Why service agreements (contracts) are a requirement for your business. How service agreements help build your brand, formalize your success, and protect your personal property.
Good morning, everybody, or afternoon, evening, wherever you are. This is Karl, and welcome to the first of a five-part class on service agreements for SMB consultants, applying the book. The first version of this book, whose subtitle is a Quick Start Guide to Managed Services. The first version of this book was the first book ever published with the term Managed Services in the title. Happily for me, I outpaced my friend Erick Simpson by about three months, so he had the second book with managed services in the title. But anyway, it has been revised since then and updated quite significantly. But here we are. The class is going to walk through the book, and I hope that you will do the reading and follow up on it, do the exercises. These classes are always designed with homework so that you go off and do something that will actually improve your business. Then we can talk about it. And if you need assistance, I’m always here for you. You can always get a hold of me at [email protected]. If you have questions about the class, about where do I find the downloads or the handouts or I can’t get logged in or whatever, [email protected] goes to my whole team.
So whoever can help you the fastest will assist with that. It might be me, but if you want to get a hold of me, just Karl P at Small Biz Thoughts. Today, we’re going to do the intro-level stuff. But as you’ll see in a minute, we’re not going to go slow. It’s not like we start out doing very little. This is not like when you go to high school and the first day of class is basically a waste of time. There are several handouts. They’re on the site at ITSPU, over on the right-hand side. Handouts include the book, service agreements for S&B consultants, in a zip format. Of course, we have all the handouts that go with the book. Most of the time, these classes have lots and lots of handouts. This class has fewer handouts because it includes the entire book. But there are a few additional handouts today on defining yourself and your clients. Just a couple of notes about the site. The site that you probably 99% went to be able to watch this right now has an area at the top that has no video until the day that the class is held.
As soon as the class is over, we put the video up there so you can view it. If you look over to the right and down below, you’ll see the class outline, and you can go to any unit that you need to. When you scroll down, you’ll see on the left, there’s unit summary, read the transcript, extra resources. We put up a transcript of the entire class. Usually, all of that gets done within 24 hours. Over to the right side, you’ll see the handouts and those vary class by class and week by week. But if there are any extra resources, that would be things like if I say, Oh, go to this website and put in this information and run this tool or whatever, that’s going to be under extra resources. Finally, just a super quick note, we do have certification. For any of these classes, there’s quizzes. There’s five weekly quizzes. At the end of the class, if you want to register for a certification, this class, let’s say, has 75 questions spread out over five classes. Okay, we take 50 of those questions and turn them into a certification exam. The certification is not difficult.
It’s just a thing you have to do. But it consists of 50 of the questions that you’ve already seen. If you have any questions about that, send me an email. Just a note in general on our process here, I’m going to pay attention to the Q&A, not to the chat. If you want to ask a question, put it in the Q&A, and I will get to those from time to time throughout the class. All right. Are we ready to go? Because we’re going to go very, very fast today. The first question is, why exactly are you here? What do you want to get out of this? I want you to write that down. I want you to literally say, I want to leave this class with a contract, or I want to leave this class with a better system for running my company, or I want to have a better understanding of the relationship between me and my clients, whatever it is. Way back in 1995, when I started my first business, I had come from a world of big iron. I ran an HP 3000 shop, which is a lot of people call them mainframes.
It was really a mini computer, similar to the IBM 3060. It had tape backups and so forth. We did nightly full backups. In only one instance that I was there did we actually need to use those, and that’s a fun adventure story. But we had a contract with somebody who managed the maintenance, the monthly maintenance of our systems. Eventually, the systems that I managed included the HP 3000, which had an MPX operating system, and then Windows Nt, when it was introduced, we had one of the first servers for Windows Nt. Then, of course, we had Novel, and we actually had a Linux system as well. We had a lot of things going on, and all of them required monthly maintenance, which I certainly did not do. We had a contract with somebody who did that. What happened was I went from there and I went as an outsourced employee running the internal tech support at HP Roseville. Again, big iron, lots of stuff going on. In that case, dozens of servers and thousands of employees. My team managed internal tech support for HP Roseville in California. I also managed the team that managed the backups, and we had daily, complete, full backups of every server every night.
