How many times have you seen an Internet Marketer or MLM marketer saying how easy it is to earn passive income from a business?
Everything you know about passive income is wrong.
If people say they are making passive income from a business they run, then they either don’t know what passive income means or they are trying to sell you something or both.
If what they are selling is a business opportunity, then RUN!!! Don’t waste your money.
I’ve been pissed about this passive income thing for a long time and the reason I’m pissed is that it is used to separate people from their hard-earned money with the false promise of easy-earned money.
I want to address what passive income really is and how you can make it.
Passive Vs. Earned
Passive Income is money that you received without working for it.
Earned Income is money that you received from engaging in labor or management of labor.
Everyone of those people who claim they earn passive income (and that you can too) are actually working to get their money. They are getting Earned Income.
See there is this super-loose definition of passive income that says any money you didn’t directly work to receive is passive income such as making an ebook sale on the Internet while sleeping or getting an affiliate commission several months after making an affiliate sales site.
Some people will say that their employees are doing most or all of the work and they just make sure it runs smoothly (management of labor) and call this passive income.
People who are actively running their business (even part time) are engaged in work and any money that business makes is Earned Income for that business owner.
The ONLY kind of business owner that earns true Passive Income is the owner who is retired from that business and the business is run 100% by others.
You could also be a business owner who inherited shares of the company such as the heirs of Proctor & Gamble or S.C. Johnson. These heirs earn passive income from the companies they are significant shareholders of, but do not engage in work including the management of labor.
What those who use the term Passive Income really mean (unless they’re trying to sell you something) is that they earn Leveraged Income.
They are using their organizational and managerial skills to leverage the labor of other people, machines & software to generate more income than they could earn through their own individual labor (selling their time for money).
Leveraged Income is what all active business owners are receiving. When you hire someone to do a job for you (an employee or subcontractor) then you are leveraging your capital & management time to gain revenue from the hired labor.
The more capital and management you can profitably invest in hired labor, equipment and software, the more you can grow your business and your income.
That sure isn’t as sexy or easy sounding as Passive Income.
If what everyone is calling Passive Income is wrong then what is Passive Income and how do I get me some?
As I stated above, passive income is money that you didn’t work for. It was earned through royalties, interest, dividends, or pass-through income from an S-Corp/LLC or partnership.
To actually make passive income you need income-producing assets.
(I don’t include capital gains in this definition of passive income because to get capital gains, you must sell the underlying asset to realize the increased value of the asset. Once you’ve sold the asset to get access to its value, you will no longer have future income from that asset.)
Income-producing assets are things like rental properties, bonds, dividend stocks, treasuries, intellectual property that you have licensed. There are thousands of sites and books and courses that can teach you about those types of passive income so I won’t go into them here, but I will cover the one type that doesn’t get covered — passive income from a business you own. (Read “Rich Dad, Poor Dad” for an introduction to income-producing assets.)
Foolish Adventure is all about making a living from building your own business and we haven’t covered making passive income because there is so much to say about how to first get Earned Income.
But today, I’m addressing Passive Income.
To get passive income from a business you must own the business (asset), have positive net income and a management team to run the whole thing.
- If you don’t own the asset, you don’t have any right to it and therefore won’t have passive income.
- If your business isn’t earning a profit, then you won’t have any income from the ownership of it.
- If you don’t have a management team in place to run the business, it will either fail or you will need to manage it and then it won’t be passive.
Look at everyone who is promoting passive income on the Internet and you’ll see that not a one of them is earning passive income. If they stopped working in their business, the business would fail. Maybe not immediately, but in time it would.
Their AdSense sites would start losing rankings and their click-throughs would drop and their income would plummet. Or if their outsourcer realizes that the owner isn’t paying attention anymore, may just change the AdSense account to himself or just copy the whole thing and do his own.
Nearly everything that Internet Marketers claim is passive like iPhone apps, AdSense sites, affiliate marketing, ebook sales, etc all need constant maintenance and vigilance since the Internet changes. Customers want different things. Google tweaks its algorithm. Competitors knock off your sites.
And it’s usually all of the changes happening at once. Google is always changing its search criteria. Customers are always looking for the next great bargain or cool gadget. And competitors are always trying to make more money and take more market share.
Burn this into your brain: THERE IS NO SUCH THING AS A PASSIVE BUSINESS.
All businesses are Active. None are Passive.
Management Teams & Passive Income
Either you or your management team must be actively working on the business or it will collapse.
You may have noticed that I’ve not said “manager.” I have written only “management team.”
If you have a single manager running your business, then you will always have to be engaged with the management of that company. One person is not a system.
One manager is a single point of failure. This means if the manager gets sick, quits, dies or does a poor job, your business will suffer and you’ll have to jump into action immediately. And if you’ve been on vacation for the last two years and don’t know anything about your company anymore, then your business will probably fail before you get up to speed on how to run it again.
To get Passive Income from your business, you must have a management team with systems in place that will improve, or at least, maintain solid management over time. A solid management system will probably include a board of directors.
Here’s the thing, if you are capable of building a business that can be large enough to support a solid management team, you probably don’t want to retire especially if you’re a young go-getter. But, okay let’s assume you’re going to retire from this business.
I would recommend that you at least sit on the board of directors and read the quarterly and annual reports so you know what’s going on in your business. If you’ve also got a solid board of directors, you may feel comfortable that your business will last at least until you die or hopefully last for many generations.
If you read the above and thought that all that management team and board of directors talk sounded like a lot of work, then you’d be right.
I can just hear some people saying that they wanted to get into this whole Internet thing so they can make Passive Income and not have to work hard to build all that corporate mumbo-jumbo.
Well here is the truth:
If you don’t build a company big enough to support a solid management structure, then you will NEVER earn passive income from your business.
You can earn more than you spend, though.
When you earn more money than you spend on your lifestyle, you can invest that money into income-producing assets that will generate passive income.
This is the reality for 99+% of all business owners. Most of us will never build a big company so we better make sure we are investing our hard-earned dollars into assets that make us money.
Now that I’ve told you the truth about Passive Income, you have a choice…
Do you stick to the fantasy being sold by Internet Marketers or do you pick one of the paths that actually lead to true passive income?