Rich individuals don’t actually own as many assets as you would believe. When I heard that statement, I had to turn my head and ask it to be repeated. It seems ironic to think that the rich are actually ‘ownerless.’ It took me awhile to fully understand the concept but I have realized it is crucial to wealth creation. Ultimately, it forms the ‘second law of money.’
When you are financially free or independent it doesn’t always mean you have to own a lot of possessions. If you are a person of wealth, it often means you don’t actually have to use your name at all. Your name won’t be assigned to any of your possessions.
Instead, wealthy people use the name of a business or corporation. They buy their major items using this company name instead of their own personal name.
Once a company or corporation is established, an individual becomes a delegate of the company and is responsible for their actions as they are on behalf of the company. Take a basic credit card as an example. Instead of the credit card reading John Doe it will take on the name of the company.
Thus, there are actually very few assets in the wealth creator’s name. All of the income-generating assets are now under the company name. You are probably wondering now, what really is a corporation or company?
This concept confused me at first. You aren’t representing a brand name or restaurant. A company or corporation is essentially an officially permitted document authorized by the government. The great thing is that anyone can do it! You don’t actually have to have anything tangible in place you just need to complete all the necessary documents.
Why would you actually take the time to do all of this with the government? If you have a registered company it is very helpful in creating your wealth. If you have a company beside your name it is easier to get into the corporate world. Wealthy people have been using this strategy for ages.
Two reasons why corporations can help buy assets:
1. Tax advantages
Your earnings will get taxed on an annual basis as a working employee for a company or business. The ‘post-tax dollars’ that are leftover are what you can the live on (ie. pay your mortgage/rent, buy your groceries, entertainment, etc). Tax is a major part of your paycheck and, unfortunately, the more you make the more the government takes.
This is where the value of a company comes in.
Being under the name of a company can offer you can advantage because you can pay off your daily living expenses as stated above on the pretax dollars. How can you actually do this? Company earnings are taxed last and the government only takes a part of your income at the end.
Individuals: Earn – Pay Taxes – Live
Companies: Earn – Live – Pay Taxes
In South Africa, companies are now taxed at a rate of 28%. If you, an individual, have a personal tax rate that is greater than 28% than you will gain the advantage. If you are able to do your work with a company at a lower rate than you will cut tax expenses and you can focus your excess wealth on income-generating assets.
Another benefit of being under a company or corporation is a certain amount of defense from unexpected lawsuits. It is not uncommon for people today to think that they can make a few quick bucks by taking wealthy people to court.
Recently, Justin Bieber has been wrongly accused of having a son with a 20-year-old woman. The chargers were ‘quietly-dropped’ and his accuser could possibly have the tables turned on her and face a lawsuit herself. People will do anything today to try to gain wealth.
In order to look out for yourself, you need to protect your assets against false claim and, to do it properly, distinguish a legal entity or company.
If all of your assets are owned under your personal name then you remain in a direct path to all of your accumulated wealth. If you are ever sued and the accuser wins, that person can get access to any and all of that wealth.
If you are a company, you ‘own nothing, but control everything.’ This is the best defense you can establish for yourself. If you are ever being sued, it will be much harder for the accuser to attain your assets since you don’t ‘own’ them. A corporation can add even more layers of protection if necessary.
As a final note, wealthy people are not the only individuals corporations can benefit from. Instead, it is really for any person who is serious about defending their income-generating assets.