What are royalties: a simple explanation for beginner entrepreneurs

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In business, franchising, and creative industries, there is often a term that confuses even experienced professionals. Many want to know what royalties are. Its mechanism is based on the right to use someone else’s intellectual property or business model. Understanding the details makes it clear: regular payments are not an abstraction but a specific financial instrument that affects profit calculation, business model development, and the legal structure of the contract.

What Are Royalties in Simple Terms

Royalties are regular payments for the right to use intangible assets. Such assets can include a brand, trademark, patent, copyrighted work, technologies, or a business system. The rights holder, known as the licensor or franchisor, grants permission for use, and the recipient, the licensee or franchisee, pays a fixed or variable percentage.

To understand what royalties are, it is enough to consider a simple example: a writer publishes a book through a publishing house and receives a percentage for each copy sold. Or a café opens as part of a well-known franchise and pays a monthly percentage of revenue to the brand owner.

Royalties in Franchising: How Does the Mechanism Work?

In franchising relationships, regular payments play a key role. What are royalties in this context? Regular payment for the right to use a business model, brand, marketing, technical support, and other intangible assets. Payments can be monthly, quarterly, or annual.

The amount may depend on turnover, net profit, a fixed percentage, or even a mixed scheme. When a novice entrepreneur decides to open a franchise business, they face not only an initial one-time fee but also ongoing obligations. This distinguishes such models from simple brand purchases.

Many wonder: what is the difference between an initial fee and royalties? The answer is simple — the first is paid once upon entering the system, the second is paid regularly as part of ongoing obligations.

Types of Franchise Fees: By Calculation Method and Application Area

The variety of applications has led to several classifications. Below is a list to help navigate the concepts:

licensing — payment for using a patent, software, musical work;
copyright — percentage of sales of books, films, songs, architectural projects;
franchise — regular payment for a business model and brand;
extractive — payments to the state for the right to use natural resources;
mixed — a combination of different schemes and conditions.

Each format is regulated by a contract that clearly specifies what royalties are: their amount, payment frequency, and conditions for terminating cooperation.

Calculating Royalties: What Affects the Rate?

The formula depends on the agreement’s conditions. The most common option is a percentage of gross revenue. Sometimes a percentage of profit, a fixed rate, payment per unit of product, or a conditional value expressed in basic units are used.

The calculation must be transparent for both parties. Often, adjustments are specified in the contract, such as excluding advertising or transportation expenses from the total amount.

Predictability is important for franchisees. For franchisors, it ensures a stable income. Both sides are interested in a clear algorithm. Any misunderstandings lead to disputes.

Taxation: How Are Payments Accounted For?

Any payment requires accounting. What are royalties in terms of taxes? In Russia, they are an expense that reduces the taxable base when there is a licensing agreement. The recipient must declare the income and pay personal income tax (if an individual) or corporate income tax (if a company).

Royalty taxation depends on the parties’ status, payment currency, and the existence of an international agreement on double taxation avoidance.

Companies must report, confirm the right to use, and justify the amount. Individuals should note that regular author royalties also fall under this concept and require appropriate declaration.

Franchise Fee and Copyrights: Who Pays and for What?

Musicians, writers, designers, photographers — each can earn passive income from their intellectual work. When signing a contract with a platform or publisher, the terms specify the amount and frequency of payments.

What are royalties in the context of authorship? Compensation for the use of a work. Payments often depend on sales, views, or use in advertising. Sometimes a fixed amount is paid per copy or a percentage of the platform’s revenue.

Modern technologies allow for automated calculations and tracking of statistics. Services have emerged where calculations happen automatically, such as streaming platforms.

Advantages and Disadvantages for Business

Like any mechanism, the payment system has pros and cons. Below are key aspects considered when developing a strategy:

allows monetizing intellectual property;
provides passive income to the author or brand owner;
encourages franchisees to increase revenue;
increases income stability;
requires a clear legal basis;
depends on revenue fluctuations;
can be burdensome for new partners;
requires regular accounting and reporting;
complicates taxation in international schemes;
requires supervision from the rights holder.