I literally had a full-time person whose entire job consisted of managing the tapes that were used in the backups. There were two primary buildings, and they each backed up each other’s servers, right? A building could disappear and we would still be in business. That’s the world I came from. When I became an IT consultant, I didn’t know that people didn’t document their work, that they didn’t have contracts with their clients, that they didn’t do monthly maintenance. I didn’t know that the way that small business operated was not the same as the way bigger businesses operated. I just started writing contracts, and I never had a client say, I don’t sign contracts. I’ve heard that so much from IT consultants. My clients would never sign contracts. We’re good with a handshake and all that stuff. I never heard that in my life from a client. I only heard it from other IT consultants. It turns out businesses, especially businesses with a lot at stake in their technology, are totally fine with signing contracts. They expect it. In fact, looking back, going back either 10 years, 15 years, 20 years, however far you want to go back, one of the most important changes that has happened in our industry in terms of professionalism is that we now find contracts to be normal and reasonable and just part of doing business.
When you add the horrible environment of ransomware and insurance companies and people getting sued, then unfortunately, it all makes sense that this is where we are and that people intend to sign contracts. But here’s the important part, and this is one of the most important lessons for today, but for the entire course and the entire book. Your contract is not about the services you deliver. Your contract is about the relationship between you and your clients. It’s like building a good fence makes a good neighbor, and nobody complains about the fence until something goes wrong. Nobody complains about the contract until something goes wrong. In fact, if you want a really good early indicator that somebody is about to reconsider whether or not they want to do business with you, it’s when a client e-mails you and says, Hey, can I get a copy of our contract? Because they’ve never read it before and today they’re going to read it. That’s an indicator that something has gone wrong in the relationship. All right, so let’s go. Again, comments or questions, go ahead and put them in the Q&A. Now, of course, obligatory note, I’m not an attorney.
I don’t play one on TV. None of this is legal advice. I’m a business advisor for whatever good that is. You should absolutely have an attorney review every legal agreement that you sign. There are good and not too expensive ways to do that. I’m going to give you some advice that might get pooh-poohed by a lot of people, but you do not absolutely do not have to spend $10,000 on an attorney. You do not need an attorney to be on a retainer so that you can, for the rest of your life, give them money for looking at something that almost never changes. We’ll come back to that. But at some point, you should plan that you will have your documents reviewed by an attorney. All right, so ta-da! We’ll start with the bad news, and then we’ll make everything much better after this. A couple of years ago, there was this story, and the case is still out there. A managed service provider got sued $1.7 million because they had advertised, You take care of your business and we’ll take care of security, and you don’t have to pay any attention to security. We got you.
In the complaint, in the lawsuit, the client’s attorneys actually quoted their service contract and used it as evidence against the MSP. Now, in my opinion, and I’m not an attorney, I think the MSP is going to win this case, primarily because it was a phishing case. This is one of these things where somebody got a hold of the secretary and pretended to be the boss and said, I need you to transfer $1.7 million to this account for this client. The secretary did it, and it was because of a phishing scam, which the MSP had no involvement in, no control over, and it was literally the client did something intensely stupid, but they had a contract that said you take care of your business and we’ll take care of security. You absolutely have to have something in place that says if this happens, what goes on after that? What are my rights? What’s the client’s rights? What are the legal rights? Is it is responsible? When does the insurance kick in? This is real. The entire time I had managed service businesses, I always felt like I was safe because I had a million dollar umbrella policy over and above the policy on my house and my car and my business and my liability insurance.
I also had a million-dollar umbrella policy, which by the way is incredibly cheap, so just get one. But today that’s not enough, right? A million dollars is… I mean, the other option is just to be so poor that you’re not suable, which is cool. I mean, you can do that if you choose, but I recommend the insurance. But if somebody can make a mistake, this mistake could have been for three and a half million. It could have been for 10 million, right? This is literally the stupidity of the client, and then the MSP gets sued and has to show up and defend it in court. I don’t want to scare you and I don’t want you to feel negative about this, but it is the background. It is the world in which we live, and this is a more public case. I’m sure it’s not the only case. When we think about the contract between you and your clients, you need to be clear about what it is and what it is not. It should not have sales material in it. Your contract should not make promises about improving their business or making their life better or anything that is an evaluative statement about improving anything in their business.
You can do that in your marketing material, but absolutely not in your contract. In fact, the norm in this business and every other business is that in your marketing material, you make promises, but in your contract, you specifically say no marketing material is to be considered part of this contract. None of the promises that we made are going to happen. Your contract needs to basically say, Look, we do not promise that your computers are going to work, or that your software is up to date, or that anything is working at all. We’re going to do what we can, but we can’t work miracles, and so we’re not making any promises. So, oddly enough, your contract is the exact opposite of your marketing material. At the same time, your contract should not include a statement of work. It should not say, We’re going to do monthly maintenance. We’re going to document everything we do, or we’re going to have a professional PSA or CRM system. We’re going to manage tickets. All of the details of how you do what you do, that can be stapled at the end of a contract as a statement of work.
