Keep Your Focus on Operations, Not Taxes

There are many motives to start a business. In a market system at its simplest form, the purpose of a business is to make money. However, you must never forget your “raison d’être,” your company’s real reason for being.

Any successful business is focused on solving a problem.

Money and revenue come as a result of helping people ease their pain. If you lose focus on that task, if you wander afield in the pursuit of that last dollar of revenue, you are likely to head for trouble. This notion is absolutely critical when it comes to business organization and dealing with government.

Every option has pros and cons with respect to the impact of rules, regulations and taxes.

If you are not careful, it is easy to focus on avoiding onerous rules or minimizing tax consequences at the expense or your core business operations. These are certainly important factors, but they take a clear second place to meeting the market demand-solving the consumer’s problem. You must have a demand for your product or service. After all, it doesn’t matter what your tax rate is if you don’t have any revenue.

As a first order priority, design your business to most efficiently solve the problem you have identified.

Once you have refined that, you can move to external concerns. Each specific state has different organizational and operating rules that apply to the various business entities. Each form has its own tax consequences. Your fundamental question is: Subject to my specific operational requirements, how do I minimize external interference and taxes? It is not: How do I make the government happy? Or, how do I pay the least amount of taxes (no matter what)?

Regardless of your best efforts, you may still run afoul of government policy.

One of the greatest risks a company faces is the fact that governments can change regulations and tax policy at a whim, undoing all of your hard analysis. Be prepared for this. When such changes occur, consult a professional immediately. This is where a good accountant or attorney will be worth every penny you spend in fees. They ought to be able to guide you through the detrimental consequences of change. If they cannot, find a new one immediately. One of the biggest deal killers in finding investors is having unprofessional advisors.

As a personal example, I had a Limited Liability Company in Tennessee that had commercial real estate holdings. Several years ago, the state changed its rules, now requiring this type of entity to pay franchise tax (based on book or net asset value). In one fell swoop, they had imposed over twenty-thousand dollars in tax liability over the previous year. After consultation and with sage professional advice, we changed form to a General Partnership. While this created potential liability issues, we are able to mitigate them with a more robust insurance plan. In addition, we had to file reorganization documents with the state. None of the actions were optimal from a cost or risk perspective. This is inevitably the case with a small business. Often you are forced to pick the “least bad” of several unsatisfactory options.

In the end,

I was forced to pay out multiple thousands of dollars in fees, incur additional annual costs and accept a potential increased risk. What I did not do was change the fundamental way in which we did business. We never altered the product or the way we delivered service. All of this occurred in the background. It was completely transparent to my clients; to them it was business as usual.

In conclusion, keep your business focus on operations – not taxes.


Dave Clark

Dave Clark taught Strategy at West Point and is a co-founder of FundingSage, which provides valuable information, tools and resources to entrepreneurs seeking to start, grow and fund a business.