What are royalties in real practice? An instrument whose effectiveness depends on the transparency of the scheme, reliability of partners, and compliance with contract conditions by both parties.

Where Is Brand Payment Most Commonly Applied?

Payments for intellectual use agreements are found in many industries. The most common areas include:

franchising — restaurants, salons, delivery services;
entertainment industry — music, films, theatrical productions;
publishing — books, magazines, digital formats;
IT — licenses for software, algorithms, databases;
pharmaceuticals — use of formulas and patents;
resource extraction — oil, gas, minerals.

The question “what are royalties” inevitably arises in all industries where someone else’s intellectual or commercial model is used.

What Are Royalties: The Main Points

Payment for rights usage is not just a form of payment but a legally significant tool for monetizing knowledge, brands, and talents. It allows creators to receive compensation for their work and businesses to use proven models.

Understanding what royalties are opens the way to smart investing, effective franchising, and rights protection. Successful companies and authors use the payment system as a way to build sustainable, long-term income. The key is legal clarity, transparent calculations, and professional support.

How much money do you need to create passive income?

Financial independence requires a regular flow of funds that is not dependent on daily activity. Such a mechanism creates structured capital that operates without direct human involvement. The amount of money needed to generate passive income is not a theoretical question, but purely practical. The answer depends on goals, level of expenses, available tools, risk, and investment horizon.

How Much Money Do You Need to Generate Passive Income: Setting Goals

Creating sustainable passive income starts not with choosing an instrument, but with defining a financial goal. The main parameter is the amount needed to cover regular expenses without active involvement. Without a clear understanding of the expenditure side, it is impossible to correctly form an investment portfolio or forecast the time to achieve financial independence.

Strategy Mathematics: How to Calculate the Capital Amount Needed

Passive income is the result of multiplying capital by yield. The main calculation formula looks like this:

Capital = Annual Expenses / Effective Yield

Here, by yield, we mean the real rate after deducting taxes, inflation, and drawdowns. Planning based only on the nominal amount and ignoring expenses will lead to errors in the strategy.

The amount of money needed to generate passive income reflects the balance between desired expenses and portfolio yield. The higher the regular expenses, the larger the initial amount. Increasing yield reduces the required capital, but at the same time increases risk and volatility.

Emergency Buffer: How Much Money Do You Need to Generate Passive Income

A common mistake in calculations is ignoring financial cushions and reserves for unforeseen expenses. Formally, the capital may provide the desired level of income, but in a crisis situation, this reserve may be insufficient. The recommended buffer is at least 12–24 months of expenses in highly liquid instruments:

savings accounts;
short-term bonds;
deposit products;
currency reserves.

The amount of money needed to generate passive income should be calculated not minimally, but based on a scenario with a “margin of safety.” The reserve covers inflation spikes, asset value declines, and temporary payment pauses.

Adjusting for Inflation: Real Needs in 5–10 Years

Planning without considering inflation devalues the strategy. With an average annual rate of 6%, the cost of expenses over 10 years will increase by 79%. That is, the need for 100,000 ₽ per month in a decade will turn into 179,000 ₽. To maintain purchasing power, the tactic should include reinvesting part of the income. This creates a “capital ladder” where the base works for current profit, and excess yield increases the base capital.

Income Generation Tools: Which Assets Create a Stable Flow

Income is not created by the amount itself, but by a correctly chosen asset. Each instrument has yield, risk, liquidity, and tax specifics. Placement formats:

Bonds generate regular coupons, with a yield of 8–12% after tax deduction.
Stocks provide dividends, but with volatility and unstable yield.
A deposit offers guaranteed but low yield — 6–9%.
Real estate yields rent but requires capital investments.
REIT funds provide access to real estate without purchasing property.

The amount of money needed to generate passive income is determined by the yield of the chosen instrument. The higher the stability, the more capital is required.

Dividends and Coupons: Direct Cash Flow

The financial flow in the passive income model arises from regular payments from investment instruments. The main sources are stocks and bonds. The mechanics differ, along with the calculation of the final yield.

