Small Business Advice for Owners: Can you make a living running a small business honestly?

When I was in college, 1965-1969, we talked about the $200,000 billion underground economy. Now 50 years later it must be 10 times that big. A high percentage of small businesses I look at have some cash payroll or some undeclared cash sales. Because of the competitiveness of the market, those that are not paying some or all of the required payroll taxes or sales taxes can quote better prices then those that are paying union wages and benefits or are paying all of the required payroll taxes. This is fraud in business.

I once actually recast the financial statements of a small profitable auto repair shop by including all the sales taxes, payroll taxes and workers compensation insurance costs that the owner was not paying that he should of. The business went from a profit to a loss.

Make Sure Your Partner is Educated on Running a Small Business

Last year I started a swimming pool construction company with a licensed pool contractor, who lives in another state where he claims no one in construction had workers compensation or liability insurance. I insisted that we do everything 100% by the book. I am a CPA and running for political office. For me to cut corners would be the road to disaster. After just a few months, my partner complained that I must have been hiding some of the money we took in because the expenses were so high. I could not educate him to the overhead costs of doing business in California. He only understood direct labor, direct material and auto expense. The costs that he could not understand or accept included office expense, office payroll, advertising, insurances of all kinds, workers compensation insurance and payroll taxes. The result was we terminated our relationship.

When we terminated our relationship, my ex-partner, instantly dropped the payroll service and started paying his staff in cash. He also subcontracted to unlicensed contractors and hired men who would not work if they were not paid in cash. Some were collecting unemployment insurance and/or were trying to get out of paying child support to their ex-wives.

Have we reached the point in America that a small business cannot make it without cutting corners? I sure hope not. It looks like we need to reduce payroll taxes and workers compensation insurance premiums enough that being honest and legal is not a formula for failure.

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