Shownotes
How do you choose a legal structure for your business?
From sole proprietorships to LLC and S Corp, there are so many options to choose from it can become overwhelming to know which legal structure for your business makes sense at every stage.
(And if you’re like Kristen, you may not even remember what you got set up as initially if you’ve been in business for a few months or years!)
In this episode we’re answering the question, “What is a business structure?” and breaking down each of the different types including sole proprietorship, partnership, LLC, S Corp, and C Corp so you can understand when each of these would be beneficial for your business, the pros and cons, and who you should talk to to form the right structure for your needs.
03:03 — What is a legal business structure (and do I have one)?
05:15 — Sole Proprietorship
09:42 — Partnerships
11:22 — LLC
21:23 — S Corp
29:48 — C Corp
📚 RESOURCES MENTIONED
- Corpnet.com
- Legalzoom.com
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🛍 75+ TAX WRITE OFFS
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Transcripts
You, as the business owner, are ultimately responsible.
Speaker:And that's, I think, one of the things that's really positive
Speaker:but also really negative about.
Speaker:Today's kind of day and age, it's so easy to start a business.
Speaker:Everybody wants to be their own business owner.
Speaker:They want to work independently.
Speaker:They want to be in charge of their own schedule and it's so easy to get started.
Speaker:But it's also so easy to get started the wrong way.
Speaker:Yeah, it would behoove you to do it the right way.
Speaker:It would behoove you to do it the right way.
Speaker:Do some googling, do some research, take that responsibility, take
Speaker:that personal responsibility to get set up the right way.
Speaker:Welcome to the Know Your Worth Show, where we teach you how to think about
Speaker:your money differently so that you can achieve your sexy money goals.
Speaker:I'm Sydnee your money Maven and owner of Know Your Worth.
Speaker:And I'm Kristen Sid's Dimepiece bestie team member and busy mama
Speaker:twins here to make sure that those of us without a financial degree can
Speaker:still level up with each episode.
Speaker:Let's get started on reaching your next goal.
Speaker:Hello.
Speaker:Hi, everybody.
Speaker:Welcome to the Know Your Worth podcast.
Speaker:I am your co host, Sidney, and your money maven.
Speaker:And I am Kristen, Sid's assistant and BFF.
Speaker:Yeah, and we are on episode nine of the Know Your Worth podcast.
Speaker:Yeah.
Speaker:How was your Thanksgiving?
Speaker:It was great.
Speaker:Yeah.
Speaker:It was a really nice weekend.
Speaker:Really relaxing.
Speaker:Did a lot of the stuff that we wanted to do this weekend.
Speaker:So yeah, it was a great time.
Speaker:How was yours?
Speaker:It was good.
Speaker:It was great.
Speaker:Yeah.
Speaker:Lots of food, lots of family.
Speaker:The best.
Speaker:Can't ask for more.
Speaker:Yeah, absolutely.
Speaker:We hope you all had a wonderful holiday weekend and you enjoyed it to the fullest.
Speaker:We hope that you were able to get some good shopping if it was
Speaker:within your budget and Slipped outside my budget a little bit.
Speaker:I'm going to have to look at that with you.
Speaker:we did a pretty good job at our house.
Speaker:Did you?
Speaker:Yeah.
Speaker:Did you do like the Cyber Monday, the Black Friday?
Speaker:I always forget to do Cyber Monday.
Speaker:So we did do some Black Friday shopping.
Speaker:And it's nice to have the online deals over the weekend too.
Speaker:Do you guys go like wait in line places?
Speaker:We don't.
Speaker:We don't do that.
Speaker:We used to.
Speaker:We used to.
Speaker:Did you?
Speaker:Yeah, we did.
Speaker:We really liked it, actually.
Speaker:It was a lot of fun.
Speaker:it super fun.
Speaker:It was a blast.
Speaker:Yeah.
Speaker:No, I would make it stressful and ruin it for everybody.
Speaker:But you probably made it fun.
Speaker:I'm sure it was very enjoyable.
Speaker:What we're doing now is we are starting the Entrepreneurship
Speaker:Series of the podcast.
Speaker:What we're doing with these couple episodes that, we'll be sequential from
Speaker:here, and we'll always add to it as we get more questions, comments, and
Speaker:concerns from you guys About what you want to know related to this topic,
Speaker:but what we're going to do is really start from the beginning And today
Speaker:we're going to cover business structure.
Speaker:How do you choose a business structure?
Speaker:What is a business structure?
Speaker:And then some of the pros and cons of each of them, okay?
Speaker:Yeah, so throughout our series our plan is to start with like hey, I have this
Speaker:idea for a business What do I do first?
Speaker:What do I do next?