Difference Between Dividends and Coupons

Stocks provide variable income, depending on the company’s profit, its financial policy, and market conditions. Dividends can change or be temporarily suspended. The level of payments depends on the board of directors’ decision. Bonds generate fixed payments — coupons specified in the loan agreement. Payments are not dependent on the market price of the securities. The issuer transfers the amount according to the schedule if it maintains solvency.

Net Income Calculation

With an investment portfolio of 20 million ₽:

Stocks with a dividend yield of 10% will provide 2 million ₽ per year.
After deducting 13% personal income tax, 1,740,000 ₽ will remain.
The actual monthly payment will be around 145,000 ₽.

Exchange rate risks can reduce the capital value. Even with stable dividend payments, a 25% decrease in the market price will lead to temporary liquidity reduction and emotional pressure. The amount of money needed to generate passive income is determined not only by dividend calculations but also by the willingness to hold assets during downturns.

Real Estate and Rent: Alternative to the Stock Market

Rental income is an option for those who prefer physical assets. Real estate creates a stable flow but requires special attention to expenses, liquidity, and maintenance. When purchasing an apartment for 8.5 million ₽ in a million-city with a rent of 38,000 ₽/month:

Annual gross income — 456,000 ₽.
Reduction due to 13% personal income tax — 59,280 ₽.
Losses due to vacancy — 1 month per year (–38,000 ₽).
Insurance, depreciation, minor repairs — another approximately 30,000 ₽.
Net annual income — 328,720 ₽.
Yield — 3.87%.

To receive 1.2 million ₽ per year, a minimum of 3 similar properties totaling 25–26 million ₽ is required, considering all overhead costs.

Real estate requires:

Significant one-time investments.
Property maintenance.
Involvement in legal matters (contracts, taxes, registration).
Ongoing expenses (utilities, insurance).

The amount of money needed to generate passive income through real estate depends on the region, rental level, type of property, and ownership format (personal or through a fund).

Yield and Taxes

Financial platforms and advertising materials often indicate gross yields that do not reflect the final profit. The net result is obtained only after considering tax, inflation, and hidden costs.

Financial snapshots:

Bank: deposit at 9% with personal income tax — 7.83% net.
Stocks: 10% dividend — 8.7% after tax deduction.
Bonds: 11% yield — remains at 9.57%.
Real estate: 5.5% rent — after tax and vacancy deduction — 4.2%.
ETF: index fund with 6.4% dividends — effective yield 5.6%.

The actual result depends on tax residency, applicable deductions, and investment form (on an individual investment account or standard).

Risk and Strategy: Income Cannot Be Separated from Loss Probability

Higher income is always associated with an increased likelihood of drawdowns. The asset’s reliability affects the amplitude of income. Risk management:

The stock market is subject to corrections, especially with high concentration in one country or industry.
Real estate reacts to economic cycles, laws, and demand declines.
Bonds lose value with a rise in the key rate, especially with a long time to maturity.
Currency assets attract with yield but carry the risk of exchange rate fluctuations and double taxation.

A portfolio with a declared yield of 12% may decline by 25–35% over several weeks in a stress scenario. Without assessing volatility, it is impossible to objectively calculate the real strategy.

Risk is managed through:

Diversification across asset classes.
Reviewing allocation with changes in macroeconomics.
Setting limits on one issuer.
Building a reserve cushion for 6–12 months of expenses outside the investment portfolio.

The amount of money needed to generate passive income depends on the tolerance for volatility. The higher the tolerance for drawdowns, the less capital is required. A conservative model requires more funds.

So How Much Money Do You Need to Create Passive Income?

Specifics replace theory. The right approach ensures results, while the wrong one leads to losses. Passive flow requires investments ranging from 10 to 25 million ₽, depending on goals, risk, and horizon. The strategy should consider taxes, inflation, source reliability. The amount of money needed to generate passive income is a question solved by numbers, not slogans.

