Sharon's Notes Although Robert discusses the entity, and timing issues as simple tax planning vehicles, it is important to understand that all decisions related to entity selection as well as in- come timing issues should have legitimate business pur- poses and be thoroughly discussed with your legal and tax advisors. Although Robert uses-these tax-planning oppor- tunities personally, he does so with the careful guidance and planning of his legal and tax advisors. The chart on page 272 describes the various forms of busi- ness entities and related issues that you need to consider when choosing the right entity for your individual needs. It is imperative that you carefully review your individual fi- nancial and tax situation with your legal and tax advisors in choosing the right entity for your business. Character of Income As far as the third component of the E-T-C, rich dad would say, "Investors control. Everyone else gambles. The rich are rich because they have more control over their money than the poor and middle class. The moment you understand that the game of money is a game of control, you can focus on The Sophisticated Investor 271 what is important in life, which is not making more money but gaining more financial control." Reaching for his yellow pad, rich dad would write: 1. Earned income 2. Passive income 3. Portfolio income "These are the three different kinds of income." Rich dad would stress that I should know the difference between these three different types of income. The С of the E-T-C stands for the character of the income. "Is there a lot of difference?" I would ask. "Very much so," he would reply. "Especially when com- bined with the E (entity) and T (timing) of the E-T-C. Controlling the characteristics of your income is the most im- portant financial control of all. But you may first want to con- trol the E and the T" It took me awhile to fully appreciate and understand why controlling the characteristics of these three different types of income is so important. "It's important because the characteristic of the income is what separates the rich from the working class," rich dad an- alyzed. "The poor and middle class focus on earned income, also called wages or paycheck income. The rich focus on pas- sive income and portfolio income. That is the fundamental difference between the rich and the working class, which ex- plains why control of the С (characteristic) is a fundamental control, especially if you plan on being rich." "In America and other advanced economies, even the first dollar of earned income is taxed at higher rates than passive and portfolio income. The higher rates are necessary to pro- vide various forms of 'social insurance,'" rich dad would fur- ther explain. Social insurance stands for payments the government makes to various people. (In the United States, this would include Social Security, Medicare, and unemploy- ment insurance, just to name a few.