Speaker:Where am I now?
Speaker:And then we're going to move on to if I start making money, where do I
Speaker:want to invest and things like that.
Speaker:So we've gotten a lot of questions from you guys about like, I
Speaker:have this idea for a business.
Speaker:How do I monetize it?
Speaker:How do I start it?
Speaker:And so that's what gave us the idea.
Speaker:Absolutely.
Speaker:Yeah, cool.
Speaker:So what's a business structure?
Speaker:So do I have one?
Speaker:You do, you do, you do have a business structure.
Speaker:So much better than I thought it was.
Speaker:So when you're choosing a business structure, it's for legal
Speaker:purposes and taxation purposes.
Speaker:That's what the business structure is related to.
Speaker:There are a few different ones.
Speaker:And the main ones that we're going to talk about today are the sole
Speaker:proprietorship, the partnership.
Speaker:The LLC, the S Corp, and the C Corp.
Speaker:Those are the main ones.
Speaker:Does everybody need a business structure?
Speaker:So if you don't have a business structure and you have an EIN
Speaker:number, if you just applied, you're probably a sole proprietorship.
Speaker:If you just get an EIN number and you don't know what you are,
Speaker:and it's just you as the only owner, you are most likely a sole
Speaker:proprietorship or a single member LLC.
Speaker:Am I a sole proprietorship?
Speaker:That's what we would have to look.
Speaker:You're either structured as a sole proprietorship or a single member LLC.
Speaker:But I remember getting a little piece of paper that was like, this is your LLC.
Speaker:Yes.
Speaker:I would say generally people are filing as an LLC, a single member LLC.
Speaker:When you file as a sole proprietorship and as a single
Speaker:member LLC, those two to quickly jump ahead and then we'll come back.
Speaker:You are filing your taxes as a pass through entity.
Speaker:So it's, coming on to your personal taxes.
Speaker:So a lot of the times you can just use your social security number
Speaker:and your income for your business is tied to your social security.
Speaker:You report your taxes on a schedule C.
Speaker:You don't have to report your taxes like a whole separate business.
Speaker:It's a different tax form.
Speaker:And we're not going to get into the form numbers or anything like that
Speaker:because there's no need and you won't remember them, like you look
Speaker:them up anyway and we rely on our tax accountants for a lot of those.
Speaker:But it's a different form when you are a single member LLC or
Speaker:a sole proprietorship, you are filing your taxes through a
Speaker:Schedule C on your personal return.
Speaker:Okay, so let's back it up.
Speaker:The moral of that story is, is you can have a functioning business for
Speaker:six years and have no idea if you have an LLC or a sole proprietorship.
Speaker:So yeah, so let's back up.
Speaker:Yep.
Speaker:And it's okay.
Speaker:If you have your EIN number, I would say most, you're a single
Speaker:member LLC for the most part.
Speaker:Look into what you filed and look into what you registered with.
Speaker:But we're talking about today, if you haven't done that yet, what
Speaker:we would recommend you doing.
Speaker:And what your options are.
Speaker:Yeah.
Speaker:Exactly.
Speaker:Exactly.
Speaker:So walk us through the options for, and what they all mean.
Speaker:So the sole proprietorship is an unincorporated business
Speaker:with a single business owner.
Speaker:What that means is if you start a business by yourself and you didn't register
Speaker:with any business entity, you would be considered a sole proprietorship.
Speaker:So you didn't register.
Speaker:. social security number is what's carrying your business there.
Speaker:What are you selling?
Speaker:What could you be possibly selling?
Speaker:Anything!
Speaker:Yeah, you could be selling you could be selling anything.
Speaker:I would say that this typically happens with more service based businesses.
Speaker:Because if you have a product that you're selling and you have a sales tax
Speaker:ID and things like that, I would say you want a little bit more Protection.
Speaker:Protection.
Speaker:So you were probably guided in a way to have a an LLC.
Speaker:That would be my experience.
Speaker:Obviously everything that we're saying here, you absolutely
Speaker:should consult with your lawyer.
Speaker:Mm-Hmm.
Speaker:you absolutely should consult with your CPA that you're filing your taxes with
Speaker:and, talk them through what's the most beneficial for you in your situation.
Speaker:But the different structures have different levels of, protection
Speaker:for you, just like you said.
Speaker:Okay, so sole proprietorship is like, I'm a freelance web designer.
Speaker:Yes, yes.
Speaker:I do freelance copywriting.
Speaker:Exactly.
Speaker:Okay, so there's no exchange of goods, it's more of an exchange of work.
Speaker:And so there can be an exchange of goods, but Again, I would say in a typical
Speaker:fashion, it's, an exchange of, services.
Speaker:Yeah.
