Desty Online is dedicated to business, online and offline.  Why, you ask, do I keep bringing up investing and the stock market?

It’s better to invest as a business than as an individual.

There are several advantages to just being a business.  If you’re running a serious business, you should already be operating as a separate legal entity, such as a C corporation, a S corporation, a LLC, a LLP, etc.  This turns the income of the business into business income instead of personal income. 

That is the key. 

Personal income is taxed first after it’s earned.  Only 401k, flex spending plans, medical insurance, etc are taken out before taxes.  You earn, get taxed, and get to spend the rest. 

A business doesn’t work like that.  The business earns, spends, and gets taxed on the leftover.  Mind you, for the business to spend money and not get taxed on it, it has to be a legitimate business expense.  Investing isn’t a business expense, per say, but it is income you can work with before taxes.  Also, a business is taxed at a lower level than an individual who makes the same amount of income.

Now, why would a business want to invest?  The same reason as a person invests:  to make more money with the money they already have.  A business that is well run and makes excellent returns on capital spent has three options when it comes to profits:

1. Reinvest into the business.  Unless the business it at its apex, there’s always new markets to get into, new R&D projects to fund, new ways to expand.
2. Reward shareholders with a dividend.  Profits go back to the owners of the company.  If you don’t mind the double taxation (once at the business level and again at the personal level), most shareholders like actual returns on their investments.
3. Invest profits in other companies.  The company wants to increase it’s income over a long term window will look to stable, bedrock type companies to invest their excess capital.  A perfect example of this is Berkshire Hathaway.  This link goes to their 2005 annual report.  Skip to page 16 in the .pdf file to see the amount of equity investments Berkshire is in.

How does a business determine which of these three options to exercise with their excess cash?  Generally it goes down this order of questioning:

1. Which would produce a greater return, reinvesting capital into the business or investing in an outside business?
2. If investment inside or outside the company isn’t practical, there is a limit to retained holding before the tax considerations say to distribute the capital to the shareholders via dividends.

This is the Warren Buffett philosophy of business investment [aff] but I try to run my own businesses along the same lines.  If it’s good enough for Buffett, why not good enough for me?

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