Do I Need An LLC?


Show Notes

One of the big decisions when you start a business is how to structure the legal entity. Do you need an LLC? What is a DBA? Why do people have S Corps? All those details and more in this episode.


[00:00] Steve: Hi there. I'm Steve.

[00:02] Tyler: And I'm Tyler. And this is It's Not About the Money, where we discuss topics like entrepreneurship, leadership, productivity, and maybe even money.

[00:12] Steve: Hopefully we won't bore you with financial jargon or the tax code, although we might especially on this episode.

[00:18] Tyler: Yeah, especially on this episode. But if we do, it won't be on purpose.

[00:23] Steve: We're just a couple of small business owners trying to make sense of the world one podcast at a time.

[00:28] Tyler: And in this episode, Steve is going to walk us through the different types of entities that you can create or use when you're running a small business. And I'm excited to learn because I recently went through this process myself and had to figure it out and it was a little confusing and a little complicated. So Steve is here to walk us through it. Steve, when did you learn about these entity types yourself?

[00:55] Steve: Well, as a tax professional, I get these questions a lot from potential clients, especially when they're first starting out as a solopreneur. They have an idea, they want to turn it into a side gig, but they don't know, do I need to make an LLC? What's it going to look like on taxes with whatever choice I make, all those kind of things. And so I really like to give them a broad overview of here's all of the entity types that you should be thinking about right now and what they might look like down the road as well. And then we'll get some concrete advice for them of what does it actually make sense to do right now for your particular business. Great.

[01:38] Tyler: That's awesome. My experience with these questions is fresh. I'm still not even sure if I've made the right choice. So I'm excited to learn from you on this.

[01:50] Steve: And the good news is that most of these things are not one way doors. You can change your mind later if it doesn't make sense or if it doesn't work out the way you wanted it to. You can always change your mind. So that's good too. Great. So I was thinking as we go through these, maybe it would be useful to have sort of a hypothetical example person business owner, and we can talk about their needs at each stage of the business and why they are making the decisions that they are. That might kind of give a good structure for it. What do you think of that?

[02:27] Tyler: I think that's a great idea.

[02:28] Steve: Do you have any ideas for who our business owners should be or what they do?

[02:34] Tyler: Sure. Actually, maybe we could use an example from my real life last year, unrelated to the coaching business that I currently run. But last year I had the opportunity to potentially purchase a vending route just locally here in the town where I live.

[02:51] Steve: Like vending machines?

[02:53] Tyler: Vending machines, that's right.

[02:54] Steve: Okay, that's cool.

[02:55] Tyler: They're vending machines. They're in places like hotels, office buildings.

[02:59] Steve: That kind of thing.

[03:00] Tyler: And this particular route, their thing was they kind of were focusing on, quote, healthy snacks. Don't know how healthy they were. Right. But it was interesting. It was an interesting opportunity because it was very high margin for a vending machine route and it was in my local area. It would have been great. Spoiler alert. I ended up not being able to purchase it because someone beat me to the punch. But I was looking into it and I had a lot of questions. I was talking to my accountant. I was looking for a lawyer maybe even to represent me and figuring out how to structure the deal and the entity and everything. So maybe we could use as an example of Vending business, you could start really small with just one vending machine and then there are obviously giant corporations that do Vending also. So it's the whole spectrum potentially of business size and complication.

[03:49] Steve: Awesome. That's a great example. And so as the owner of this business you would then contract with the locations where the vending machines are to provide the vending machine as a service, sort of a thing.

[04:06] Tyler: Yes. It would be some kind of agreement. Not necessarily contractual. I think it just depends on the location. But you'd basically come to an agreement with the owner or the manager of the space. Like if it was the lobby of a hotel or like I said, the lobby of an office building or something. And basically, at least for this particular route, there wasn't any monetary exchange there. They just wanted to be able to provide the service of Vending for their patrons. And it was up to the company to well, up to the vendor, the owner of this thing to provide, maintain, stock the machines.

[04:46] Steve: Okay, love it. Let's do it. So the starting point for any business, especially one like this where it's just the one owner is called a sole proprietorship. Sole proprietorship. And that is known as a pass through entity. Do you know what that means?

[05:06] Tyler: Vaguely, but I think you better explain it.

[05:09] Steve: Okay.

[05:09] Tyler: My understanding is that it has to do with how an entity is treated for tax purposes.