Speaker:Yeah, exactly.
Speaker:So they're easy to dissolve, there's less paperwork than the other entities.
Speaker:Like we said, it is a pass through when it comes to taxes, so it will get filed on
Speaker:your personal return with just you or your family's tax return through a Schedule C.
Speaker:Can you write things off if you're a sole proprietor?
Speaker:Yes, you can.
Speaker:You can.
Speaker:So if you're an independent contractor, you can have things that
Speaker:are absolutely business expenses.
Speaker:Like my Canva account.
Speaker:Yes.
Speaker:My, whatever programs I use.
Speaker:Exactly.
Speaker:To charge my customers, like Stripe or something like that.
Speaker:Exactly.
Speaker:Exactly.
Speaker:Wow, I feel so smart.
Speaker:Yeah, yeah.
Speaker:You're, you're totally right.
Speaker:You're totally right.
Speaker:The big red flag when it comes to sole proprietorship is there is
Speaker:no personal liability protection with the sole proprietorship.
Speaker:What does that mean?
Speaker:Say, as a contractor, you are working for a client and they sue you for the
Speaker:work that you did, that it was wrong or inaccurate or for whatever other reason.
Speaker:You get sued by a client a customer.
Speaker:They can come after your personal assets.
Speaker:Like my house, my kids?
Speaker:Yes.
Speaker:Mm-Hmm?
Speaker:. Now your you, your kids we're taking your firstborn child.
Speaker:Yes, absolutely.
Speaker:They are up for grabs by your clients, so protect them.
Speaker:No.
Speaker:Yeah.
Speaker:Mine were expensive.
Speaker:So it's good value.
Speaker:You got to protect that.
Speaker:Yeah, that's true.
Speaker:Okay.
Speaker:Okay.
Speaker:Okay.
Speaker:Great to know.
Speaker:Yes.
Speaker:You want to make sure that you are protecting.
Speaker:Your assets so when you have a soul, yes, you must protect this house.
Speaker:Absolutely.
Speaker:You're you're right you're right So you want to set up that protection
Speaker:most of the time it is much easier to just have the sole proprietorship It
Speaker:like you said you can just get started.
Speaker:You just go with it but your personal assets can be at
Speaker:risk should anything go awry.
Speaker:So this might be something if you're starting out a business, you're
Speaker:not sure how it's going to go.
Speaker:So I'm just going to like dip my toe into this contracting
Speaker:world and then it blows up.
Speaker:You have clients left and right.
Speaker:You're like, I need more protection because I'm bringing
Speaker:more people into my house.
Speaker:Yes, exactly.
Speaker:And yes, exactly.
Speaker:And so what I've heard from a few people that have come from the very,
Speaker:beginnings of their businesses, if you are a sole proprietorship or you
Speaker:don't have an EIN yet, that doesn't mean you don't have a business.
Speaker:Oh, that's interesting.
Speaker:If you are operating a business, you are collecting money for a good or
Speaker:a service that you are performing, and, people are issuing you 1099s or
Speaker:you're being paid for those services, you need to file those taxes.
Speaker:Like I said, they're on your personal return, it's not a separate business
Speaker:return, but you should be claiming that as income on your personal taxes.
Speaker:If you're not...
Speaker:You should start, that's where you're you're opening up the risk to your own
Speaker:personal assets and your own personal liability, so If you have a business
Speaker:that you're operating and you're not claiming that income You really should.
Speaker:Just because you don't have, if someone asks you and you don't know what you
Speaker:are, you don't have the EIN, but you are operating a business, you are, are
Speaker:liable for those taxes, and you can absolutely have risk associated with that
Speaker:that you should be very much aware of.
Speaker:Not to scare anyone, but, but a little bit, get.
Speaker:Get going on that.
Speaker:Get your ducks in the rest of the episode.
Speaker:Call your accountant.
Speaker:Exactly.
Speaker:So next up from a sole proprietorship, what's the next step up?
Speaker:The next step up is a partnership.
Speaker:Okay.
Speaker:So the partnership is when two or more people agree to perform
Speaker:these trades in the businesses.
Speaker:They're dividing profits and losses, but they don't incorporate.
Speaker:That's a partnership.
Speaker:Do they have an EIN number?
Speaker:Yes, and you can file as a partnership.
Speaker:Okay.
Speaker:But again, if it's you and your friend...
Speaker:You're starting a business that can be considered a partnership
Speaker:to you haven't incorporated.
Speaker:So you don't have that like legal structure you're paying
Speaker:taxes, but you don't have legal.
Speaker:Yes, and they are Pass through taxes there as well on each person's personal return.