That can be separated out into an email. It can do anything it wants, but it can’t be built into the body. It should not be built into the body of the contract. What’s left over is the relationship. If you think about it, it’s pretty straightforward. You hire somebody to do work for you and they do it. If they do a good job, you pay them and everything is good. But if the person who, let’s say, they lay concrete in your patio, Okay, great. If they dump the extra concrete in the street and the city sues you, well, what happens? There’s some behavior there. There’s something that contract… Or if you don’t pay them, what happens? If you have a dispute, what happens? If they don’t put in the rebar they promised, what happens? There’s all kinds of things about the specific job and that relationship. What happens if that person doesn’t pay their taxes and then says, Hey, I thought that Carl was going to pay those taxes. Well, you got to have a contract that says what’s what. Okay, so how your relationship works, and we’re going to go into that in more detail, but that’s what should be in the contract, not this other extraneous stuff.
You need to be quite aware of the, I call them random representations, but there’s a lot of places where you make promises and you got to make sure that you stop doing that. No promise you make should be inconsistent with your contract. At the end of an invoice, you might say terms are net 30 days. Well, what if your contract says net 15? That’s a legitimate argument for somebody to say, Well, here’s this thing, and you send it to me, and I actually signed it, and it says net 15. I’m sorry, but it is what it is. You have to be careful about the promises you make on invoices, letterhead, and all that, and it’s worth reviewing these things so that they either say nothing or they just say fluffy, nice things like, We are committed to your happiness and we love you and please stay with us forever. That stuff. So be careful about those representations because anything where a client says, Well, you said… That’s a potential problem. Okay. So you’re going to talk about the things you need to buy to make your business go. The first thing is you need to buy some legal services.
Unfortunately, coming from whatever, I’d say 10 years ago, there were three people on Earth who sold legal services specifically designed for IT consultants. Now there are people who have seen that there are people buying and selling businesses for millions of dollars, and they go to shows and they see there’s millions and millions of dollars to be made. They say, Oh, well, I’ve got the insurance that you need, or I’ve got the legal services that you need, and they want to sell you a $10,000 a year package of legal services. You don’t need that. You absolutely don’t need that. Here’s the thing. The reason that you need a book like this and a template designed specifically for our industry is that, and I’ll just put it on the record here, we’re being recorded, attorneys are among the laziest people on Earth and the most hardworking. They will work really, really hard, but they try not to come up with anything new if they can avoid it. If you went to an attorney and you said, just run of the mill, Joe attorney, and you say, Hey, I need a contract to run my computer business. They would say, Okay, sit down.
They’d say, What do you do? Oh, I sell this and that. Oh, and you sell time. What else do you sell? Do you sell hardware and software? Wait, services. What are services? What do you mean by that when you say the word services? They would interview you and they would take a bunch of notes, and then when they would go into a service that they pay for and they would download a contract for services. It might be refrigerator repair services. It might be roofing services. It might be a contract for financial services. It might be anything. The chances that it’s a contract for IT consulting are pretty slim. They’re going to take a contract and they’re going to give you the most generic contract you could possibly imagine. But in our business, we do have things like monthly maintenance, regular patches, fixes, and updates. We do have a need for the client to play their role and not do stupid things and to actually let the updates run, let the computer reboot, make sure that the cloud services is paid for, make sure that you have a working antivirus. Some of that falls on you and some of it falls on them, but where those two touch each other is your relationship.
It’s way better to have a contract where the basic contract is designed specifically for this business because you’re going to get a higher-level contract. Now, having said that, the contract that’s in the book was reviewed by an attorney. I think the last time it was reviewed by an attorney was six years ago. Okay, what does that mean? Well, California, they were recording this in 2023, end of 2023, our legislature just went home, and there are more than 1,100 bills waiting for the governor to sign or veto. Some of them, probably 1,000 of them, will become laws. Some of those laws are going to affect small businesses. They’re going to affect contract law. They’re going to affect taxation and what you can do and what you can’t do. In other words, no matter what district you’re in, what state, province, even what country you’re in. Anything that you sign today, you have to be absolutely sure that it is still legal, that it uses the right words for your state or province or county or whatever. You need to make sure that it’s enforceable and that you don’t have two pieces of the contract that conflict with each other, right?