[05:14] Steve: That's exactly right. Yeah. So for tax purposes, another name for it actually is disregarded entity. So it's a thing that maybe exists, but for tax purposes we pretend as if it does not exist. So a sole proprietorship, you don't have a legal entity yet. It's just you the person. So everything's under your name, your Social Security number, whatever it might be, and all the income and expenses for the business get passed through onto your personal tax return on the Schedule C. And that's different from some of the entity types that we'll see later on, where the business can become its own entity and it will file its own tax return. So we'll get to that later. But the sole proprietorship, the starting point is just a pass through entity, a disregarded entity. Everything flows through to the personal tax return.

[06:14] Tyler: So if you're operating as a sole proprietorship, is there any paperwork or registration that you need to do in order to run your business, or do you just go for it?

[06:24] Steve: That will depend a little bit on the local jurisdiction. If they have requirements as far as business licenses or you need to register with the city or anything like that. Especially if you've got clients visiting your premises, then you might have to do that. But for tax purposes, no, there's no special thing you have to do. You can just start operating a business under your own name at any time. Okay.

[06:51] Tyler: And if I did need a business license with the city or whatever, that would just be my own personal name, not the company's name. Right.

[06:59] Steve: Although let me caveat that there's a thing called a DBA or a doing business as it's also called a fictitious name or a trade name. This is where you want to operate the business under something other than your own personal name. So in this example, we'll say like Jane's Vending might be the name that they want to pick rather than operating it as Jane Doe. They want to advertise the business maybe on their website or on their business cards as Jane's Vending. But they don't have a legal entity yet. So they would go to it's typically either the county or the state and file some paperwork to say, I'm going to operate a business, me as the individual. Here's my name. This is what the trade name of the business is going to be. And then if they might do like a name search to see if that name is already being used by anyone. But if not, then they'll say, great, here you go. You can now start operating under that name.

[08:06] Tyler: Did you say fictitious entity?

[08:10] Steve: Yeah, fictitious name.

[08:11] Tyler: Fictitious name. Okay. That's interesting. I'm glad we've got you on here as an expert because I always think that the wording in these things kind of gets funny and it starts to sound like legalese to me a little bit. It's kind of splitting here.

[08:22] Steve: So that's interesting.

[08:24] Tyler: Fictitious name. So basically, what is that referring to? Fictitious. Meaning there isn't a separate legal entity. I don't want to say fake, but it doesn't exist. But we're giving it a name anyway.

[08:37] Steve: Yes, that's exactly right. There's not a separate legal entity for it, but it's not fictitious in the sense of it does not exist in the real world, but that there's not a legal entity underpinning it. It's just the person. Although well, I should say you can also file for a DBA if you have an LLC. We'll talk about that in a second. LLCs? The LLC can operate under a different name than its registered legal name. Just the same as a person can operate the business under a separate name. Than their personal legal name. The fictitious doesn't mean necessarily that there's not a legal entity under it, but it means that the name is different from the legal name of the person or entity operating the business. That's a better way to say it.

[09:25] Tyler: Okay. And that could be either a sole proprietor or some other kind of entity. You could file doing business as if you wanted to operate under a different name.

[09:35] Steve: Yes, that's right.

[09:36] Tyler: Interesting.

[09:39] Steve: When you are operating as a sole proprietor, the important things to keep track of in this stage are keeping your business transactions separate from your personal transactions. This is going to be a theme through all of these as we go along. But always keep your business transactions separate from your personal. For one thing, that will make your tax preparer happy because it makes their lives much easier. But for your own sake, it also protects you if you get in an audit. It's much easier for the IRS to poke holes in things if your personal transactions are all mixed in with business, they can say, well, maybe this one isn't actually a business expense because you're also paying a bunch of personal expenses out of this account. And so we need more proof than if you have them separated out and you've got all the documentation on a business account.

[10:34] Tyler: So you say keep your transactions separate. As a sole proprietorship, would you recommend having a separate account entirely like a business account? Or is it okay to keep it all in your personal account since it's a pass through entity anyway, and just keep track of which transactions are for the business?

[10:53] Steve: Right, I would recommend having a separate bank account. It doesn't have to be a business bank account even. It can just be a regular personal bank account, but still keep it separate from the one that you where you spend your everyday personal transactions.

[11:11] Tyler: Okay, so this concept of keeping business and personal separate, it's with us here from the very beginning.

