I have owned a business on the side for the last few years. Every year I become more and more thankful that I do. In fact, it has gotten to the point where I think EVERYONE ought to own their own business. There are so many awesome benefits, and such little downside, that if you don't yet own a business, you should seriously consider starting one. Here are some of the benefits I have experienced.
10 Reasons You Should Own a Business
# 1 Extra Income
The main reason most people start a business on the side is simply to get some additional income. I certainly have enjoyed that extra money. It allows us to give more, save more, and spend more. What's not to like? Oh yes, it has also allowed me to pay more in taxes. Oh well, 3 out of 4 isn't bad.
# 2 Extra Retirement Accounts
Many employees are stuck with crappy retirement accounts and can only put a small percentage of the amount they need to save for retirement into tax-protected accounts. They have to wait until they leave their job to roll that money into an investment account with good options. When you're the boss, however, you get to choose the retirement plan. My side business allows me to have an Individual 401(k). If I can make enough income, that's another $53K a year I can protect from the tax-man and any future creditors.
# 3 Entrepreneurial Mindset
Perhaps the greatest benefit of owning my own business is that it has caused me to look at the world in a different way. Your mindset changes from a Scarcity Mentality (where you want to get a bigger percentage of the pie) to an Abundance Mentality (where you realize you can make the pie bigger.) You realize that YOU can create jobs for other people. You also realize, at least if you're in a business that scales, that there is no cap on your income or the value of that business. All of a sudden you see business ideas all around you all the time. It is a rare day that goes by that I don't think of or see a business that can be started. Obviously, I don't have the time to start them all, but you only need to get rich once!
# 4 Escape from Medicine
# 5 Appreciation for Your Main Job
One of the benefits I never expected from my side job was how much more I enjoy practicing medicine now. Perhaps it is simply because I don't have to practice it. But I think it is because I have learned that you have to work really hard to make “doctor money” doing anything else in life! Sometimes it feels like a break to just go into the ED, wrestle a few cocaine addicts, bust a few Percocet-seekers, empathize with the truly ill and injured, and maybe even save a few lives. My two jobs have a symbiotic, synergistic relationship. Each one makes the other one better.
# 6 Tax Deductions
It is really hard to deduct much as an employee. You're stuck dealing with the limitations of Schedule A. Schedule C is so much easier to use. Just doing a little moonlighting on the side for your “side business” may give you all kinds of deductions you wouldn't otherwise benefit much from. Scrubs, white coats, cell phones, computers, home office, business mileage, licensing fees, DEA fees, CME costs etc may all now be deductible when they weren't before. Everybody paid on a W-2 ought to figure out a way to have at least a little 1099 income each year.
# 7 Better Understanding of Business, Finance, and Taxes
I get better at business each year. Business is really an enterprise that consists of adding value to the lives of others. The better you can do that, the more you are rewarded for it. I have learned a ton about marketing, sales, accounting, and information systems that I never would have known without starting a business. My understanding of finance and taxes has also increased with the additional complexity the business adds to my life.
# 8 Less Need for Disability and Life Insurance
I own lots of disability and term life insurance. But you know what? My business would probably be worth as much or more to my wife in the event of my death. Sure, this website would change a bit. But it's income certainly wouldn't go away any time soon if I keeled over. I'm not planning on cancelling my policies or anything, but it's nice to know that neither I nor my family are completely reliant financially on my ability to practice medicine.
# 9 Building Something of Value
I mentioned above about the joy of business- adding value to the lives of others. That can be very fulfilling. But practically speaking, I am also building something of value to me. This website has an ongoing income. That's worth something. Websites are notoriously hard to value for sale, but there's no doubt this enterprise has at least a low six-figure value. That could be seven figures by the time I get around to selling it.
# 10 Having Fun
I often wake up in the morning excited to write something to you that I have been thinking about. Or to implement a new way to monetize (make money from) the site. I go to work tonight at 7 pm to do an eight hour shift in the ED. I played with the kids today for a while, and went for a two hour mountain bike ride (I know, this ski season sucks- I wrote this post in February). I also spent 4 or 5 hours today working on this site. Not because I had to, but because I wanted to. The best job in the world is the one where someone pays you well to do something you would do for free. Maybe your side business will do that for you.