Speaker:Yes, exactly
Speaker:Yes, it's all the caffeine go ahead yeah getting this I
Speaker:hope you guys are getting it
Speaker:With that that can absolutely offer some flexibility and that you can get started,
Speaker:you can get into business but you need to make sure that you understand and know the
Speaker:person that you're doing this with because you don't have a defined legal structure.
Speaker:So some of the cons of that are that you need to agree on critical
Speaker:business decisions before they come up because when you get into a situation.
Speaker:That, oh, crap, this person did this, this person did this, and you don't have an
Speaker:agreement on how that should be handled.
Speaker:It's not in the operating documents of You're letting yourself open
Speaker:to not protecting your house.
Speaker:Exactly.
Speaker:Okay.
Speaker:You want to make sure that you absolutely know what you're getting into and who
Speaker:you're getting into this partnership with.
Speaker:You still have to file an annual information report with that one,
Speaker:but it's still taxed as a Pass through on your personal, okay.
Speaker:Mm-Hmm.
Speaker:, that makes sense.
Speaker:then next step up, little more protection.
Speaker:Yes.
Speaker:Is the LLCI would say this is the most common one that I interact with.
Speaker:Okay.
Speaker:Is the single member or multi-Member?
Speaker:LLC.
Speaker:So you can be in an LLC by yourself or you can be an LLC with a partner?
Speaker:Yes, exactly.
Speaker:Or multiple.
Speaker:Multiple partners.
Speaker:Okay.
Speaker:Exactly.
Speaker:What are pros and cons to an LLC?
Speaker:some of the pros are that you do have limited liability
Speaker:protection over your assets.
Speaker:What's important with this though is that you're keeping your assets separate,
Speaker:your business and your personal.
Speaker:So this is where you want to make sure that you have a separate bank account
Speaker:for your business and it's underneath your EIN number and that you have
Speaker:It's separated because if you have a clear separation of your business
Speaker:assets and your personal assets, your personal assets are not at risk.
Speaker:So two questions with an LLC, you're filing business taxes and personal taxes.
Speaker:So all of your, yes.
Speaker:So yes and no.
Speaker:It can be both.
Speaker:Yeah.
Speaker:You're good.
Speaker:Let me, these are really good questions.
Speaker:Okay.
Speaker:So you can be an LLC.
Speaker:And file taxes if you're a single member LLC, you're filing taxes on your
Speaker:schedule C So again, it's passed through it goes under your personal return.
Speaker:It's filed as a schedule C if you have a multi member LLC You are
Speaker:receiving a k1 document that will split the income of your business.
Speaker:Amidst those multi members.
Speaker:Yes, exactly.
Speaker:And then it is again, filed with your personal return then.
Speaker:So you take that file, and you would submit it to your tax
Speaker:accountant, and they would then file it with your personal returns.
Speaker:Second question is you keep referencing an EIN number.
Speaker:How does a person get one if they don't have one?
Speaker:Yeah, absolutely.
Speaker:So you can get an EIN number with a lawyer that will help you form your business.
Speaker:You have to fill out certain paperwork and forms to submit for an EIN number.
Speaker:You can also do it through LegalZoom or a couple different sites like LegalZoom.
Speaker:I've done it both ways for some of our businesses.
Speaker:So for a single member LLC I did for the bookkeeping business,
Speaker:I did it through LegalZoom.
Speaker:And what was nice about LegalZoom is they have a registered agent service.
Speaker:If I get any paperwork, it goes through LegalZoom and then I get notified.
Speaker:I don't have to put my personal address out there.
Speaker:So that someone can't search my LLC and see my home address.
Speaker:It goes through the registered agent service.
Speaker:So LegalZoom offers that, so do a bunch of other sites or
Speaker:you can go through a lawyer.
Speaker:So what we did for the Golf Academy and that's a multi member LLC with my
Speaker:Husband, my brother in law, and my sister.
Speaker:We went through a lawyer.
Speaker:He helped fill out all that paperwork.
Speaker:He also helped us fill out all of the operating documents.
Speaker:What are the ownership percentages?
Speaker:When it comes down to a vote, there's four of us.
Speaker:So if it's an even two and two, how do we decide?
Speaker:And so who has, if it's that someone has one extra percentage, or it
Speaker:comes down to an unbiased party comes in, or whatever that looks like.
Speaker:You have to write an operating document when you have more
Speaker:owners in your business there.
Speaker:It protects you with that, it helps operate the company so that you know
Speaker:how to proceed in the operations.
Speaker:Like A, B, or C happens.
Speaker:Exactly.
Speaker:Okay, I have a basic question.
Speaker:So you have to have an EIN number to have an LLC?
Speaker:Yes.
Speaker:Do you have to have an EIN number to have a partnership or sole proprietorship?