[11:17] Steve: Yes. And it'll also make things easier if you start to use bookkeeping software or budgeting software later on. If you've already got everything in a separate account, then that makes it so much easier to plug in because you can just say, read all the transactions from this account, they're all business transactions. Just plug them into the ledger and we're good to go, rather than having to go through everything and say, well, this one was business and this one was not. And just makes it a little simpler. Yeah.

[11:45] Tyler: So a question for you about a DBA or doing business as what are some of the why would you want to do that as opposed to just operating under your own name? Is it mostly for branding and marketing type reasons or are there any financial or tax implications or benefits for doing that?

[12:06] Steve: There are not any tax implications that I'm aware of. So it would really just be the marketing side or the appearance of legitimacy of this is a business separate from me, even though legally, tax wise, it's not. It is just you under the hood. But when you're out in the marketplace, you can market it as that name. Yeah, that's the primary reason that makes sense. Depending on what the business is, you may not need that. So it's really just going to be in the vending machine situation. Like you're still going to sign the contracts as your name because that is the legal name of the business. It's still your name as a sole proprietor, but in your marketing materials, your email, your business card, you can use the trade name there.

[13:03] Tyler: Okay, that makes sense. Actually, I have another question for you about business transactions. How important is it to keep your receipts for purchases that you make for your business expenses?

[13:17] Steve: I would say keep all your receipts, whether that's in a shoebox or you scan them into a dropbox folder or you email them into QuickBooks and it links them with your transactions. Whatever level you're at, keep the receipts because you might need them in an audit. Chances are you probably won't end up getting audited and you won't ever need those receipts. But if you ever do, you'll be really glad you had them. So I would say error on the side of keeping everything.

[13:48] Tyler: Okay. So at what point in Jane's vending business do you think it would start to make sense to consider moving on from a sole proprietorship?

[14:00] Steve: So the next step up from sole proprietorship would be to create a single member LLC. LLC stands for limited Liability Company. An LLC is still a disregarded entity. It's still a pass through entity as far as taxes are concerned. But the primary benefit you get with an LLC is liability protection, where if you become involved in a dispute or a lawsuit, your personal assets will be protected and the business assets are the things that are at stake because the business is the one entering into the contracts, conducting the business, all those kinds of things. So as long as you can maintain the entity properly as a separate thing from you as a person, then you have that liability protection if something were to happen, that's the primary reason you'd want to do this. So in the vending machine example, what do you think of that? What kind of considerations is Jane going to have with the vending machine business as far as liability?

[15:11] Tyler: Yeah, I don't know. I guess maybe she eats a snack from one of the machines or not. She one of her customers, buys something from her machines. Each snack gets food poisoning or something, I don't know. Or is upset because the snacks dot dispense properly and punches the glass and cuts their hand. I have no idea.

[15:29] Steve: Really?

[15:29] Tyler: I don't know.

[15:30] Steve: Right, yeah. So there's all kinds of examples where you might be liable and maybe the vending machines on someone else's premises. I don't know that you would have what am I trying to say? Like injury kinds of liability, although except maybe in the example of they broke into the window, but like if you're operating a brick and mortar store and somebody trips on the way in and breaks their arm, that's a classic example of where the business could be liable for some of those medical bills. And having an LLC and your business insurance that can cover those things is a really important protection for that kind of a business owner.

[16:21] Tyler: Yeah, that makes sense. So if I am Jane or even myself in my coaching business and I'm trying to decide whether I want to operate as just myself or sole proprietorship or an LLC, it sounds like really I have to decide if I'm worried about getting sued.

[16:41] Steve: Yeah, that would be the primary consideration. You could also make an argument that an LLC has a higher degree of legitimacy in the eyes of your potential counterparties. The folks that you want to do business with, where if they see LLC after the name, then they're like, oh, this is still legitimate company, this is not just Joe down the street.

[17:02] Tyler: Yeah, that makes sense.

[17:03] Steve: So that could be a good reason to do it as well.

[17:05] Tyler: So just like the DBA, there's an element here of visibility, of legitimacy and maybe of even marketing because you can choose a name for your LLC, right?

[17:15] Steve: That's right. And you'll typically go through a process of registering that with the state and part of that is doing a name search to make sure there's not already a business operating under that name. And when you file the paperwork that becomes part of the public record as well that this business was created here's. The name of the registered agent, which is another consideration. Typically what that means is the registered agent is the person who is authorized to receive communication on behalf of the company. So if you were served a subpoena, for example, they would go to the registered agent because they're going to be the one available during business hours to receive that kind of paperwork for the business anyway. All of that is in the public record. So again, as making the business appear more legitimate, that's a tally in that column.

