Wednesday, February 29, 2012

You've got to be kidding

Annually the business is required to prepare a survey of "personal property" for the city, local district, and state tax assessment. They want to know how many desks and chairs, trash cans, toner cartridges, reams of office paper, lab notebooks, binder clips, staples, paper towels, tissues, and rolls of toilet paper we have on hand, so that they can double tax us on those items. Yes, like just about everyone else, we pay sales tax on office supplies and furniture that we purchase for the business. At one point, some bureaucrat had the bright idea that they could raise an extra couple hundred dollars from every business in the state, if they forced us to engage in the most absurd of exercises in time wasting. Our bill for last year was $83.45. It's not that I object to the cost, though in principle, why should I pay taxes twice for the same items? But what a huge waste of time both for the business, and for the state employees who have to process the reports, calculate the tax, deposit the checks. Isn't there an easier and more equitable means of gathering business taxes?

Why You Don't Need Venture Capital

Check out Brian Hamilton's brief take on why you don't need venture capital. I think the essence of the matter is to allay the belief that businesses start first with outside investment. There are times when third-party investment makes sense, but hardly ever from the start.

Tuesday, February 28, 2012

Disqualified Entrepreneurship

My company is headquartered downtown in a largely depressed, somewhat industrial, Midwestern small city. According to Sperling's Best Places, Racine has a population of about 81,000, a median home price of $122,100, unemployment of 14.1%, and a cost of living about 11% below the US average. When my wife and I decided to relocate our family out of the Los Angeles area (neither of us were California natives), we had three main criteria in mind:
  1. Affordability (we were tired of renting again, after having owned a house in Denver, then a condo in Santa Barbara, but not about to buy into the overpriced Southern California housing market).
  2. Family (my family is scattered to the winds, but my inlaws are concentrated within a couple hours of here).
  3. Water (we learned to sail when we lived in Santa Barbara; my office is adorned with pictures of beautiful sailboats as inspiration for the boat we plan to own someday).
Racine fit the bill. Housing is still depressed here. The value of our home (purchased in 2008) has dropped about 6% since we bought it, putting us about where we started in terms of equity. But then, it's a place to live not an investment, and it satisfies that requirement.

About three years ago, we bought a small building downtown (four blocks from Lake Michigan) as the company was expanding beyond me and a part-time assistant. The downtown area is perhaps half vacant. So much real estate on the market. I see these buildings and all the potential they represent. I think of all the businesses that could fill them.

I've started getting interested in alternative investments. I'd far rather invest in a business that I am committed to building, than buy some miniscule share of a public company, where the value of my investment is driven more by perception than by anything else. But the odd thing about tax regulations, and the focus of virtually all government incentives for building and growing companies is that they preference investment in someone else's business but not your own.

While the IRS allows an endless variety of investments to be held in one's retirement accounts, there is this unbending rule regarding disqualification, which prohibits a party from transacting with themselves. As Pensco's Top 50 Questions & Answers explains:
Generally speaking, it takes three elements to create a prohibited transaction for an IRA:
  1. the IRA;
  2. a disqualified person in relation to an IRA (e.g., the owner or owner’s spouse, ascendants, descendants, etc.)
  3. a transaction between 1 and 2 above.
As I read it, that means, it's okay to invest in someone else's business, but not your own. Now, granted, it does appear there are convoluted ways to invest in a startup, or an existing company that you are a minority owner of, but as far as I can tell, the rules that prohibit self-transacting prevent such a business from being one's source of income.

In other words, if your IRA owns the company, you can't get paid by it. What's more, it would be forbidden for my IRA to buy a building that a business I own would rent, or for me to personally own a building that a business my IRA owns would rent. What an odd way to hinder entrepreneurship. Sure, your investment can grow in your retirement savings. But some of us still need to pay our bills today.

I look longingly at these vacant buildings, and glancingly at my retirement savings, invested in small stakes of large companies that I have little connection to, and I wonder just how much more I could accomplish, if I could take my own funds to invest in expanding my firm, or starting a new one.

Monday, February 27, 2012


There must be a fine line between perseverance and stubborness. There must be a difference between holding on to a failing idea and holding on to one that hasn't yet succeeded. Surely, there are times to let go. Knowing where to draw that line, like knowing when to buy a stock and when to sell is perhaps a skill, an art, or plain dumb luck. But then there is more to the principle of perseverance.

To persevere is not to always make the right choice, but simply not to give up. It is to make enough good choices to permit another go. I think of a talented poker player: It's not always coming out on top; rather it's making sure that your wins outweigh your losses. Or think of evolution: it's not that every random mutation need contribute to fertility and survival; rather that the collection of features and behaviors must account for more benefits than detriments.

And so it is with entrepreneurship: persevere, reflect, learn, grow, evolve, and try again.