Multi-level sales rep investment seems like waste of energy
Dear Dave: My husband and I have an opportunity to buy into a new energy company. Evidently you can buy into these companies and can become a sales rep. Then, with your accounts and with other representatives that you get to come in under you, you can earn commissions, bonuses and residuals as well. It will cost $500 to sign up and $50 per month to stay in. I want to know if it's a waste of our money or something we should seriously consider. — Jen
Dear Jen: This sounds like a multi-level company, and that scares me. Not all multi-levels are bad, but lots are and start-ups like this worry me the most. If someone came to my door wanting me to buy my gasoline or electricity from a multi-level organization — and whether my lights stayed on were dependent on that company — I'd tell them to take a hike.
There are two aspects you want to look at with multi-level companies. One is the financial stability of the company. The other is the strength of the idea. In other words, would you buy the product if you weren't interested in selling the stuff?
There's a multi-level company out there that sells food and will deliver to your door. Some people might do this, but the truth is that most folks don't have groceries delivered to their homes. Ideas like this ask consumers to change their buying habits, and from a marketing perspective that's a tough sale.
Remember the old saying "When in doubt, don't"? I think I'd let this idea sit for a while. — Dave
Dear Dave: I'm 21 and have had my own small business part time for about a year. Two months ago I left my full-time job to focus on this business, but I'm getting really frustrated. It seems like every month a different problem is coming up — taxes, insurance or something completely unexpected. I wondered if converting to an LLC or an S Corp would help me out and make things easier. What do you think? — Josh
Dear Josh: Moving to an LLC or S Corp status probably won't help much in your situation. And from what you've said, I don't think that's your problem. It sounds to me like the trouble is that you're not planning for expenses or doing a budget for your business.
You should be able to anticipate taxes and insurance each month because those aren't surprises. You know they're coming. Plan ahead and figure out what you need to make in August, September and October to be able to break even on these things. Emergencies will always pop up, and you need to be ready for those. But taxes and insurance will always be there, so you should start planning for the future.
Sit down and lay out a budget, giving every dollar a name on paper just like you would at home, and see what expenses you can anticipate for the upcoming months. In business there are two kinds of expenses: fixed and variable. Fixed expenses are recurring expenses such as rent, office supplies or the phone bill. They're usually about the same each month. Variable expenses are the costs associated with producing your goods or service.
If you're in construction, the more homes you build the more you'll have to spend on materials. That cost will vary according to how much business you are doing. The good thing about variable expenses is that as they go up; that usually means your income is going up as well! After you've covered your fixed and variable expenses, everything else is profit.
LLCs and S Corps are not magic tax-erasers, and the fact is, they really don't save you much. You need a game plan, Josh. Start working toward projecting your income and expenses a little better, and get your business on a budget. If you'll do these things, I can guarantee you won't have as much stuff sneaking up on you! — Dave