[18:18] Tyler: Yeah. So what about reasons that you might not want to set up an LLC and just keep operating as a sole proprietorship?

[18:27] Steve: Well, all of that paperwork, especially if you decide to hire a small business attorney, is going to cost you a little bit of money up front. So maybe between 1000, $2,000, something in that ballpark. And then there's also a bunch of ongoing paperwork to maintain the entity. This is things like having consent forms that document. These are the decisions that the business is making. And the point there is all to keep the paper trail of this LLC is a separate entity from me as a person. I am the manager of the LLC, but I am doing things in the best interest of the business. I'm not just using the business to funnel through the things that I want to do as an individual. So the paper trail for that is important. But that's a little bit of work that you have to do on a regular basis just to keep things legitimate.

[19:26] Tyler: And you would not need to do the similar type of paperwork if you are sole proprietorship. Is that right?

[19:31] Steve: That is right, yes.

[19:33] Tyler: Because I guess with an LLC, you're really just trying to be able to prove if it ever came up that you are separate from your entity. This is kind of an interesting concept to me. It's a separate entity, but it's like not a person anyway. It's kind of an abstract concept, right? It's kind of cool.

[19:56] Steve: Yeah. It's piercing the corporate veil is what they call it, when when there's not sufficient evidence to demonstrate that the company is a separate entity from the person. That's the point at which your personal assets can become liable. So that's the reason it's so important to maintain that documentation all along.

[20:18] Tyler: How big of a business can you have as an LLC? It seems to me like I've seen everything from a small one person business using an LLC all the way up to rather large businesses. I just saw a giant landscaping company truck out in front of my neighborhood the other day. They were an LLC.

[20:39] Steve: That's right. I think even Google is an LLC now. When they reorganized into the parent company Alphabet, that had as like a holding company that has a bunch of other companies inside of it. Google, the legal entity, became an LLC at that point rather than an incorporation.

[21:01] Tyler: Interesting. So there seems to be no size limit.

[21:05] Steve: Yeah, right. But probably worth saying that if you are expecting your business to grow. If Jane is expecting her vending machine business to grow, she can keep the LLC for a good long time and maybe forever. If it continues to make sense, then yeah, that can be the final stop and that's totally fine.

[21:26] Tyler: Okay. So one of the questions that I had when I was thinking about how to set up my own business is I had heard, right, that you can use a business entity for some kind of tax advantages right. By deducting business expenses for one, which it sounds like works regardless of the entity type, as long as they're legitimate business expenses. But there's something about being treated by your entity as an employee or something. I'm not even really even sure what to ask about this. How do taxes work with a single member LLC? You said it's a pass through entity. It's a disregarded entity. Just like a sole proprietorship. It sounds like all of your revenue, all of your income is just going towards your personal taxes as well as the business expenses that you're deducting.

[22:17] Steve: Yes, that's right. For a single member LLC, it's going to get passed through to your Schedule C on your personal income tax return just the same as it would be if it were a sole proprietorship.

[22:30] Tyler: And does the entity also have to pay taxes or is it just you?

[22:33] Steve: No, just you.

[22:34] Tyler: Are there any additional taxes besides income tax that I would owe on business income?

[22:42] Steve: Yes, there is the regular income tax that will get assessed after you account for business income and business expenses. But besides that there is also self employment tax and what that is, is as a W two employee, you'll know that there's a bunch of taxes that get taken out from your gross pay before the money actually hits your bank account. And some of those things are the Medicare and the Social Security tax. When you are a sole proprietor or a single member LLC, you also have to pay that tax on your income, but you have to pay both portions of it, the employer part and the employee part. So the thing that you don't see on the pay stub as a W two employee is what the employer is paying, but they're paying the same amount as you are typically. So it's double what you see on the paycheck. But as an employee, you only had to pay half of that. When you're self employed, you pay both sides of that, but you get to take a deduction for the employer half of it.

[23:59] Tyler: Oh, interesting.