August 26, 2025

Best Passive Income Options in 2024

Financial freedom seems like an unattainable dream for many, but making money in 2024 will be easier than it was 10 or 15 years ago. In a volatile economy with constant fluctuations and rising inflation, additional income becomes a lifeline that helps you not only survive, but also thrive. Let’s look at passive income opportunities that can be the beginning of financial freedom.

How to make your first money with minimal investment: passive income opportunities

There are several basic ways. These can be shares and ETFs, online projects or crowdlending. It is important to understand that each of these options requires an initial investment. However, with the right approach, you can generate a stable income from it. How do you make your first money? It is advisable to start with small investments, carefully selecting projects and gradually increasing capital.

Real estate investments

For beginners, real estate investments are still one of the most stable investment options for generating reliable passive income. Many people think you need millions to get started, but that won’t be the case in 2024. There are also many options for beginners, such as jointly buying commercial property or investing in apartments to rent out later. The real estate sector in Russia has many opportunities that do not require high initial costs.

The key concepts remain liquidity and profitability. It is important to determine the potential of the property, consider maintenance costs, and evaluate the potential for the property to increase in value. The combination of stability and long-term benefits makes this an attractive option.

When you invest, you can not only earn a steady profit, but also use debt leverage to increase your profitability. This allows you to earn monthly profits by renting out commercial space, creating a steady financial flow. Additionally, the increase in real estate prices over time can significantly increase the capitalization of the asset. When choosing a property, it is important to take into account the location of the area and development opportunities. These have a direct impact on liquidity and profitability.

Investing in stocks and ETFs

Stocks and ETFs provide a great way to generate passive income with minimal investment. This method is suitable for those who want to make a profit by investing money without worrying about the complexities of the stock market. For beginners, investing in stocks and ETFs can be the first step towards financial freedom, especially if you start small and gradually increase your investment.

How do you start investing in ETFs?

By purchasing an ETF, the investor becomes the owner of a part of a large, diversified portfolio managed by professionals. ETFs are the best choice for novice investors as they provide access to the markets of several countries and regions at the same time. This is especially attractive for those who want to minimize risk and diversify their investments.

Part

Investing in shares of large companies provides the opportunity to receive regular dividend payments. Companies such as Gazprom, Sberbank and international giants such as Apple and Microsoft pay dividends to their shareholders, creating an additional source of passive income. In addition, the stock price may rise, giving you the opportunity to make money if you sell the stock at a higher price.

Create an online project

Online projects are one of the most accessible and promising ways to generate passive income. Possible formats include blogs, YouTube channels, educational courses, etc. It does not require any large investments, just an idea and access to the Internet. Anyone can start their own project, whether it is creating content or selling services and knowledge in digital form.

For example, a cooking blog that generates revenue through ads and affiliate programs, or a YouTube channel that generates revenue from views. Internet projects run 24 hours a day, do not require constant presence and allow you to earn money at any time of the day.

How to earn passive income without experience?

One solution to this is to create courses. People are willing to pay for knowledge and creating online courses provides an opportunity to earn passive income even long after the course is ready. Platforms like Udemy and Coursera offer you the opportunity to earn money by publishing courses and selling your knowledge. It is important to choose a topic that is in demand and provide quality content. Only then will your course get a high rating and attract more buyers.

Passive income through crowdlending

A relatively new method that will gain popularity in 2024. The idea is that private investors provide loans to small businesses through special platforms. In return, they receive interest on these loans. This is a great way for those who want to receive payments with minimal investment, as the barrier to entry to crowdlending platforms is very low.

Its benefits lie in accessibility and the possibility of spreading risk. Investors can choose several small projects, which will help them diversify their investments and limit potential losses.

For example, in Russia through the Startrack platform you can invest in promising startups and earn income as they grow. This is a great option for those who are looking for sources of additional income and want to do something new.

Conclusion

There will be countless opportunities for passive income in 2024. This is a great opportunity for anyone seeking financial freedom. Investing in real estate, stocks, ETFs, starting your own online project or participating in crowdfunding creates opportunities for independence and contributes to building a sustainable financial platform. If you start today, you can create a stable source of income in a few years and minimize the impact of financial risks.

August 26, 2025