Attorneys do that. They go through and you might have a perfect contract, I promise you. An attorney will make a change because they get paid to do that, right? They have to earn their money somehow. So even if it’s a perfect contract, in fact, it could be a contract they wrote last year and they forgot about and you give it to them again, and they review it, they’re going to make some change because that’s what they do. But the bottom line is they’re going to go through and make sure that it’s good and just and that it’s enforceable and that a judge isn’t going to throw something out because it’s completely stupid, right? Your contract is good for a very short period of time, and so you do need to have it reviewed by an attorney. Now, I have over the years, I started out by finding a local attorney who actually became one of my clients. He basically said, Look, for 350 bucks, I’ll review your contract. Great. Then I went back to him again and again and again, and every time a client would ask for a change here and there, he would review it and then send me a bill for 100 bucks, 150 bucks, whatever.
Over time, even under those circumstances, even under the review of an attorney who had seen the pieces of my contract emerge over time, it became a bit of a Frankenstein monster, right? Every three years, he would sit down, go through the whole thing, make a few changes. He knew that every word in that contract was originally his, but he would still make these changes, right? I didn’t have him on retainer, and I don’t think you need an attorney on retainer. I will tell you this, and I will fight anybody who disagrees with me on this, if you have a good contract that at some point has ever been reviewed by an attorney and you want to make a few changes and update it for your state, I think that you can take that to legalShield. Com, pay $30 a month, and you will find a good attorney who will review that contract in your state to verify that it is good and enforceable. You do not need an attorney who specializes in managed services, and you don’t need an attorney who charges $600, $800, and $900 an hour. You can find good competent attorneys. Now, I hope you then go to that same attorney you found through legal shield or whatever, and give them the opportunity when it’s time to do a rewrite.
But you don’t have to spend a fortune on this. Chris has a question. Are we able to see what questions everybody posts? I don’t think so. Now, if I say type the answer, you might. I’ll send that. Yeah, questions are not intended to be chat, although some people do that. Cool. If you have any questions about anything I say, Ian says he sees it now. How about that? In terms of other things you need to buy, you do need to buy insurance. You need errors and admissions, general liability. You need different kinds of insurance for your company, and that’s just part of running a business. Your contract needs to acknowledge the fact that I’m going to pay my taxes, you’re going to pay your taxes. We’re both going to insure our stuff. You’re going to do the things it takes to be a professional business in the 21st century. Unfortunately, whether you like it or not, you’re going to have to buy insurance. That’s just the way the world works. You’re going to have to have a contract. You can be quite minimalist. There’s at least one person here who is starting a new MSP.
Welcome, our newest member. But at some point, you’re going to have to do this. The good news is if you’re just starting out, you don’t have enough to lose, so you don’t have to have the most expensive insurance. But eventually, when you’ve got a business that’s got a top line revenue of two million and you’ve got a couple of employees running around, you’re going to have to have all the insurances and all the other things. Now, the good news is if you’re just starting out, a lot of what you need for your business might be covered under things you already have. Your homeowner’s insurance should cover equipment that you have in the trunk of your car as you’re driving to a client’s office. Verify all that. It’s going to take some extra work, but you may have some insurances that do you good. But eventually plan that you will have a long list of insurances that just whatever it is, everybody’s got a different number. But if you exclude cybersecurity, most of these are at a reasonable price. Anyway, that’s that. Here’s the difference for me between a service agreement and a service level agreement.
To me, a service agreement is simply the document that outlines the relationship between you and your clients. A service level agreement says, for example, that if the server is down for a certain number of hours and we don’t meet our response time, we’re going to give you some of your money back. I have never signed a service level agreement. I don’t believe in them. I don’t think they’re necessary in this industry. You are welcome to do so. We have the verbiage in the book if you’re interested in that. I don’t encourage you to offer them. One of the major vendors in our space, I’m going to say 10 years ago, started telling people, use your PSA to put up these guarantees of response time and then go out and sell yourself as being better than the competition because you have a service level agreement and you’re going to meet these targets. That led people to thinking that they needed to sign agreements. Then some of them were shocked when a client said, Well, you promised in your contract, in writing, that we would have a two-hour response, but you took four hours and we’re going to sue you.