What Kind of Business?
So, what kind of business should you start? I have no idea. It might be a website. It might be writing a book. It might be a T-shirt business. It might be an investment property. Perhaps it is manufacturing a device you can use in your practice. Perhaps it is selling a craft you make. Perhaps it is teaching, or consulting, or reviewing charts for insurance companies or attorneys (defense only, of course.) Or perhaps it is just practicing medicine for yourself, rather than someone else. Whatever it is, go for it. The benefits seriously outweigh the risks. Too many of us are becoming employees without sufficient knowledge, skills, or desire to make it in the business world. And that's a shame.
What do you think? Do you own a business? What do you like the most about it? Comment below!
I agree completely. I now own multiple side businesses in addition to my practice of medicine. I have partnerships with my wife, brother, and others. We operate restaurants, real estate, and other various businesses. They aren’t always trouble free, but like medicine, I enjoy solving issues as they arise. Each business has its own “challenges,” but I don’t view this as a negative. I embrace the journey. In addition to the extra income produced, I like creating something that wouldn’t have existed without me being an entrepreneur. Adding back to our community, providing jobs for others, and learning the skills it takes to build a business from scratch are all aspects I enjoy about being a business owner…and of course…the additional income is nice too. It’s also fun learning how to utilize write offs for a number of things including travel, restaurant evaluations (eating out at times becomes a business expense to review the competition), office equipment, etc.
That would make for a great readership poll…what write offs do you utilize for your small business and how do you justify taking the expense (no crazy stretching of the truth–just plain ole legitimate expenses). We could all learn from that one.
A few other Husbands and I joke around that we’ll buy a commercial building around town and use half of it to start a microbrewery and use the other half a daycare for our growing number of small children. It’s just a dream for now, as our wives need to make it through residency first!
Hey Tyler. I’ve had these same conversations about investment opportunities in our Dads Married to Doctors group and in our DMD investment subgroup. Come join us on Facebook. http://dmdlifestyle.com – click community.
Several of us are all figuring out how to replace our busy physician spouses income so we have options of how we all spend our time!
Thank you for the excellent post. I think many physicians think about the possibility of starting a side business. However, the time it takes to figure out how to get started may seem too daunting and I think keeps many of us from pursuing those ideas.
It would be great to see a couple of follow-up posts on how to start a blog/web-based business and how to self-publish a book — ateas that the WCI has expertise.
For the blog, I’m curious if it’s something one can just start up, or if it would be better to form an LLC first. Also, a discussion of various hosting platforms and how the online advertising landscape works, would be welcome.
There are whole sites dedicated to this question, but my short opinion is that I’d start the website first and file for the LLC later. Most websites don’t make any meaningful money and should probably be created as a passion first and money-maker second. WCI will tell you it took years of effort to get a return on his time investment. Took me 4 years of writing to make anything meaningful from mine.
The most common platform you’d use in 2015 is WordPress, either self-hosted (wordpress.org) or hosted (wordpress.com). Being self-hosted gives you much more flexibility and control but also more responsibility. I’m personally a believer in self-hosting and self-education, but you can always start a hosted WP.com site and export to self-hosting later if you decide to make a go of it and need more control. Squarespace is an elegant alternative, also generally less flexible. Nothing outside of those two choices is really worth your time. No matter what host/platform, every business needs a legitimate URL (~$10/year).
Advertising for most sites is volume/readership based and unlikely to make most people any money without a very large readership. As most sites that an average person are likely to create in their spare time are niche sites, the advertising that would work best for these is self set-up (like WCI) and not part of a network. “Sponsorship” is commonly used in place of traditional banner ads for many individual sites (e.g. daringfireball.net), but again, the rates you’d be able to charge may not be meaningful until several years in when you have an established readership. A more common revenue scheme for many people would be primarily based on affiliate links, like Amazon Associates.
Thank you for the information. Sometimes it’s helful to at least get pointed in the right direction.
