So you’re raking in some dough with your business now. Maybe you’re a powerseller on ebay, or maybe you’re selling some tshirts online or something. No matter how you make it, you’ve worked for your coin. You should make sure your coin is working for you. Where are you putting all that money? If you have any noteworthy amount sitting in a checking account, it’s time to pack up and stash your loot elsewhere.

A standard checking account earns no interest. There are a number of high-yield savings accounts available online for individuals, but not many for businesses without high minimums. Don’t make the mistake of trying to store your company’s money in your personal high-yield account, separate accounts are important. Many money market accounts at large institutions are looking for $10-50k before they’re even paying a decent rate.

ING Direct has an Orange for Business account which is modeled after their Orange Savings account. There are no minimums, and it’s currently paying 4.50% APY. At that rate, $5k will earn a little less than $20 of interest in a month before it begins to compound. I currently have everything that’s not immediately needed to prevent a cashflow crisis in one of these accounts. It’s not the greatest return, but it’s a great return with minimal risk. The account is linked to your pre-existing checking account, keeping the funds close at hand.

If you’re interested in opening an account, give me your email address and I’ll send you a referral. It’ll get you a cool $25 bonus for making a $250 initial deposit (I get $10).

I’ve been sick as a dog this past week. I started to feel sick while writing about work-life balance and a few hours later I was in bed with the flu and all the fun it brings along with it. The doctor confirmed my suspicions the following morning. I’m back to work today, but spent the better part of last week in bed, certainly uninterested in touching a computer.

Now that 2007 has come to a close, it’s time to start thinking about taxes. Your own taxes are enough; nobody wants to have to worry about going through the process twice. If you use a business to house all your side projects, that’s exactly what you get: two sets of books, and two tax returns. The advantages however, far outweigh the drawbacks.

Separate Books and Accounts
It’s very difficult to see how successful a project is when you pool that money into your personal accounts. It will make tax time a nightmare. Sorting through receipts trying to figure out what was a business expense and what wasn’t would NOT be fun. When your books and accounts are separate, none of this is an issue as your business is a separate legal entity. You can think of the business as a really dumb friend that needs you to keep an eye on his account balances and checkbook register for him. This is a requirement in many jurisdictions, and even where it’s not it’s just plain stupid to not do things this way.

Sorting Mail is Easier
In the interest of keeping overhead low I work from home, and so should you. BKE’s legal address is the same as my home address. For true separation I should use a PO box, but given the kind of mail I receive, I manage well like this. When I get the mail, the first thing I do is sort it into three piles. Everything addressed to Brad Kelly goes in one pile, everything addressed to Brad Kelly Enterprises goes into another, and advertisements go into the trash. Except for pizza coupons. I like pizza.

Income Splitting and Lower Corporate Tax Rates
LLCs, Partnerships and the like use pass-through taxation by default. Every profit and loss flows through to the owner’s personal return, even money that’s left in the company as capital for expenses. While this makes tax time easier, it can also bump you into a higher tax bracket, increasing your overall tax bill.

If you file IRS Form 8832, you can elect to be taxed as a corporation. This forces a separate return for the business and allows you to decide how much money to leave behind in the company and how much to give to yourself as personal income. Any money left in the company (they call this retained earnings) is taxed at the corporate rate, which is 15% on the first $50k, and 25% on the first $75k. This can save you money because anyone earning over roughly $30k personally will be taxed at 25%.

It’s Easy to See How Much You Made Personally
Instead of taking “owners draw” or anything like that, I run a payroll and issue myself a check or direct deposit. You operate like any other employee would, and it’s nearly impossible to pull the kind of shenanigans that interest the IRS. You also get a W2 at the end of the year, making it a breeze when you do your own taxes.

Avoid Self-Employment and Estimated Taxes
Self-employed people have to pay “double” the medicare and social security tax because usually your employer pays half. Many also have to make quarterly estimated tax payments. When you tax your company separately and issue yourself payroll checks, all the tax withdrawals are taken care of automatically by your payroll outsourcing company. It’s just like having a job somewhere, no surprises.