So don’t take your legal advice from your vendors. Don’t let vendors choose your business model. I’ve never found that to be a successful strategy. Again, you’re all welcome to disagree with me on this, but I don’t think you should sign service-level agreements. The only people that I think these should apply to are things like the cable company. Every time your cable goes down, by golly, you should dispute your bill and see if you can get some of your money back. By the way, good luck with that. If you want to know how useful service-level agreements are, try to get money out of your cable company for an outage. All right, so the subtitle of the book is a quick start guide to managed services. We’re going to go through this and what’re going to see in this class is there’s a lot of tips about how we run things. There’s a great book called Noise, N-O-I-S-E by Daniel Kahneman and some other folks. In the final chapter of the book, they talk about… Noise is all about the variation in responses to various things. Think about when a judge has somebody in front of them for sentencing, do all the judges give the same sentence?
No. Okay, so there’s some noise. All right. How much of that is personal bias? How much of it is error in the system because the wrong facts were presented, right? In your own business, there’s a lot of noise, right? There’s a lot of variability. There’s a lot of human interaction. The way that we deal with this is we move from having standards. Standards are things like we will take reasonable care of your systems and we will do things that are reasonable to take care of you. Rules are things like we will back up and get a complete full backup every night. We will do monthly maintenance and it will be done in this order. We’re going to start with this machine and then go to this machine, right? So generally, your relationship should start with standards and move to rules when it is necessary, right? So when you think of things like best practices, it might be a best practice that we try to treat all of our clients fairly. Okay, that is a standard. But the rules would be if there is a financial dispute, first we do this, second we do this, third we do this, tick, tick, tick.
So standard operating procedures emerge as standards become rules. Things that are flexible become less flexible. With standards, your employees have lots of discretion. With rules, they have less discretion. That evolution from standards to rules. Sometimes standards are good. Be good to people. There’s a lot of standards in customer service. Treat people fairly, treat people well, right? But when you get down to the nitty gritty, how do you turn your systems over to an employee? Well, you create a set of rules and you say, if this happens, do this and then do this and then do that. It’s the hard borders around your service. We’re going to talk about all of these kinds of things and that evolution and when it’s appropriate to have each level of discretion within your system. Questions. I’m just going to zoom, zoom, zoom, unless you guys have questions. All right, so the first thing, handout number one, is to define yourself. Who are you and what do you do? In other words, do you offer hourly labor? Do you sell blocks of time, flat fee projects? What do you offer and what kinds of things? What services do you specifically offer up?
You should have a pretty exhaustive view of this. Now, some people start out by saying, I’ll do anything. Well, I would tell you that is a mistake. You can’t do anything, so you got to figure out what you do. Go through that exercise in handout one. Sometimes it’s useful to say, I do have this thing that we do and I can figure it out. But as my brother Arlin used to say, I got to stick to my knitting. In other words, you got to do what you do. It might be that refurbishing hard drives is a thing that you can do and it’s fun and you enjoy it or whatever. But if it’s not a major piece of your business, don’t write it down as a primary offering of what you do. Part of what you’re going to do with a contract is you’re going to define the services, hardware, software, and service-related things that you do that you offer to the public. And then you’re going to define who is your client and what do they need and what do they buy. You’ll see, I have a very strong preference for bundling things. I hate trying to sell every tiny little thing individually like, Oh, and by the way, here’s an invoice for one screw.
Nobody does that. I like to bundle services so that people have a bigger invoice, but also that I can control a lot more of their environment because we’ve included the pieces and they don’t go buy them from somebody else and I don’t have to worry that somebody else configured something that I have to maintain. Define who you are and what you want to offer. If there’s things that are super minor, like we sell about four telephones a year, fine. Put it on the list, but put it below a very dark line that says other miscellaneous things. I can set up a home theater. I’d rather not. It’s not the focus of my business. It’s not what we do. Do you offer programming services? Do you offer web hosting, web development? Everything. Just write down everything. And if you’ve been in business for a while, with luck, you have enough detail inside your QuickBooks or your Zirove or whatever you’re using for financial stuff, fresh books. You’ve got enough information in there that you can put out a list. You can run a sales report of every item that you sold. Sales by item detail for the last 12 months, and then just put them into big categories and define what you do.