In item #4 Escape from Medicine, I think you may have meant to use the word disenchanted instead of disenfranchised?
You’re right of course. Now I’ve not only got the grammar nazis, but also the vocabulary nazis! 🙂
I saw that and thought, that, with continued loss of physician autonomy, there is some disenfranchising going on that definitely can lead to disenchantment.
I just want to spend the extra time w kids and family, maybe travelling. Dreams do come true…
“Scrubs, white coats, cell phones, computers, home office, business mileage, licensing fees, DEA fees, CME costs etc may all now be deductible when they weren’t before. Everybody paid on a W-2 ought to figure out a way to have at least a little 1099 income each year”
I know you’re not in the business of giving tax advice, and correct me if I’m wrong, but isn’t it just a percentage of those fees listed above that are actually eligible for deduction? For example, if you work 95% of your time at the W2 position and 5% on the 1099 gig, just 5% of you license fees are deductible.
Hmm….the instructions for Schedule C lines 22 and 23 are a little vague on this point, but I can see your argument. The counter argument being that you need the entire license to run your moonlighting business, so why shouldn’t you get to deduct it all.
The IRS is very clear on dividing things up between business and personal use. They are less clear on dividing things up between business (Schedule C deduction) and employee use (Schedule A unreimbursed employee expense subject to the floor.) That seems like a major hassle to me and I doubt that most docs in this situation do that. I bet most just throw everything on to Schedule C and let the IRS worry about it. Is it right? Perhaps not, but I don’t see any clear instructions on it. Do you have a link?
I’ve only been in this situation for 2 or 3 years in my life (where I had both 1099 physician income and W-2 physician income in the same year.) I deducted the whole thing and didn’t get audited, but your argument is strong that I was wrong to do that…and my statute of limitations is up on those years!
If you’re military or a federal employee, you can be licensed in a different (cheaper) state. So you could argue that maintaining your license in ‘this’ state is so you can moonlight/run your business. You could say the same about getting an institutional DEA number (only good at your place of employment) vs an individual DEA number…same for own malpractice insurance. I think you can make a solid case for the deductions…
I love owning a business and am always looking for ways to start a second unrelated one just for the additional retirement account. But, there are a lot of additional stresses, time-suckers etc. that come along with owning a business. I have a few friends who started, realized it wasn’t for them, got out and now work for another company doing the same thing and love it. They just do the dentistry and leave all the other stuff to someone who likes it.
So I’m a little unclear on the second retirement account. I am a dentist with a 401k through my s corp. I was recently shot down with profit sharing idea because my income it set pretty low then I take a lot as distributions. The funding of the profit sharing would be hugely expensive for very little benefit. I was then really pumped about a backdoor mega roth until being denied after three days of phone calls because of ACP testing. I really want to get more then 18, and backdoor Roth, and HSA working for in us tax advantage accounts.
My wife is an employee so double that, but it still doesn’t seem like enough. I would be willing to start another business, in addition to my PC and LLC for the building, if I could get more tax deferred accounts.
Yes, that’s a big issue. When you have employees, you can’t give yourself a benefit you’re not providing for them.
I’m in a similar position as you. I don’t know how many employees you have, but we are at about 7 per doctor in our office. We have a 401K and profit sharing, and although it was close on the profit sharing side, the 401K was well worth it. The profit sharing was almost a wash once we looked at the expense, but we did it this last year for the added tax deferred space, almost 30K, and we will include the employee portion when looking at total compensation at the end of the year. Also remember that the employee must vest over a period of time, up to 6 years, so it’s not all theirs right away.
I would run the numbers again and see if its worth it. I would beet that unless you have 10 employees, then shifting that income to the W2 will make sense even after the increased taxes.
With 7 employees per principal, I am curious if the “wash” calculation on profit sharing was looking only at the cost vs tax write off now, or if it actually includes the anticipated tax at retirement. When we defer, we don’t escape taxes, we just delay and possibly reduce them.
When I looked at this issue for myself with 2 employees, profit sharing did not make sense at all. I was looking at contributing almost as much for my staff as I was for myself. However, I had unfavorable fairness-testing parameters — we are similar in age, there is not as much differential in pay as one typically sees in professional offices between principal and staff, etc.