[24:02] Steve: It'S on a separate schedule in the tax return and your tax pro or the tax software will calculate that for you automatically. So it's not something that you have to worry about, but it is an additional tax that you are paying. But let's see, the reason for that though is because a sole proprietorship and a single member LLC are a pass through entity. The company is not paying the employer side of that. It's all the income is getting passed through to you as the individual. So that's why it shows up on your personal tax return. When we get down to like a C Corp, which is a separate legal entity, it pays its own taxes on its own income and then pays salaries or distributions to its employees and owners and shareholders and it gets taxed again when the money goes to those individual people. So the corporation is paying taxes and the individuals are paying taxes.

[25:04] Tyler: Now I know why you like this topic because you're a tax person. There's a lot of taxes involved in all there is a lot of taxes. Yeah.

[25:15] Steve: Those taxes are the primary reasons for why you would want to choose one of these over the other. Okay, that's interesting. It depends on because some of it is really just liability protection. Like the difference between sole proprietorship and single member LLC is really just like liability protection. And that's on the legal side, there's not really a tax difference. But as we go on here, we'll talk about Scorp and C Corps. That's where it really comes to taxes and how much money are you making and does it make sense to switch to one of those other things to get a more favorable treatment?

[25:51] Tyler: Well, that's what I was interested in. How do we get more favorable tax treatment? Is it time to move on to talk about the next type of entity? Or is there anything else you want to say?

[26:00] Steve: No, let's do it. Let's go ahead. So when you have revenue above a certain level, where the amount that you're taking home as the owner is, I don't know, in the in the 100,000 range is typically a good rule of thumb for when you want to start thinking about this. At that point, it may make sense to make an election called an Esque election. You're still keeping your single member LLC, but you're electing to be taxed differently on that entity. And in so doing, you can pay yourself a salary as the owner. And as a matter of fact, you have to if the business has profit, you have to pay the owner a salary, the shareholder. And let's see, so you have the owner's salary, but then you can take additional income on top of the salary. If you had more profit that you want to go to you personally, you can treat that as a distribution which gets taxed differently. You don't have to pay the self employment tax on that portion of it.

[27:12] Tyler: Interesting. So that's like your because you own it, that's your share of the profits on top of your salary, basically.

[27:19] Steve: Yes, exactly. That's right. And so when you're getting to that size of the business, that's when it starts to make sense. The reason you would want to wait that long is because there's a lot of additional costs that come with compliance on that side because you've got to run payroll now. You have to file a separate tax return for the business entity at this point. And then your personal tax return will also look a little bit different and potentially also involving your attorney with any of these things. So all of those costs together add up to a certain level where you don't want to do this too early, where you're not going to recoup those costs in your tax savings.

[28:07] Tyler: Oh, that's interesting. So basically you would want the extra work that's required for being taxed this way to pay for itself through tax savings.

[28:19] Steve: Basically, yes.

[28:22] Tyler: And would you as a tax professional be able to help me understand when my business was reaching that point, like when to pull the trigger?

[28:31] Steve: Yeah, I would. And the things that it's going to revolve around are how much profit the business is making and what your salary would be as the owner shareholder. There's a term that the IRS uses called reasonable compensation. And they don't define that. They don't nail it down. It just means sort of a hand wavy about what other people in the industry doing your thing with your level of experience, about how much they would get paid.

[29:04] Tyler: So they don't want you to take a salary of a dollar per year and then disbursement of $60,000 per year. That's exactly right, yeah, because that's where my mind went.

[29:14] Steve: Yes, that's precisely the reason for that. But there's just enough ambiguity around it that they keep you on your toes, I guess. Yeah. If you wanted to draw everything as a salary, the IRS would not have a problem with that because you're paying all the taxes on that, the self employment taxes on all of that the whole time. So they're fine with that. But the real benefit of an S Corp is you can take some of it as a salary and then the rest of it as distributions and save on the taxes. So one thing that we haven't mentioned yet about Scorp is that the income and expenses from the business flow to the owner shareholders 1040 on two ways. Previously, when it was a sole proprietorship or a single member LLC without the S Corp election, the income and expenses came in on the Schedule C, which is the self employment thing. And when you have the S Corp election, they'll come in on a W two, because you're drawing a salary, and that's the salary portion of it. And the distributions, the money that you're getting out of the business on top of your salary comes in on another form called a K one. And what that does is it shows you the total of the income and the expenses for the business, but it doesn't go into all of the detail that you have to on the Schedule.