So please download that handout, take a look at it. I would love to actually have you go through it. Then you have to decide if you’re a managed service provider. Now, to me, managed services is a very specific thing. Unfortunately, there’s good news and bad news. The good news is for me, I wrote a bunch of books on managed services, and it became the standard words for the industry to define our entire industry. When people think they’re getting into managed services, they go buy a book. It’s probably mine. That’s good. The bad news is a lot of people have begun to use this for the generic term for IT consulting. In most IT consulting, the majority is not managed services. Managed services, to me, means that you take ownership of the client’s systems. You are the one that they talk to. They don’t go buy something different from everybody they find. They don’t go buy toner from other people. They don’t call on other people to look at their stuff. As a result, the closer you get to managed services, the more you feel like you’re part of their team. They involve you in discussions about changing to a new ISP or changing the layout of their meeting rooms if they’re going to have big screens and so forth.
For the most part, managed services is delivered under a contract. It is prepaid monthly. It provides very specific maintenance-focused services on contract for a flat fee. Now, I’m going to try to only do this once, but I cannot stand the term all you can eat, so I tend to go off on 30-minute rant on all you can eat. I won’t do that today. But there is no such thing as all you can eat. If you want to know what all you can eat looks like, go to an all you can eat restaurant and then take a photograph of the rules. Everybody has to order the same thing. You’re going to be charged extra if you waste food, that you can’t take any food home, limit of three hours, blah, blah, blah. There’s a whole bunch of rules. The same thing is true in your business. Do not use the term all you can eat because some clients somehow is going to hear that and they’re going to think what you really mean is all you can eat, but you can’t do all you can eat. If you have an all you can eat contract, I will pay you $1,000 a month and I will bankrupt you because I will ask you to do 100,000 hours of work and you will almost immediately be out of business, right?
Most clients are not like that, but there are clients like that. Every once in a while you will trip on this concept of all you can eat and you will lose a bunch of money. It’s much better from the start to never, ever, ever use that term and don’t let other people get away with it. It is a cancer on our industry. The beautiful thing is if you start with maintenance, you’ll be in good shape. If you think about it, the evolution of this in my business was that I had a bunch of clients on contract. Everybody signed a contract, and it was just for hourly. There was no concept of managed services yet. Then I, because this is the world I came from, I did monthly maintenance at every client. In every client every month, I took a checklist and I went through a certain set of procedures on their server. I verified that the backup was working. I documented any problems. I applied patches, fixes, and updates. I tested the environment to make sure that they weren’t running out of disk space and that the antivirus was working properly. I went through a checklist.
Then I went to each desktop and I made sure that they were all tuned up. I estimated over the course of a year or so that it takes about roughly an hour a month per server and about 15 minutes a month per desktop over the course of a year. Those are the general numbers that, Huh, there. If I do all that, there’s a predictable amount of time and money involved. When I first started figuring out how to figure out a flat fee, I just said, Look, we’re going to focus on the maintenance. I estimate your maintenance to be this amount of money, boom, and we’re going to go through an exercise on this. But the basic idea was that I could figure out what it was. We had a managed service amendment to our contract. We got the standard contract and we have an amendment that is for managed services. It says this maintenance is going to be covered for this flat fee. If you have a bunch of maintenance one month, I come out behind. If you have almost no maintenance that month, I come out ahead. But what you get client is a predictable fee every month.
If there’s a big project, you know you’re going to have to pay extra. If there’s big changes, you know you’re going to have to pay extra. But the maintenance is included for a flat fee. And never did I ever say all you can eat because that’s not what we’re selling. All right. The main thing you got to do when you’re starting out is figure out what is the appropriate form of your business. Actually, this is worth revisiting, I would say, every five or 10 years. But the most common thing, at least in the United States, is to be a sole provider. A sole provider, basically your personal tax number, your tax ID becomes the tax ID of the corporation. Now, you can also have an employer ID as your tax ID and still be a sole proprietor. The bottom line is all the information in your business gets calculated and then it becomes an entry line in your personal tax information, right? There really is only one entity, although you do business under a different name or you may do business under a different name than yourself, but it’s you. You are your tax ID.
You can still have employees. There are people with 50 employees who are sole proprietors. It doesn’t keep you from having a tax ID and so forth. But just know, if you’re a sole proprietor, that is when all of your personal stuff is connected to your clients because they have access to it, because they are doing business with you as a person, as an individual, right? Probably a better preferred method for most people in the United States is to be an SCORP. You might be an LLC or a limited LTD or a T1 in England, right? There’s different names from around the world, but… A limited liability company still files taxes as a corporation or you got to file taxes as something. But an S-corp is basically a corporation that exists on its own. It has its own identity to the federal government, to the IRS. It does eventually show up as a specific income on your personal income tax, but the corporations have has its own taxes and its own liability. What that means is that somebody can sue your company, and what they’re suing is the corporation, not you personally. They may also list you personally, but that’s separate.