Speaker:No, you can just start your business.
Speaker:Yeah.
Speaker:This is like one of those choose your adventure stories,
Speaker:remember when you were little?
Speaker:Like, if you want the character to do this, turn to page 85,
Speaker:that's what this feels like.
Speaker:Okay, so sole proprietor and partnership, you're just like, hit the ground running.
Speaker:Yeah, you might not have an EIN number.
Speaker:and then
Speaker:LLC, it's like, you're getting a little more serious, you're getting
Speaker:an EIN number, congratulations.
Speaker:It's like.
Speaker:Getting a little ribbon.
Speaker:Yes, exactly, exactly.
Speaker:I hope this is helping you guys!
Speaker:I know, really though, I hope it is too, with that...
Speaker:Okay, so we were talking about the pros, are there any cons to having?
Speaker:Yeah, and there are some.
Speaker:With the cons of the LLC, it's a little bit higher in the formation costs.
Speaker:It's nothing crazy, it's nothing like...
Speaker:Like 500 bucks, like...
Speaker:Yeah, it depends on the state what you're that you're filing in so you've picked
Speaker:the state that you want to file in and pay Taxes and then if it's a state that
Speaker:collects taxes for your business so a lot of people you hear file in Delaware
Speaker:because the taxation in Delaware is much different and much more lenient than
Speaker:in other states, but you have to have an address state so Can it be like a P.
Speaker:O.
Speaker:box?
Speaker:I think, you know what, I'd have to check on that, but I believe
Speaker:it, I believe it can be appeal.
Speaker:It might need to be a physical address, but I actually don't know
Speaker:that, the answer to that question.
Speaker:I, just for ease, went through Pennsylvania for all of them.
Speaker:I know that there, yeah, I just, I didn't see a need to file in a different state.
Speaker:I'm here, this is where my business operates out of.
Speaker:So we filed in Pennsylvania.
Speaker:I would say that if you're looking to really gain some like,
Speaker:I don't know, additional insight on why you would file in Delaware.
Speaker:Or in another state like that, I would really consult with your
Speaker:lawyer or your CPA to make sure that you're setting that up appropriately.
Speaker:Okay.
Speaker:There are a couple websites too that will help you with
Speaker:the setup process completely.
Speaker:They'll get you registered on every site CorpNet is the one
Speaker:that we utilize and we work with.
Speaker:Yeah, they get you registered, they get you set up, they'll get you set up for
Speaker:sales tax collection, for payroll filing.
Speaker:What I would recommend is from the beginning...
Speaker:file with them and they will then take care of any filings that you need.
Speaker:Interesting.
Speaker:So they're a good one that we work with in our business to make sure that, if
Speaker:there's setting up, one of the ones that we went with them first was setting
Speaker:up for nonprofits because that was new for me when I helped a client set
Speaker:up a nonprofit and I wanted to make sure I had everything appropriate.
Speaker:So we went through corpnet with them to make sure that It
Speaker:was all set up the right way.
Speaker:Is there an expense with that?
Speaker:Yes.
Speaker:For the nonprofit that we were just looking to have set up through
Speaker:Pennsylvania, I believe that the corp net fee ended up being like 800 in total.
Speaker:That paid all the filing fees.
Speaker:It paid all the processing fees.
Speaker:I think it was 800 for the.
Speaker:Nonprofit, so it might be different for other entities.
Speaker:We've only used corpnet for nonprofit filings that I have assisted with Walk
Speaker:away from corpnet with your EIN your LLC like just in a little pretty package.
Speaker:Like here you go.
Speaker:Yep Okay, sales tax ID.
Speaker:They help with all payroll stuff all of that.
Speaker:That's awesome.
Speaker:Mm hmm.
Speaker:Yeah, I know It's a really good one.
Speaker:So there is resources out there I would really recommend getting all of your
Speaker:ducks in a row before you go and take the first step with like registering
Speaker:on, if you're in Pennsylvania, MyPath, registering here, registering there
Speaker:because If you are looking at, like, something like CorpNet, they'll make
Speaker:sure that you have every box checked off.
Speaker:I've had a lot of clients that have started the process on one site and then
Speaker:not finished it on another site, and then they're, like, getting letters in
Speaker:the mail, like, I thought I registered for this, and they didn't, and it's
Speaker:because they didn't know all of it.
Speaker:You need to make sure that a part of this you register with your state
Speaker:taxes, your local taxes, federal, all of that, EIN for federal.
Speaker:And then also making sure that you register with the state and making
Speaker:sure that you register with your local.
Speaker:If you have a local business, you need to register with the locality that
Speaker:you're in to make sure that you are registered as a business in that locality.
Speaker:I think a lot of people forget that.
