The History and The Power of Companies
As part of our overall financial strategy, it is strongly recommended that we own our own corporation wrapped around our assets.
Look at the history of taxes: Taxes
Forms of businesses in the United States
Businesses in the United States usually take three principal forms:
- individual proprietorships,
- partnerships, and
- corporations
Of the three, incorporation is the most appropriate for a large business. This is because it offers a legal structure independent of the life or resources of a single individual. A corporation has a board of directors, the members and officers of which can be replaced. It also issues stock, so that when stock is available, ownership is easily transferable.
Corporations have many shareholders. However, it is possible that the company is “privately held”, which means that the stock has never been offered publicly. Or the company could be “closely held”, which means there may be a legal limit on the number of stockholders, and restrictions on the transferability of the shares.
Privately held and closely held corporations are not required to publish their financial reports; so frequently, not much is known about them. A small number of investors may own all the shares, or it may be that members of only one or two families own the stock.
Other forms are used less frequently. Typically, they are employed when there is some purpose other than the usual conducting of business. Some of the other forms are cooperatives, membership associations, trusts, and not-for-profit corporations.
The company
The Andes stretch for more than four thousand miles like a jagged, crooked spine down the western side of the South American continent. Formed roughly a hundred million years ago, as the Nazca tectonic plate began its slow but tumultuous slide beneath the South American plate, their highest peak, Mount Aconcagua in Argentina, rises more than 22,000 feet above sea level. Aconcagua’s smaller Chilean brethren stand like gleaming white sentinels around Santiago. But it is only when you are up in the Bolivian highlands that you really grasp the sheer scale of the Andes. When the rain clouds lift on the road from La Paz to Lake Titicaca, the mountains dominate the skyline, tracing a dazzling, irregular saw-tooth right across the horizon.
Looking at the Andes, it is hard to imagine that any kind of human organization could overcome such a vast natural barrier. But for one American company, their jagged peaks were no more daunting than the dense Amazonian rainforests that lie to the east of them. That company set out to construct a gas pipeline from Bolivia across the continent to the Atlantic coast of Brazil, and another - the longest in the world - from the tip of Patagonia to the Argentine capital Buenos Aires.
Such grand schemes, exemplifying the vaulting ambition of modern capitalism, were made possible by the invention of one of the most fundamental institutions of the modern world: the company. It is the company that enables thousands of individuals to pool their resources for risky, long-term projects that require the investment of vast sums of capital before profits can be realized.
Smaller enterprises might operate just as well as partnerships. But those who aspired to span continents needed the company.
However, the ability of companies to transform the global economy depended on another, related innovation: Stock market
The History of Corporation
When it comes to taxes, the rich see opportunities. They do not play by the same set of rules as other people. The rich know about corporations, which became popular in the days of sailing ships. The rich created the corporation as a vehicle to limit their risk to the assets of each voyage. The rich put their money into a corporation to finance the voyage. The corporation would then hire a crew to sail to the New World to look for treasures. If the ship was lost, the crew lost their lives, but the loss to the rich would be limited only to the money they invested for that particular voyage.
The Power of Corporation
If we look at the beliefs of socialists and capitalists, we may quickly began to realize that the philosophy of the capitalist makes more financial sense.
True capitalists use their financial knowledge to simply find a way to escape from taxes. They head back to the protection of a corporation. A corporation protects the rich. But what many people who have never formed a corporation do not know is that a corporation is not really a thing. A corporation is merely a file folder with some legal documents in it, sitting in some attorney’s office registered with a state government agency. It’s not a big building with the name of the corporation on it. It’s not a factory or a group of people. A corporation is merely a legal document that creates a legal body without a soul. The wealth of the rich is once again protected. Once again, the use of corporations became popular-once the permanent income laws were passed - because the income-tax rate of the corporation was less than the individual income-tax rates. In addition, certain expenses could be paid with pre-tax dollars within the corporation.
The Tax Code of the United States also allows other ways to save on taxes. Most of these vehicles are available to anyone, but it is the rich who usually look for them because they are minding their own business. For example, “1031” is jargon for Section 1031 of the Internal Revenue Code, which allows a seller to delay paying taxes on a piece of real estate; that is sold for a capital gain through an exchange for a more expensive piece of real estate. Real estate is one investment vehicle that allows such a great tax advantage. As long as you keep trading up in value, you will not be taxed on the gains, until you liquidate. People who do not take advantage of these tax savings offered legally are missing a great opportunity to build their asset columns.
The poor and middle class do not have the same resources. They sit there and let the government’s needles enter their arm and allow the blood donation to begin. Today, I am constantly shocked at the number of people who pay more taxes, or take fewer deductions, simply because they are afraid of the government. And I do know how frightening and intimidating a government tax agent can be. I have had friends who have had their businesses shut down and destroyed, only to find out it was a mistake on the part of the government. I realize all that. But the price of working from January to mid-May is a high price to pay for that intimidation. My poor dad never fought back. My rich dad didn’t either. He just played the game smarter, and he did it through corporations-the biggest secret of the rich.