If you are good at separating your personal stuff from your corporate stuff, then you maintain what they call the corporate veil. As long as you don’t treat your company like your personal ATM, you maintain this separation between yourself and your corporation, and therefore, somebody who sues you can’t pierce the corporate veil, is what they call it. At the end of the day, the corporation should have profit at the end of the year, and that profit flows to your bottom line. They are great tools for taxes, specifically for those of you inside the United States. We have a thing called Social Security. In Australia, they have super annuity. It’s different names, different places. But in the US, if you pay yourself, let’s say, $60,000 a year from the corporation, that’s what I’ve paid myself. Since 1995, that’s what I’ve been paid. I earned $60,000 a year, I’ve never had a raise. It sucks. But anyway. But here’s what happens is if my corporation has profit over and above that, I still pay taxes on that, but I don’t pay the Social Security tax. I say 15% of all that extra money because I’ve got a high enough salary that a judge is never going to throw it away and say, No, that’s not a reasonable number, so I can enforce that, and I limit how much I have to spend on Social Security.
Now, that also limits how much I’m ever going to get from Social Security. You have to take a bet on you versus the government versus the economy. But anyway, there’s lots of options there. I highly encourage you to talk to a financial advisor about what is the best way for you to run your business. Now, there are people who also run C-Corp. Now, a C-Corp is a little more complex, and there are a lot of advantages to an S-Corp. Again, this is not a class on all that, so go talk to a financial advisor or take a class. But C-Corp can maintain their earnings from year to year to year, and it doesn’t have to drop down to your bottom line. There are some people who run C-Corp where at the end of the year, they just pay themselves everything, and at the end of the year, it always has zero dollars of profit or loss, and they run it like an S-Corp, and you can do that. But bottom line is most people, that middle option is probably the right form for your business. Having said that, when it gets time for retirement, you might choose to disband the corporation and run as a sole proprietor again.
Again, part of it depends on how it affects your taxes. It is worth talking to somebody who does taxes to figure out the best way to run your business. Obviously, Reianne Bouchianico has some classes on that inside our community, so you can check those out. The reason I talk about the taxes and the money and all that is that if your client is an escort, they have separated their personal stuff from their business stuff. If you are an escort, you have separated your personal stuff from your business stuff. If neither of you has done that, you could literally be in a situation where the only way you can get a bill paid is you got to take possession of their pouch and their living room furniture, right? You don’t want to do that. They don’t want to do that. You don’t. You have to maintain the separation between your business and your personal. The IRS has lots of guidelines around this, but the bottom line is there are benefits to each way of incorporating yourself or running your business, so you have to make choices. But the bottom line is you need to be aware of what you’re doing and what the consequences are of those various decisions.
Spend at least some time on that. Now you’ve figured out who you are, who do you want your clients to be. Again, one of the biggest mistakes people make when they first start out is they say, I have to take every penny. That is absolutely not true and never has been true, and it can lead you down some bad roads into doing some bad things that are not good for your long term future. Think about the clients you want. I had somebody that I work with very closely who emailed me yesterday and said, I just want to let you know I really appreciate working with you because I have some other people I work with that are just absolutely horrible and make me have a very, very bad day and I don’t want to have a bad day. One of the primary rules of my business, and I documented this in the Absolutely Unbreakable Rules of Service Delivery, we only work with people we like. That is literally a written rule inside my company and has been for every company that I’ve owned. We only work with people we like. If somebody wants to yell and scream and be a total jerk, that’s cool.
They’re just not going to be my client. When I started out, I would take any shop of any size. After, I don’t know, three or four years, I finally realized I got to work with people who have at least, and at the time I thought it was five employees so that they have enough equipment to make it worth my while. There is overhead to having a client no matter how small they are. How small can they be? Eventually, what I figured out is what I really need is without regard to the number of employees, I need somebody to be worth in the neighborhood of 900 or a thousand dollars per month in to be my client. Now, it took me probably five years in business before I was able to make that statement. But I wanted people who would sign a contract. I found myself working with nonprofits, and there are two kinds of nonprofits, those without money and those with money. I found myself working for nonprofits who were associations down at the state capital who had lots of money. That became a vertical industry for me. I found myself working with several attorneys.
