When most small businesses start, part of the excitement is going to the bank to open a business account.
You order company chequebooks and deposit books.
The money starts to flow into your new bank account, and you pay the company bills at the end of the month.
If there is anything left, you write a cheque to yourself, call it a ‘draw,’ and deposit it to your personal chequing account… okay, fair enough – nobody uses ‘cheques’ anymore – but the principle is the same…
This is a fine and efficient setup if you don’t have a house mortgage. But if you have a mortgage (or other non-deductible debt), there is a much better way to structure your banking.
It is called the Cash Flow Dam, and it is extremely powerful.
Proprietorship Versus Corporation
Being able to implement the Cash Flow Dam relies on you owning a proprietorship.
A proprietorship is a business, but it is different from a corporation. A corporation is its own legal entity – you may own 100% of it, but the corporation itself is as real as you are in the eyes of the law and is as distinct from you as anyone else.
A proprietorship, however, is you. It is an unincorporated business you run and own as if it were yourself. In other words, any income from the company is treated like any income you receive in wages or salary from your job. And you can do anything you want with this income.
And a proprietorship is not necessarily just a rental property; it can be a home-based business you own, a hotdog cart, etc.