Speaker:Yeah.
Speaker:That's interesting.
Speaker:Who is supposed to tell people to do that?
Speaker:Like, how do they know?
Speaker:There's not a lot of resources out there that bring everything all together,
Speaker:so that's where CorpNet and sites like that are really good because
Speaker:they really do bring it all together.
Speaker:And you have to pay for that service, but for the peace of mind knowing
Speaker:that you have everything checked off.
Speaker:And you don't get like down the road where you're like, I'm filing
Speaker:my taxes and I have all this money and all of these taxes too.
Speaker:And, oh wait, you didn't?
Speaker:Exactly.
Speaker:Is that Berkheimer, like what I get a letter from?
Speaker:Yep, yep, exactly.
Speaker:And we've had clients that have been, like, they open up another storefront
Speaker:or they're in this township where, the Berkheimers, they're like, taxing entity
Speaker:or, that they need to be registered.
Speaker:And they get it in the mail and they're like what is this?
Speaker:And they'll come to me as their bookkeeper.
Speaker:And I'm like, did you register as a business?
Speaker:And they're like, No, you didn't do that or didn't do that.
Speaker:I'm like, no, that's not, that's not what I do.
Speaker:That's not, I don't, I didn't know that you didn't do that.
Speaker:There are a lot of times alerts, like when you go to register for
Speaker:like a payroll, say you've employees and you are paying your employees.
Speaker:If you're paying through ADP or Gusto or QuickBooks, you need to enter those ID
Speaker:numbers because they will remit the taxes for you and file the tax filings for you.
Speaker:But if you don't have that information in there, you'll get alerts.
Speaker:They'll send you alerts like, what's this number?
Speaker:We're not going to pay.
Speaker:What's this number?
Speaker:We're not going to file.
Speaker:And you'll have a countdown on whatever it is that, after, if you don't
Speaker:let us know in 30 days, we're not going to continue service because.
Speaker:They're now paying employees and you're not collecting
Speaker:the appropriate taxes for it.
Speaker:So you will get alerts if you use some of those sites, but that's for certain.
Speaker:So the moral of the story is, is if you are moving forward with
Speaker:a legitimate business, it would.
Speaker:I'm going to use a word that my mom uses.
Speaker:It would behoove you.
Speaker:I was just going to say, you were going to say behoove?
Speaker:Yes.
Speaker:It would behoove you.
Speaker:She always uses that word and I'm always like, why?
Speaker:It would behoove you.
Speaker:Why, mom?
Speaker:She doesn't listen to these, but Diana.
Speaker:Shout out.
Speaker:Okay, so it would behoove you.
Speaker:It would behoove you.
Speaker:To have 500 to 1, 000 set aside that you can go to corpnet and be like, I
Speaker:just want to make sure all the boxes are checked off and I am set up legitimately.
Speaker:Mm hmm.
Speaker:Okay, or have a sit down conversation with someone like you or a CPA or a friend who
Speaker:has a business in the same locality that you do to say, Make me a checklist or
Speaker:help me make a checklist of all the things I need to do so I'm not screwed later.
Speaker:Yes, exactly.
Speaker:Okay.
Speaker:Exactly.
Speaker:Okay.
Speaker:Because I feel like we're both very ADHD.
Speaker:Do you feel like we covered LLCs?
Speaker:I do.
Speaker:Okay.
Speaker:I feel like we...
Speaker:So I'm going to come back to it after we go through the S Corp because
Speaker:there's another note that I want to make sure I touch on for LLC.
Speaker:Owners, when it comes to payroll.
Speaker:I can't believe you knew I was going to say behoove.
Speaker:Yeah, whenever you were like, I'm going to say a word, I'm like, it's behoove.
Speaker:It's behoove.
Speaker:You're definitely going to say behoove.
Speaker:Okay, we're like really synced up.
Speaker:Okay, so S Corp.
Speaker:Okay, so an S Corp is the tax classification for a business that
Speaker:has elected, passed through income, losses, deductions, and credits
Speaker:that are shareholder's tax return.
Speaker:So again, who's the shareholder?
Speaker:The shareholder are the owners of the business.
Speaker:So yeah, the owner of the business, the shareholder of the
Speaker:business is the one in charge.
Speaker:and not necessarily the one in charge if you have, like, employees where
Speaker:they have different, job titles.
Speaker:Sure.
Speaker:But like, you are the shareholder of the business.
Speaker:With the S Corp, you're avoiding the double taxation.
Speaker:What does that mean?
Speaker:Double taxation means that as a, an LLC, partnership, sole proprietorship,
Speaker:you have to pay self employment taxes.