You may remember the first lesson I learned from my rich dad. I was a little boy of 9 who had to sit and wait for him to choose to talk to me. I often sat in his office waiting for him to “get to me.” He was ignoring me on purpose. He wanted me to recognize his power and desire to have that power for myself one day. For all the years I studied him and learned from him, he always reminded me that knowledge was power. And with money comes great power that requires the right knowledge to keep it and make it multiply. Without that knowledge, the world pushes you around. Rich dad constantly reminded Mike and me that the biggest bully was not the boss or the supervisor, but the tax man. The tax man will always take more if you let him.
The first lesson of having money work for me, as opposed to working for money, is really all about power. If you work for money, you give the power up to your employer. If your money works for you, you keep and control the power.
Once we had this knowledge of the power of money working for us, he wanted us to be financially smart and not let bullies push us around. You need to know the law and how the system works. If you’re ignorant, it is easy to be bullied. If you know what you’re talking about, you have a fighting chance. That is why he paid so much for smart tax accountants and attorneys. It was less expensive to pay them than pay the government. His best lesson to me, which I have used most of my life, is “Be smart and you won’t be pushed around as much.” He knew the law because he was a law-abiding citizen. He knew the law because it was expensive to not know the law. “If you know you’re right, you’re not afraid of fighting back.” Even if you are taking on Robin Hood and his band of Merry Men.
My highly educated dad always encouraged me to seek a good job with a strong corporation. He spoke of the virtues of “working your way up the corporate ladder.” He didn’t understand that, by relying solely on a paycheck from a corporate employer, I would be a docile cow ready for milking.
When I told my rich dad of my father’s advice, he only chuckled. “Why not own the ladder?” was all he said.
As a young boy, I did not understand what rich dad meant by owning my own corporation. It was an idea that seemed impossible, and intimidating. Although I was excited by the idea, my youth would not let me envision the possibility that grownups would someday work for a company I would own.
The point is, if not for my rich dad, I would have probably followed my educated dad’s advice. It was merely the occasional reminder of my rich dad that kept the idea of owning my own corporation alive and kept me on a different path. By the time I was 15 or 16, I knew I was not going to continue down the path my educated dad was recommending. I did not know how I was going to do it, but I was determined not to head in the direction most of my classmates were heading. That decision changed my life.
It was not until I was in my mid-20s that my rich dad’s advice began to make more sense. I was just out of the Marine Corps and working for Xerox. I was making a lot of money, but every time I looked at my paycheck, I was always disappointed. The deductions were so large, and the more I worked, the greater the deductions. As I became more successful, my bosses talked about promotions and raises. It was flattering, but I could hear my rich dad asking me in my ear: “Who are you working for? Who are you making rich?”
In 1974, while still an employee for Xerox, I formed my first corporation and began “minding my own business.” There were already a few assets in my asset column, but now I was determined to focus on making it bigger. Those paychecks with all the deductions made all the years of my rich dad’s advice make total sense. I could see the future if I followed my educated dad’s advice.
Many employers feel that advising their workers to mind their own business is bad for business. I am sure it can be for certain individuals. But for me, focusing on my own business, developing assets, made me a better employee. I now had a purpose. I came in early and worked diligently, amassing as much money as possible so I could begin investing in real estate. Hawaii was just set to boom, and there were fortunes to be made. The more I realized we were in the beginning stages of a boom, the more Xerox machines I sold. The more I sold, the more money I made, and, of course, the more deductions there were from my paycheck. It was inspiring. I wanted out of the trap of being an employee so badly that I worked harder, not less. By 1978, I was consistently one of the top five salespeople in sales, often No. 1. I badly wanted out of the rat race.
In less than three years, I was making more in my own little corporation, which was a real estate holding company, than I was making at Xerox. And the money I was making in my asset column, in my own corporation, was money working for me. Not me pounding on doors selling copiers. My rich dad’s advice made much more sense. Soon the cash flow from my properties was so strong that my company bought me my first Porsche. My fellow Xerox salespeople thought I was spending my commissions. I wasn’t. I was investing my commissions in assets.
My money was working hard to make more money. Each dollar in my asset column was a great employee, working hard to make more employees and buy the boss a new Porsche with before-tax dollars. I began to work harder for Xerox. The plan was working, and my Porsche was the proof.
By using the lessons I learned from my rich dad, I was able to get out of the “proverbial rat race” of being an employee at an early age. It was made possible because of the strong financial knowledge I had acquired through these lessons. Without this financial knowledge, which I call financial IQ, my road to financial independence would have been much more difficult. I now teach others through financial seminars in the hope that I may share my knowledge with them. Whenever I do my talks, I remind people that financial IQ is made up of knowledge from four broad areas of expertise.
In summary
- Spend
- Pay Taxes
- Spend