[30:52] Tyler: C. So this is interesting. It sounds to me like electing to be taxed as an S Corp is a lot of additional work and potentially even expense. And the reason I say this is interesting is because up until this conversation, which I'm learning a lot from our conversation, I've kind of thought it would be awesome to build my own business to the point where it would make sense to be taxed as an S corp because of the perceived and this is just my perceptions, an uneducated tax person's perceptions, I guess you could say on the matter. I just heard about the tax advantages right. Which you explained a little bit has to do with you can control your salary essentially within reason, and then you can avoid paying additional self employment taxes on disbursements on top of the salary.

[31:47] Steve: Right, right.

[31:48] Tyler: But now with what you've explained about having to do payroll and this other paperwork and potentially getting counsel and things like that, now I'm wondering, boy, do I just stay as a single member LLC as long as. I can or will it does it scale with revenue? Like, if I'm making $200,000, that'd be awesome. As a single member LLC, would it just be dumb to continue to be taxed as a pass through entity because I'd be losing money at that point? Does that make sense? I don't know.

[32:22] Steve: Yeah. If you're making 200,000 profit in the business, you're definitely in that range of where you ought to consider making the S Corp election. The primary costs are the compliance, like you mentioned, the payroll and the additional work on the tax side. And that's going to come out to, I don't know, 5000, 5000 a year somewhere in that neighborhood.

[32:44] Tyler: Okay.

[32:44] Steve: But that doesn't scale linearly with the business. Those are pretty much fixed costs. That'll scale a little bit with the number of employees. That's more of where it'll come in.

[32:57] Tyler: Okay.

[32:58] Steve: Yeah. If it's just you and you're making 200,000 and the tax savings makes sense with those compliance costs, and then next year you make 300,000, your compliance costs did not scale up by another third or another half. They're going to stay pretty much the same.

[33:19] Tyler: If my self employment tax and my single member LLC is getting above these numbers that you've mentioned here, like, would you say $5,000 or something that it would cost me to run this through an S corp? Then it might be time to start thinking about, like, oh, I could be paying fewer taxes by organizing myself this way and coming out ahead.

[33:45] Steve: That's right. You're going to have to pay more money to your accountant and your attorney in the meantime, but you'll come out a little bit ahead and then hopefully down the line as your revenue continues to grow, then you keep those tax benefits on all the extra money you're getting after that point.

[34:05] Tyler: Okay. So conceptually, I think I understand that, but what I'm getting out of this is when the time comes, I will talk to my accountant.

[34:12] Steve: That's right. Yeah. So Jane, as she's starting with her first couple of vending machines, she doesn't need to worry about making an S Corp election at that point. So the other thing I'll say about the S Corp election that I've been saying for all of these is keep your business and personal finances separate and keep good accounting books. At this point, you really ought to have a good bookkeeper. If your revenue is this high as well, it's probably worth paying that paying a good bookkeeper so that you're not doing it yourself at that point.

[34:50] Tyler: Can we talk about that for a second?

[34:52] Steve: Sure.

[34:53] Tyler: I'm not actually clear on the difference between a bookkeeper and an accountant for my business because it seems like you're differentiating that here. Can you help me understand the difference?

[35:04] Steve: Okay. When you say accountant, are you thinking the guy that does the taxes?

[35:09] Tyler: Yes, sorry. My tax person.

[35:10] Steve: Okay. Yeah. Because you could use the term accountant to refer to both a bookkeeper and a tax professional.

[35:18] Tyler: Okay.

[35:18] Steve: Depending on who you ask. So that's why I clarified the bookkeeper is the person that's looking at all the transactions month to month as they're happening, making sure they get categorized properly, running financial statements so that you can see how the business is performing, potentially also running payroll for you, making sure vendor invoices get paid. That's sort of the galaxy of things that a bookkeeper might do for you. And you can certainly do all those things yourself, especially when you're small and just starting out, that's totally fine. But when you're getting to the point where your revenue is high enough that your time would be better spent building the business rather than managing the data entry and the categorization of things, where it would really make more sense to get the leverage of paying a bookkeeper to do that so you have more time back to build the business.

[36:18] Tyler: Yeah, that makes sense. So it's basically outsourcing the day to day financial record keeping of your business.

[36:27] Steve: Exactly. Yes. And if you have a good bookkeeper, they can also find ways of mining that data for useful business insights that can help you make better business decisions as well. Things that you might not notice yourself. Just keeping the books where a good bookkeeper can look at those numbers and say, for your kind of a business, these ratios look really good, or we could improve something over here just because they have so much experience looking at those numbers every day.