Speaker:You pay Whatever tax bracket you're in, on the net income of the business,
Speaker:and your payroll from your business, if you are a single member LLC a multi
Speaker:member LLC, an LLC that's paying taxes as a sole proprietorship, or a sole
Speaker:proprietorship or partnership, you are paying yourself through owner draw.
Speaker:Owner draw.
Speaker:So you can take money out of the business, but it is not considered
Speaker:a business deduction, a taxable deduction when you pay yourself.
Speaker:It gets paid through the equity on the balance sheet from you know the
Speaker:episode we did a couple weeks ago.
Speaker:Yes, the one that really stretched my brain.
Speaker:So you are paying yourself through your equity, your owner draw.
Speaker:So you are not reducing liability as your business when you are a
Speaker:sole proprietorship, single member LLC, multi member LLC, partnership,
Speaker:and the LLC is when you're paying as a sole proprietorship.
Speaker:When you're an LLC, you can elect to be an S corp, to be taxed as
Speaker:an S corp, or you can elect to be taxed as a sole proprietorship.
Speaker:if you are an LLC that is Taxed as a sole proprietorship, you're paying
Speaker:yourself through owner's equity.
Speaker:You're paying yourself through owner draw.
Speaker:Okay You can take money out of the business whenever you want.
Speaker:It's not reducing your tax liability.
Speaker:Got it When you are an S Corp, or when you are...
Speaker:An LLC electing to pay taxes as an S Corp, you are on your company's payroll.
Speaker:So you are paying payroll taxes every time you pay yourself.
Speaker:So you have a salary, and it is a reasonable salary that is set for your
Speaker:industry that you should think about and work with your tax accountant on
Speaker:to make sure that it's appropriate.
Speaker:And you can still take distributions.
Speaker:But you are paying yourself payroll.
Speaker:You are on payroll.
Speaker:So when you are an LLC or a partnership or a sole proprietorship and your taxed does
Speaker:a sole proprietorship, if you're that LLC, you have to pay a self employment tax.
Speaker:So you pay whatever tax bracket you're in because it's being
Speaker:taxed onto your personal return.
Speaker:So if you're in a 22 percent tax bracket paying 22%, but then but then there's
Speaker:also a self employment tax assessed.
Speaker:On top of that.
Speaker:Okay.
Speaker:That is the double taxation.
Speaker:You're avoiding double taxation on the corporate income when
Speaker:you are filing as an S Corp.
Speaker:Okay.
Speaker:Somehow I think I followed that.
Speaker:Okay.
Speaker:Yeah.
Speaker:Yeah.
Speaker:Good.
Speaker:Good.
Speaker:So yes, we can reduce the owner self employment taxes
Speaker:when you file as an S corp.
Speaker:Why would somebody want to file as an S corp?
Speaker:What are the benefits of that for them?
Speaker:So mainly that reduction in the double taxation.
Speaker:Sometimes, this changes a little bit and there's some regulations on what
Speaker:type of businesses, when you can switch and things like that, you need to.
Speaker:So again, talk to your tax accountant to confirm when it's the right time for you.
Speaker:But a typical threshold is around 50, 000 of profit.
Speaker:When you are making 50, 000 of profit as a single member LLC or a sole
Speaker:proprietorship partnership, you should think about transitioning to an S Corp.
Speaker:So all of these things are like walking up a staircase with your business.
Speaker:Yes.
Speaker:So it's like, as you grow, your liability, the way you want to.
Speaker:Protect yourself gross.
Speaker:Yes.
Speaker:Okay.
Speaker:Yes.
Speaker:when you are paying that self employment tax under 50, 000,
Speaker:it's typically more beneficial to just pay that self employment
Speaker:tax and have it be a pass through.
Speaker:It's just not, when you hit that 50, 000 threshold, it becomes
Speaker:more beneficial to switch.
Speaker:Okay.
Speaker:Yeah.
Speaker:So if you have an LLC, a single member LLC, You can elect to then
Speaker:become an LLC that files as an S Corp.
Speaker:You have to submit that paperwork by March 15th of the current year.
Speaker:If you want to be an S Corp in 2023, for the year of 2023, you have to file this
Speaker:paperwork before March 15th of 2023.
Speaker:If you want to be an S Corp for 2024, Submit it now.
Speaker:You could submit it right now, but you have until March 15th of
Speaker:2024 to become an S Corp for 2024.
Speaker:Just a note there.
Speaker:Anytime you send any change or election forms to the IRS, you
Speaker:should keep a copy of that form.
Speaker:You should scan it.
Speaker:You should keep a copy of it.
Speaker:You should date it.
Speaker:And then you should send it certified mail and keep the receipt
Speaker:and staple that to the form.
