Wealthy people don't own much? Hey, come again. This just about summed up my confusion when I first heard this concept from my mentor.
The idea that the rich are ownerless didn't make much sense to me back then. But I soon came to realise that it's one of the most important concepts in the game of wealth creation, important enough to form the 'Second law of money'.
Being financially free does not mean that you personally own a lot of assets. In actual fact, it means the complete opposite. Wealthy individuals own very little (if anything) in their own names.
They use the protection of a company or cooperation.
Instead of owning income-generating assets, vehicles, bank accounts, purchasing groceries or paying for children's school fees in your own name, you have the option of buying assets and doing day-to-day activities in the name of a company.
By setting up one, you basically become a representative or employee of the company. Everything you do as an individual you do on its behalf. Your credit card for example won't have your name printed on it, but your company's name.
The same goes for real estate. Buying or selling property happens in the name of your cooperation, not your name.
You merely act as a facilitator of each and every deal.
As a result, wealth creators generally own very little in their personal names. Their corporations are the true owners of their income-generating assets and hence wealth. So what exactly is a cooperation or company?
This is something that really confused me when I first started. It's not a factory or retail store. It's not a big building or brand name, nor is it a group of professionals selling a specialised service.
It's merely a legal document registered with the government. Anybody can establish a company. That's the beauty of the process. No physical thing has to be established to start a company. All you have to do is complete the paperwork.
Okay, why even go through the 'hassle' of filing a few pages with the authorities?
A company makes playing the wealth creation game significantly easier. A person can get so much further in a corporate setting than he or she can as an individual. It's the only real way to play the game. It's how wealthy people have been doing it for hundreds of years.
There are two major reasons why a cooperation is used:
As an employee, first you pay the government, i.e. get taxed, and then you live on what is left (post-tax dollars). And the more promotions you get or harder you work, the more the government gets. Tax is a major expense and should be minimised legally as far as possible.
This is where company comes in.
Firstly, earnings are taxed last, which means the government only receives their share of your income last. You benefit by living on pre-tax dollars.
For example, mortgage fees, vacations, car payments and food can be treated as company expenses.
Only once these fees have been taken off your income will tax come into play.
Individuals: Earn - Pay taxes - Live
Companies: Earn - Live - Pay taxes
Secondly, companies in South Africa are taxed at a rate of 28%. This will benefit you as an individual if your personal tax rate is higher than 28%.
Conducting business in a company at a lower tax rate minimizes your tax expense, which means you have more resources to spend on income-generating assets.
The second major advantage offered by a cooperation is protection from creditors and lawsuits. Let's face it. We live in a world where some individuals will do anything to make a quick buck at the expense of wealthy people.
Just have a look at the recent lawsuit against Justin Bieber, who was accused of being the father of a 20 year old woman's son. As you may well know, the charges were "quietly dropped" leaving his accuser with a possible counter lawsuit.
Suppose you owned buy-to-let property. What if the tenant seriously banged his head on a low hanging door frame and then sued you for damages relating to leasing of unfit property?
The fact is everybody wants a piece of the action and one of your jobs as a wealth creator is to protect your assets against unlawful claims.
The best way to do that is within a separate legal entity or company.
In your personal name, you own and control everything. Legally, your name acts as a direct route to your assets and wealth. Someone can simply sue you to get their hands on it, provided their allegations can be proved in a court of law.
In a company, you own nothing, but control everything. This is the ultimate form of protection.
If somebody wants to sue you for whatever alleged indiscretion, they will have a tough time stripping you of assets you don't own.
Also, depending on how you structure your company, corporations can be used to add multiple layers of protection around your assets.
In summary, corperations are not only there for wealthy people to make use of, but rather for anybody who wants to own and protect their income generating assets.