The most important thing we get from a business is cash flow. The temptation, of course, is to spend this cash flow on boats, vacations and other lifestyle items that don't add to our wealth. One of our School of Wealth Strategy students, however, wants to use his business cash flow to build his wealth in other investments outside his business. David asks the following question:

Q: Hi Tom! I have a business related question. Is it possible to use reinvest the positive cash flow from my business into another asset class so that my surplus funds are not just sitting in a bank account? My business is an education consulting and coaching business, and I want to use the surplus funds or profits to invest into paper assets and create cashflow through options in order to develop more cashflow. I was curious about how the taxing for this type of situation would occur, and what the cashflow from the investing would be categorized as in the book keeping. Thank you Tom!

A: Absolute yes to your first question, David. Not only is is possible, it is highly recommended. This is the way to build wealth. Here is how you do it. First, treat your business separately from your investments in your accounting. To do so, open a separate bank account in a new entity for your investing. For type of entity, speak to one of our Tax Strategists at 866.467.5809. Your new entity will have its own set of books. You will distribute out the funds from your business entity to you individually and then contribute them to your investment entity as a capital contribution. Then, you can go ahead and invest through your investment entity.

When you use the proper entity structure for your business and investing, not only do you get the best asset protection, you also reduce your taxes and maintain good records.

Everyone should follow this formula for building wealth. Use your excess cash flow for wealth building activities. Be sure you are using the right entity and maintain good bookkeeping so those entities are respected by the IRS and the Courts.

Financial freedom comes from cash flow, tax reduction and solid wealth building principles.

Warmest regards,

Tom

This question comes from Mark T. He wants to know if doing business with immediate family is "suicidal." An interesting question I'm sure many of you face. Here's my take on doing business with family.

There are some pretty good positives about doing business with family. First, you know them and should know their capabilities. Second, there should be strong loyalty bonds between family members. I have personally had some success doing business with family members. Of course, I have also had some failures. Here are some things to recognize when doing business with family members.

First, remember that you will always be family even if your business venture does not work out. For some, this creates hard feelings when a business doesn't succeed or people don't perform as expected. Communication and clear understanding is essential in this situation. I suggest you take a look at two of our courses on Informal and Formal Agreements. You can find them in our School of Wealth Strategy at http://www.provisionwealth.com/products.

Second, make sure that you have proper internal controls in place so there are no temptations for one of the partners to "borrow" from the business without telling the other partners. We also have a course on Internal Controls in our School of Wealth Strategy. Finally, be sure there is good reporting and that everyone understands that this is a business and not a charity.

If you are lending money to a family member, the best thing to do is to think of it as a gift. Don't expect repayment. Then, if you do get the money back, then you can be pleasantly surprised. If you don't, then it's no big deal as you considered it to be a gift in the first place.

Family business endeavors can be challenging. They can also be rewarding to all parties and actually increase family bonds if done right. And the only right way is to treat them as a real business and have all of the business controls and communications in place. Too often, because it's family, we make assumptions and we all know the result of what happens when we ass u me.

Warmest regards,

Tom

Q: Hi Tom! My parents are getting to the age where they are going to need more assistance from me. This is where I'll be taking care of them, emotionally, physically, and financially. In terms of taxation, would I claim them as dependents or is that only for children? With my parents having no income or way to support them, and their health starting to show challenges, they unfortunately have become more and more dependent on me. Thank you for your help with this topic Tom!

A: David: Yes, your parents can be claimed as your dependents so long as:
1: They do not received significant other income (check with your Tax Advisor on the specific amount they can receive) and
2: You provide more than ½ of their support during the year (including gifts from other family members).

Warmest regards,

Tom