That became another vertical that I really liked. Then I had people who were accountants and enrolled agents. I basically had a variety of clients, but I had three verticals that consisted of probably 80% of my business were those verticals. You’re going to evolve over time, but you should do it with intention, right? Think about do these people have fun projects? Fix? Are they good to work with? Do they pay their bill on time? That stuff. What are your requirements? Because I listed my requirements and these are mine, they’re not yours, so scratch out anything you don’t care about, add something that you do care about. I know people who only work with people of their own religion or people who went to a certain college. There’s one guy that I met several years ago. His entire business consists of people whose offices are inside the Empire State Building. When he goes to work, he only goes to one address, but he goes up and down the elevator all day long, right? You can build any business that you can imagine. Who do you want to work with? What do these people look like? Now, if you’ve been in business for a while, three years, five years, 10 years, doesn’t matter, go down your list of clients and evaluate them.
Who are your top 10 favorite clients? Not the most revenue-friendly, the favorite clients. The ones who invite you to their barbecues, whose children’s names you know, whose dog’s names you know. I had one client one time that my daughter loved their dog and so they would invite… They would bring their dog in when they knew she was going to be in the office. She would hang out in their conference room with their kid and their dog. Those are the people I want as clients. Who do you want as your clients? How friendly do you want it to be? How business-like you do you want it to be? Where’s the good mashup that actually works for you? What do those people look like? When you look at your 10 favorite clients, what is it about them that you like? Is it because they’re friendly? Is it because they pay on time? Is it because they treat you like a professional? Is it because they take your advice and don’t ignore you? What makes them good? Put those things on your list and evaluate all of your clients. Because just as when we sort people by money, when you sort people by whether or not they fit your model, there’s going to be some people at the bottom where you’re like, I put up with this person, thought, Oh, my God, I would be so happy if I could fire them today.
That gives you a clue that you need to fire that client. A couple of thoughts about the future, because we want to look for the next five years. I think managed services continues to be everywhere. By that I mean maintaining the whole system and not doing one-off, break-fix-stuff. Branded tech support, I think, is going to continue to grow, and the franchises and so forth are becoming better and better. There’s a lot of national companies now that they want to be everywhere. Everybody from Staples to Best Buy wants to do IT support. I don’t think they’re particularly good at it, but they will get your client’s attention. We have a massive amount of mergers and acquisitions. If you’re really, really small, the good news for you is those people are growing businesses that have worse tech support and worse customer service every year. Your best opportunity in marketing today, as far as I’m concerned, is to target large companies and say, Hey, does your managed service provider give you the service they used to? Or have they gone downhill since they got bought up by that big national corporation? Listen to the radio for the ads about, Hey, we’re local and we love you.
Those are the ads you want to be putting out there. I think the larger M&A-based companies are going to be so focused on money that customer service will become a bolt-on after the fact, and their service will only decrease over time as they get larger and larger, and that’s all good news for you. All right, super quick homework. By the way, we try to do 50-60 minutes every week, and for whatever reason, I have a tough time keeping it to that, but I’m going to try. Talk to your tax pro, determine whether or not you have the right form for your company. If you haven’t talked to anybody about this in 5 or 10 years, I recommend that you actually do it. It’s worth that discussion. Then gather up whatever contracts and forms and things that you have. Any piece of paper where you’ve got a client contract or client communication, including your newsletter, where you might have made some promises that may or may not affect your contracts. Try to gather those up and have a sense of what they are so that when we begin the work next week, you’ll be set for that.
Then we got a couple of handouts defining you, defining your client. If you can evaluate your clients between now and next week, I’d love to see any interesting notes that you come up with on that. If you want feedback on any of this or of the homework or just anything going on in your business, send me a note, Karlp@smallbizthoughts. Com, and I will try to get back to you in a reasonable time frame. I just emailed somebody who sent me a note in May and said, Hey, I’m sorry for the slow response, but I’m caught up now. But if you don’t get a reply from me in what you consider to be a reasonable amount of time, just go ahead and resend it and say, Hey, I’m just putting this at the top of your mailbox. Box. With that, I will take any questions you have. This has been a super quiet class. I get these from time to time. All right, not seeing any comments or questions. I’ll go ahead and put this to sleep. We’ll get the recording up as quick as we can along with the transcript. Oh, Ian says he’s being attentive.
Thank you, and I appreciate that. Very good. All right, well, thank you all, and I will see you next week.
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