My point is that the possibility of setting up a great 401k deferral space is not necessarily a shoe-in for businesses. If this is a primary motivator, then the numbers really have to be looked in to. Being able to direct your own 401k investment options, on the other hand, is a huge advantage.
For professionals who are already owners in their own business and are looking for a side-gig to created another 401k, be aware of the controlled groups issue.
The wash was post tax, but that was in my favor as I will be in a much lower bracket when I retire, I planned on 25% instead of 39%. It also didn’t include the vesting timeline, which will also push it in my favor. We actually had a couple people leave to stay home with family, and another go part time for the same reason. They will never be there long enough to vest their portions, so that will go back into the pot to offset future expenses. I also have family as employees which worked against me, but even with all that the profit sharing still worked out. I did go through about 10 different scenarios with the TPA before we found one that worked the best. Also, the profit sharing is optional, so we don’t have to contribute every year.
Same thing with the safe harbor match, I planned on everyone maxing it out, but in reality, only 10% participated, this year up to about 20% participation rate.
It’s not a shoe in for everyone, but I do wish that I had started it years ago when there were only 3 employees besides the doctor, it’s much more expensive now. WCI was also very helpful in helping me see if the worst case scenario was worth it. We e-mailed back and forth a bit with math questions and like I said, worst case came out almost a wash and we haven’t been anywhere close to worst case so far.
I am a partner in a large multi-office dental practice. We also own a very large building that we operate our largest office out of. Are we able to create “extra retirement accounts” for our building partnership?
Probably not, that’s probably not earned income.
Couldn’t you create a real estate LLC to hold the real estate and charge a management fee as any other commercial real estate company would do? The management company could pay it’s employees, namely you, a “fair wage” and a 401k could be set up for the management company.
How you would get around controlled groups is another matter since it would probably be the same owners, but if the owners of the building were substantially different then perhaps that might be possible. For instance, if the building was owned by one of 3 partners with several non-physician partners, then wouldn’t this be ok?
You might find yourself arguing about it with an auditor.
I’ll second that, it’s passive, not earned for the rental.
“Probably not, that’s probably not earned income.”
Isn’t there a way to characterize income from rental properties as earned income in order to open an IRA? Like if your main occupation was owning and managing properties. I’m pretty sure a friend of mine is doing this.
Yes doctor, if your main occupation is in real estate, then it is earned income. 🙂
Wow, thanks for the responses! For 10years I’ve had terrible experiences with financial planners. My last experience was on my accountants recommendation. I didn’t do any research or ask about fees because I trusted my accountant. I realized after two years they were charging 2%, had front end loads, churning my account 300%(so I’m sure there were other loads/fees) and had expense ratios of .6 to 2%. I’m pretty sure the fees were astronomical. AND my accountant was getting a “fee” of .25%.
This year could be called my pissed off investing year. My wife and I are saving, paying off debt and making sure we live well below our means.
I’m actually loving the investing research. I’m about 20% through the posts on this site. I’ve read the archives of many others and am slowly moving up to the more advanced levels. Thank you for this site! Also thanks again for the responses!
General comment about #6 tax deductions… Business tax deductions on Schedule C are way easier to harvest than, for example, itemized deductions on Schedule A. But one probably also ought to look at whether Schedule C is “right place”…
BTW most people with already receiving a W-2 should not form an S corporation for a sideline business… but in some special cases that S corp entity choice can save money and also create a safer place to deduct.
Steve, can you please elaborate on why a W2 employee should not form an S corp?
You mean for a separate business, or for his W2 wages?
In regards to this comment:
“BTW most people with already receiving a W-2 should not form an S corporation for a sideline business… but in some special cases that S corp entity choice can save money and also create a safer place to deduct.”
Nice post, WCI style.
Great Post. I’ll offer two more reasons to consider owning a business:
A. Multiple Steams of Wealth: A great business does more than provide positive cash flow for the owner, it becomes a valuable asset that can be sold at a later time. Many business owners who retire with a high net worth are able to do so because they sell part or all of their company as an exit strategy.
