning.com


Accounting Made Easy by the Accountinator

April 2, 2012

Home business, small business, and large corporations all need accounting services to one extent or another.  Larger business will have staff accountants while small business may have one or two bookkeepers and a home business has, well, you!  As the chief cook and bottle washer of a home business, the owner handles the production, marketing, sales, shipping, accounting, and more. Outsourcing accounting functions is an option of course, but many start up businesses want to save money and owners prefer to control all aspects of company operations.

How much about accounting did you learn in high school or college?  A few terms here and there and the difference between accounts receivable and accounts payable.  If a few accounting classes were taken, one might understand the difference between a balance sheet and a trial balance report or be able to define and describe E.B.I.T.A and G.A.A.P.  Lost yet?  I have taken a few classes in accounting and know little more than terms and roughly how they apply to accounting.  When I do need help and terms explained in plain language, I turn to a friend – Mark Holtzman –  that puts terms into plain and clear English on his blog: www.accountinator.com .

Mark’s basic tenet is pure and simple: “Do-it-yourself accounting – quick, cheap and easy.”  Here at Homepreneurs we understand and agree with quick, cheap, and easy.  The concept has guided us from the beginning and continues to this day. We are constantly on the hunt for free or low-cost services that can help you start and run a home business. The Accountinator is one of – if not the – most valued informational site we’ve run across.

When you need tips on starting a business, Homepreneurs can help.  If you need to know the language of business and all things accounting, I’ve not found a better source than Mark Holtzman’s Accountinator.  In his several times per week postings, you’ll find wisdom, advice, humor, and education.  Check the site out, you won’t be disappointed.

By Dion D Shaw

Dion D Shaw is the founder and owner of Homepreneurs

Disclaimer

Homepreneurs does not endorse nor have any relationships (Mark Holtzman is a friend) with any of the services listed.  Homepreneurs receives no compensation or consideration for its suggestions.  Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.

© Homepreneurs 2010 – 2012, All Rights Reserved


How To Stay Afloat While Between Jobs

March 22, 2012

“Those who fail to plan…

Plan to fail…”

I’ve always believed that people should experience two things: a job loss, and owning an old Volkswagen Beetle. The former because it gives one a chance to examine career choices and change if desired. Why the Bug? Owning an old car with no air conditioning, no power anything, and using soup cans for oil filters provides a sense of the simple things in life.

Back to the layoff – though it can have certain positive aspects – it is a major disruption in life. How does one put food on the table, pay the bills, etc?  Expenses must be managed and some income flow maintained.  I’ve personally experienced this three times in 12 years, each time a little harder than the last.  But below are some thoughts and tips for getting through this difficult period:

– Use blogs and websites like Homepreneurs to find jobs or ways to make extra money.

– File for unemployment benefits.  Assuming you weren’t fired for theft or some other felony, you are likely eligible.

– Let all your friends and business contacts know you are looking for a job.

– Cut extra – non-essential – expenses immediately.  Stop the magazines, newspapers, health club memberships, and daily lattes.

– Make a lean budget and stick to it.

– Be on the lookout for any and all opportunities.  Even temporary work can lead to a real job and proves to a potential employer that you are motivated.

– Work odd jobs to get some extra cash.  This could be delivering pizzas, mowing lawns, temp work of any kind; all this helps your cash flow.

– Work on your entrepreneurial mindset talents and mindset.

– Consider COBRA health coverage offered by the previous employer or short-term health insurance.  Nothing will drain savings faster than medical expenses.

Here are some links to other sites that may help you too:

WiseBread.com

Friends-tv.org

CookingOnABudget.com

SBA.gov

Job loss does not mean the world is ending.  Maintaining a good attitude and positive approach is very important.  Stay in contact with former co-workers.  Volunteer to help others, this can lead directly to job offers and shows a commitment to work and the community.

By Dion D Shaw

Dion  D Shaw is the founder and owner of Homepreneurs

Homepreneurs.  New Day.  New Opportunity.

This blog excerpted in part from http://blog.simplyhired.com/2011/08/8-great-ways-to-stay-afloat-while-between-jobs.htm

Disclaimer

Homepreneurs does not endorse nor have any relationships with any of the services listed.  Homepreneurs receives no compensation or consideration for its suggestions.  Homepreneurs strongly urges all interested parties to conduct research and accepts no responsibility for any losses incurred.

© Homepreneurs 2010 – 2013, All Rights Reserved


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