A friend of mine launched a successful BBQ restaurant in Minnesota last year. He has always been entrepreneurially minded, and enjoys entrenching himself in the community by gabbing with the locals every day. He also understands how lucrative life can be if you are the skilled operator of a small business, as the sales gains accrue to you personally in a way that salaried employees never benefit. Although, perhaps most importantly, he also understands that paying $0.85 for pitchers of beer that are sold for $6 can add a cool $2,575 to your monthly income when you go through 500 orders per month.
He mentioned to me that he built up almost a $45,000 in excess cash that had accrued in his sole member LLC’s account since the start of August, and that he was planning on making an investment in something that could be turned into a passive income stream to support the long-term health of the business.
I had his musings in mind when I studied the future income prospects for shareholders of GlaxoSmithKline (GSK) going forward from this price point of $38.50.
With a dividend of $2.88, you could buy yourself a very nice income stream by making a sizable GSK investment at the present price. Someone that buys $45,000 worth of the stock will end up with 1,168 shares of GlaxoSmithKline paying out $3,363 in annual dividends. Purchasing stock in GlaxoSmithKline through a brokerage account held in the LLC’s name, and then depositing all the dividends back into the LLC’s bank account, is a great way to improve the cash flows of your business by building supporting income streams that can protect you when hard times come, and can increase your largesse during years of prosperity.
This is the same principle that enabled farmers in Quincy, Florida that owned large blocks of Coca-Cola at the behest of banker Pat Munroe to survive the Great Depression–those Coca-Cola dividends enabled the survival when the wheat prices were low.
From a legal perspective, this strategy is less wise. When you have brokerage accounts funnelling income back into the account of the business under your control, those funds can be eligible for relief in the event your business has a legal judgment against it arising from a tort or contract claim. If you pull the money out of the LLC and then put it in your own personal brokerage account, it moves beyond the reach of judgment creditors.
The best practice would be to create a parent entity LLC that receives profits from the restaurant as a subsidiary LLC, and then set up the brokerage account LLC as a separate subsidiary that funnels money back into the parent account. It sound like a hassle, but it only means an extra $50-$100 in annual costs and a bit of extra paper work that only takes up a few hours each year. The parent LLC would act as a holding company to sidestep the liability issues mentioned above.
If he does something like this a dozen times in his life, he will be able to have all of his expenses self-funded. He mentioned that the costs of operating the restaurant are almost $4,000 per month. If GlaxoSmithKline stock represented a $280 income stream, he would only have to build thirteen other income streams to have stock investments fully fund his business costs with all of his restaurant revenues then becoming unrestricted, deployable cash.
Originally posted 2016-11-28 13:27:41.