[37:02] Tyler: So there's an element of financial analysis potentially here.

[37:06] Steve: Yeah. Cool.

[37:07] Tyler: As we're talking about this, I'm like, I want to make it. I want to make it so that I can have a bookkeep, but I want to get to the leftkeeper. That sounds fun.

[37:17] Steve: Absolutely.

[37:19] Tyler: On the other hand, I'm a budget nerd and so maybe I'd like to do this for myself as long as I can. Forever, who knows?

[37:26] Steve: Right. Well, and especially at the beginning, I think it's really useful to be in the weeds with your numbers all the time just so that you know what's going on with the business. Yeah, so nothing wrong with that at all, especially when you're first starting out.

[37:41] Tyler: And I think one of the topics you and I have talked about discussing in an upcoming episode is how to best handle that as a really small or new business. Like I have. Right. What tools do I need?

[37:53] Steve: What?

[37:54] Tyler: So we'll save that for a different episode.

[37:56] Steve: But we should definitely talk about that because I have opinions. I think you do, too.

[38:00] Tyler: Good. I have uninformed opinions. We've talked about this and I'm running into limitations of the tool I use for my personal finances. So, yeah, there's lots to discuss here and unpack, I think, and I would love to hear your opinions on that because I don't know what to do.

[38:20] Steve: Yeah. I think a theme that you could take away from this discussion and potentially every discussion we have is there's more than one way to do it? And you'll get different answers depending on who you ask.

[38:31] Tyler: Yeah.

[38:31] Steve: And it's really going to depend on your business and what your goals are and all those kinds of things. Right. That comes out certainly in the legal structure, the tax structure of your business. And it comes out in all kinds of decisions that you have to make as a solopreneur.

[38:49] Tyler: So let me take a stab at kind of summarizing what you've taught me so far today. So basically the entity types that you've talked about are sole proprietor, single member LLC. And then for either of those entity types, you have the option of filing a doing business as if you want to operate under a different name than yourself or your entity. Right?

[39:15] Steve: That's right.

[39:17] Tyler: And both a sole proprietor and a single member LLC are tax the same. It goes to your personal tax return.

[39:27] Steve: Correct.

[39:29] Tyler: And so there's really no tax advantage to setting up a single member LLC, but there is an advantage for liability protection as long as you maintain it as a legally separate entity. However, as your business grows, you can choose to have your LLC taxed as an S Corp after you've made cross a certain threshold of revenue where actually any money that you spend on payroll and other expenses related to having an S Corp is paid for by the tax savings.

[40:01] Steve: That is right. And you said it correctly, that the Scorp is not a separate legal entity on its own. It's a tax election that you can make. Yeah.

[40:12] Tyler: So it sounds like for just about anyone who is thinking about starting a business, they're either going to start as a sole proprietor or maybe an LLC. What other entities are there and are they worth considering at this point for.

[40:28] Steve: Someone just starting out, that's probably all you need to know. But there are other entity types that you might need depending on the structure of your business or how big it becomes or who is involved in the leadership and the ownership of it. So the two big ones that we can mention are partnerships and C corporations. A partnership is where you've got multiple owners that want to divide up the income and expenses in a particular way, and that's typically taxed as a pass through entity. Each partner gets a K, one that then goes on to their personal tax return. So if you've got multiple owners, the partnership is also kind of the analog of the sole proprietor, where if you don't form an entity, then the default is a partnership and you have multiple owners where the sole proprietor, you only have the one owner. If you have multiple owners, the default, tax wise is a partnership.

[41:33] Tyler: Okay, so you and your business partners get together, you start doing business, you don't create a separate entity. Does this apply to things like I've seen you hear partnerships apply to groups like law firms, for example. Is it common for them to operate as partnerships?

[41:50] Steve: Yes, that is a very common structure for a law firm, an accounting firm. A lot of doctors offices operate that way. There's an analog of the LLC for partnerships, which is a limited liability partnership. And that's a thing that you could consider if that's the kind of structure you're creating. That's probably all the detail we need on partnerships. The other one is the C corporation. If the business gets big enough that you want to have investors or you want to go public, that you'll need a C corporation. And the main difference tax wise, between A C corporation and an LLC is that the corporation is its own entity, but it also pays taxes on its own income before it even distributes money to shareholders or pays employees and all that. So it's got its own tax return. So the income that's coming through a C corporation gets taxed twice, once when.