Save for Retirement
When you form a business to govern your projects and websites, you can create a a 401k program. Sharebuilder is one place that comes to mind where you can create a 1-person 401k program. Not only does this allow you to save for your retirement tax-deferred, but you dictate the program specifics and employer match levels, something any other 401k can’t offer.

Access to Dropship Suppliers and Wholesale Prices
Most dropshippers, like those found in the Drop Ship Source Directory and other wholesalers won’t even talk to you without a state tax ID number. When you create a company, you can sign up for a sales tax license. This opens a lot of doors to some valuable business relationships that would otherwise be unavailable to you.

Keep Your SSN Private
For anyone to send you a check online, they need to know your contact and tax information. There is always a field for your social security number. Every business should have a federal EIN, which acts as your company’s social security number. Since my company has accounts with CafePress and Google and the like, rather than me, they all have the company’s federal EIN instead of my personal SSN.

Once BKE was created, I just went around and changed all the account names and SSN information to reflect the company rather than myself.

I thought it would be nice to sort of detail what I’ve done with Brad Kelly Enterprises since starting the company this past July. This will give you a better idea of where I’m coming from…it’s always nice to have the backstory, right?

The initial goal of Brad Kelly Enterprises when I filed the necessary papers with the state of Michigan was to separate eBay consignment (which I was already doing on a small scale) from my personal finances. Once you’re selling with some level of frequency and volume, it’s difficult to do your taxes and tell them it’s still just a hobby. I’m also fairly close to moving from one tax bracket to another as well. A few thousand dollars of extra income this year would be enough to push me into a fairly sizeable tax increase.

I’ve since moved away from small-scale consignment for individuals and turned my attention toward companies looking to clear out old merchandise. I still do some consignment for individuals, but really just friends and family. The advantages of dealing B2B merit their own post, and are outside the scope of this article; but it would suffice to say that it was a good move. This has allowed me to become a silver-level Powerseller in just a few months, and has comprised the bulk of BKE’s income to date.

While it is “active income,” that is, it requires a considerable amount of ongoing work, it can still be a fairly reliable way to generate some funds without much costs, either up front or ongoing. Currently, I’m just stockpiling that money in a high-yield account. Should I need it for any startup or project going forward, it’s there. By keeping it in the business, there’s no temptation to personally spend it (and have it count as income for me). That’s about where I’m at right now. If you’ve got any questions, please feel free to ask, as I’m sure I’ve glossed over a few details. Where do we go from here? I’ll cover that a little later.

Even a moderately-inept investor could tell you that diversification is important. They won’t tell you, however, that it’s just as important to diversify where you GET your money, as it is to diversify where you PUT your money.

The concept of diversification is simple. By spreading your money around, the chances that any one event could totally take you out of the game are reduced. You can learn more about the diversification as a risk-reduction strategy with Investopedia’s article on Diversification. The old standby, Wikipedia, also has a much friendlier article on diversification.

We’re told not to “put all our eggs in one basket,” but that’s what we do everyday. Where does your money come from? If you’re like most people, you get up and work for someone else everyday. In exchange for your time and your energy, you have a stream of money gushing (or trickling) toward you in the form of a paycheck. If someone turns off the flow, you could be SOL and unable to make your rent payments. It’s rarely your hand on the spigot, either.

Let’s apply the concept of diversification to income now. Let’s say that in addition to your job, you find a few other ways to make some extra money. Maybe you’re turning in scrap metal, maybe you’re running a website about Furbys. Maybe you’re spending your weekends on eBay. Your income is spread around a bit more. One person can’t come along and kick you off the gravy train. If you lose your job, you might lose 50% of your monthly income. That still hurts, but it hurts a lot less than losing 100% of your monthly income.

The same idea applies to the any source of income though. If you run out of stuff to sell on eBay, the lights won’t go out–you just might eat out a little less. If interest in Furbys drops (I can’t imagine how that could happen) you’re not left out in the cold either.

The bottom line is that if you make all your money from a day job, someone else controls your livelihood. You’re betting everything that you won’t lose that job, essentially. What could be riskier than that? Take charge and build your own safety net. Who knows, side money can become big money.