B. Improve The World: It is really possible to do well while doing good. One success formula is to find a need in the marketplace and then provide services or goods to fulfill that opportunity in an ethical, sustainable, healthy way. In fact, companies that take the high-road often are able to charge premium prices as their customers demand high quality.
I suggest that every White Coat professional consider becoming an entrepreneur too.
Amen.
For the W2 employee who obtains a small amount of inconsistent 1099 income from other activities, is there a way to put this money away pretax in retirement accounts? I already max out my 401k pretax via my W2 gig.
Individual 401(k)
I have been saving in an online bank for the past few years in addition to maximizing my tax deferred accounts etc. I feel like I do not have the time to run a business, and once tried real estate investing (buying rental properties)but it was a flop. My brother, however, does real estate full time and has a growing real estate investing business, buying, rehabbing and flipping houses and owning rental properties.I am about to move my money from the online bank account to create a taxable investing account (boglehead lazy portfolio) with Vanguard. My dilemma: I would like to invest in my brother’s business because I think it is potentially more lucrative. He has a good business model and his business has been steadily growing over the past 6 years and I like real estate investing but am no longer interested in doing it on my own. My question is: What is a safe proportion to invest in my brother’s business versus in the lazy portfolio? My risk tolerance is moderate to moderately aggressive. I know this is a personal question but I love the idea of investing in my brother’s business rather than as a 10% passive REIT allocation, plus,the potential gain is so much more and I feel more like I am indirectly involved in a business.What would you advise?
I’d say keep it under 20%. If it were me, I’d probably limit it to 5%.
Hello!
I started reading your blog early last year and i have found it to be so helpful and it has even challenged me go continue to develop myself further. I recently started writing a book and i am in the professional editing stages. I plan to sell these in the near future.
I guess this would be a sole proprietorship and that would allow me to open a solo 401k in addition to my work’s employer sponsored 401k. Do you have any guidance as to how i would organize myself to start this business or if there are blog posts you’ve already written on how to start a business, can you please share the link with me? Thank you!
Start with writing the book. See if it makes any money. If it does, you have a business. It is that easy. If all you ever make is $500, then it seems silly to go register with the state as a sole proprietorship. I’m not hearing a need for an LLC or corporation.
After what amount of income outside medicine do you think it would be worth setting up an LLC for a side business? Or am I thinking about this wrong and the biggest benefit of the side business is additional retirement accounts and being able to deduct certain costs by not being an employee?
Let’s add some precision to your questions. LLCs aren’t about an amount of income. An LLC adds perhaps some legitimacy in the eyes of some and maybe some non-malpractice liability protection to a differing degree in different states. If your business carries lots of liability, you should do an LLC early. If not, maybe never.
Now let’s shift gears to your second question. Any self-employment income qualifies for additional retirement accounts for someone whose other income is all employee/W-2 income. You don’t need an LLC to open an individual 401(k). You also don’t need an LLC or corporation to deduct legitimate business expenses. Employees can deduct unreimbursed business expenses too, but not as much and it is a lot harder.
Hope that helps.
How does asset protection come into play when you own a side business?
Lets say I’m operating as an independent contractor (sole proprietor) physician. My wife will be going into restaurant management and is planning to buy some local cafes/coffee shops/etc. We would most likely not be buying the land–just the businesses, and all the equipment inside.
I know if my wife forms an LLC, if someone slips and sues her, then only her business assets are at risk (though if she’s personally at fault, I believe her/our personal assets could then be at risk). But what if I get sued for malpractice? I know my home is not protected in that situation–but what about the businesses? And would there be any difference in protection for the businesses if I were also a co-owner? I guess what I’m trying to ask here is are your side hustles protected from creditors if you get sued for malpractice?
If the answer is actually quite complicated, I can of course consult a lawyer.
You’re right you should be concerned about both internal and external liability with your various entities.
I don’t see how your patient could get your wife’s business by suing you though. If you were a co-owner, it is state dependent but if it is in an LLC, the creditor is often only able to get a charging order. If you leave the cash in the business, you can send the person who sued you the tax bill without sending them any income!