[43:02] Tyler: It'S coming into the entity and once when it's going out to its owners.

[43:07] Steve: Yes.

[43:08] Tyler: That seems like a bummer.

[43:11] Steve: If you're the owner, right?

[43:14] Tyler: I guess it's pretty good if you're like society and you want roads and things. So that's good.

[43:19] Steve: Well, yeah, that's true. And the benefit of having a C corp is the liability protection, the ability to have investors, to sell shares publicly, all of those benefits that we as society have decided to grant to companies. The cost to the company is that they have to pay taxes at the company level as well, but they get a lot of benefits out of it as well. So if that makes sense for your business, then that's where you want to go. But for most of the folks listening to this show, that's not going to apply, certainly at this stage and maybe ever, right.

[43:57] Tyler: Okay, I've got a question for you.

[43:59] Steve: All right.

[44:00] Tyler: This is one I've been dying to ask you because of my own experience, just for the record. I have my coaching business. It's a very small business. I work with a limited number of clients at any given time. I did decide to create an LLC, and for me it was primarily for the branding marketing legitimacy element. Right. I'm not going to realize any tax benefits from it or anything at this point, but I also kind of want the experience of doing it. I'm interested in this space. I'd like to learn about having a small business, et cetera. But I got different opinions as I talked to different people about it. So here's the question. Do lawyers and accountants see the issue of what kind of entity you should be using for your business differently?

[44:53] Steve: That's a great question. I have to imagine the answer is yes, if only because accountants amongst themselves see this issue differently. You'll get different answers from different accountants and so I imagine lawyers are going to come at it from the perspective of the law and what legal protections does the entity need? And those kind of things where accountants, or at least tax accountants like me are looking at it more through the lens of the taxes. What benefits are you going to get out of this or not?

[45:33] Tyler: That makes sense because when I talked to an attorney, a small business attorney, about this, their opinion was like, oh, yes, liability protection, it's very important. This is what we recommend. I talked to my accountant about it and he's like, well, do you think you're going to get sued? And I was like, no, probably. And he's like, well, don't worry about it. There's no tax advantage. I'm paraphrasing.

[45:58] Steve: Right.

[45:59] Tyler: But I just thought it was very interesting to talk to two different professionals who are both in the realm. I mean, he serves small businesses, so does the lawyer, and they just had different opinions on it. So I'm glad I did what I did because of the experience, learning experience. And I do like how separate it keeps things from myself. Separate bank account, separate books, separate credit card, all that kind of stuff, which I know you can probably do as a sole proprietor, but it just feels official.

[46:27] Steve: And even when you're signing contracts, you're signing it as the manager of the LLC, not as you.

[46:32] Tyler: That's right. It feels very official. I signed my name, manager of my LLC.

[46:38] Steve: Right. But I think this is a great example of why it's important to have a team of people around you who have these different perspectives so that the lawyer can come at it with their perspective, the accountant can come at it with their perspective. Your bookkeeper may even have a different perspective than the tax pro because they're more looking at the day to day and the business management aspects of it, where the tax pro just wants to see how do these transactions map under the tax return? If you can set up your Quickbook so it just maps directly under the tax return, tax pro will be happy. But that's probably not the best decision for you as the business owner because there's a lot of things you could learn from that data if you slice and dice it a different way anyway.

[47:25] Tyler: Yeah, that makes sense.

[47:26] Steve: Yeah. Useful to have a team of people around you.

[47:29] Tyler: That's great advice. Well, is there anything else you want to say on these topics before we call it a day?

[47:35] Steve: I think that is a good overview for folks. We can leave it there.

[47:41] Tyler: Okay.

[47:42] Steve: Maybe we'll come back to this topic over time. Yeah, that'd be interesting.

[47:46] Tyler: See how things develop from here.

[47:48] Steve: So best wishes to Jane with her vending machine endeavors. May she grow and profit.

[47:56] Tyler: That's right. We didn't end up talking about poor Jane very much, but yes, good luck to her. Good luck to us. As we work on our own businesses as well, and anyone else who is doing the same or thinking about doing the same, it's a lot of fun.

[48:09] Steve: Yeah. Thanks to all our listeners for tuning in today. Hopefully something here was helpful for you on your journey and you can join us again for another episode of It's Not About the Money.

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