Speaker:Anytime you send anything to the IRS that has to be in by a deadline or just
Speaker:in general when we elected to submit as an S corp We filed before march
Speaker:15th But we got a letter in the mail saying that we were approved for 2024
Speaker:for the next year And we were like, no, we, we filed before the deadline,
Speaker:but they didn't get it until after and, or they didn't review it until after.
Speaker:So then we had to go back and write a letter and prove it and
Speaker:then send that certified mail.
Speaker:And then finally they were like, Oh, okay, sure.
Speaker:But if you can't prove it, you can't go back.
Speaker:Yeah, exactly.
Speaker:So always have your paper trail for the IRS.
Speaker:Absolutely certified mail, keep your receipts with it, keep
Speaker:the tracking number with it.
Speaker:Take a picture of it.
Speaker:Yeah, yeah, absolutely.
Speaker:You can send it like super certified mail where they have to sign for
Speaker:it when it gets to them so that you know when they sign for it too.
Speaker:Oh, I would do that.
Speaker:Yeah, so we did that with the second, when we sent our support,
Speaker:we sent it that version so that we could tell whenever they got it.
Speaker:Yes, that's what some of my recommendations would be with that one.
Speaker:Some of the cons there, again, you have to file with the IRS to be an S Corp.
Speaker:You have to...
Speaker:Be approved.
Speaker:Yes.
Speaker:Yes.
Speaker:Like the club, you do have to say certain things, like, of why you're electing
Speaker:this, and they have to approve it.
Speaker:Okay.
Speaker:There are certain corporations that are ineligible for this status.
Speaker:And again, I'm not totally clear on all of them.
Speaker:It's certain types of businesses at certain instances can be approved as
Speaker:an S Corp and sometimes you can't.
Speaker:I know that service providers are one that it's a little bit trickier you have
Speaker:to not be considered the sole employee of your business is one of the stipulations.
Speaker:So like say I had no employees that know your worth and I was doing everything
Speaker:myself And you were making above that 50 and I was making above that But the IRS
Speaker:could say that I'm the only one there.
Speaker:I don't have a team.
Speaker:I'm doing every job function Then I can't make that switch.
Speaker:You are the owner of the business.
Speaker:You are everything.
Speaker:You have to prove that you deserve a salary.
Speaker:So you have to prove that there are employees of your business
Speaker:and that you are, a different role than what you were before.
Speaker:Interesting.
Speaker:And again, I'm not totally clear on all of the businesses and what
Speaker:those things that the IRS would say.
Speaker:So again, that's where it's really good to just file with you.
Speaker:So my tax accountant helped us file with this because I wasn't
Speaker:clear on all of the requirements.
Speaker:So I just went to them and said, what do I need to do to make sure that I have this?
Speaker:And we went through all the checklists.
Speaker:We explained why and we submitted the form to the IRS and it got approved,
Speaker:but we just had to go back and then say, no, we want it for this year.
Speaker:Yeah.
Speaker:Yeah.
Speaker:You have to prove yourself.
Speaker:Exactly.
Speaker:Exactly.
Speaker:There are definitely certain states that have different reporting for S Corp.
Speaker:So be aware of the state that you're in and what their reporting requirements are.
Speaker:If you do use something like LegalZoom to set up your business entity they
Speaker:have programs within their system that will alert you when those...
Speaker:Filings need to happen, so you can keep track and keep a good checklist
Speaker:if you work with them, or again, your tax accountant should let you know when
Speaker:there's certain filing requirements.
Speaker:But some of them you're responsible for and you need to be aware of
Speaker:them, so absolutely check what your state regulations are.
Speaker:They're right on the state website.
Speaker:That's pretty clear.
Speaker:If you go to your state's website, at least in Pennsylvania, when the deadlines
Speaker:are for things to be submitted, they're pretty clear on the Pennsylvania state
Speaker:websites for what the dates are for those.
Speaker:All right.
Speaker:Cool.
Speaker:So then after the S Corp, how many more steps are there?
Speaker:There are a couple we're not going to get into nonprofits too much and
Speaker:we're not going to get into like co op so much, but the next one is a C
Speaker:Corp and again, we're not going to get too, too much into the C Corp either.
Speaker:the C Corp election is, so you are subject to tax at both the
Speaker:corporate and the personal level.
Speaker:So there's some pros.
Speaker:You have the limited liability protection.
Speaker:The biggest difference is you can raise funds through stocks, so that's like the
Speaker:biggest time that we hear, at least in my operations in my business, when I hear
Speaker:companies going from an S corp to a C corp, is that they are issuing stock in
Speaker:the company, so they're getting investors, and they're issuing stock in the company
Speaker:a pro to this is the transfer of ownership with the company is very easy, because you
Speaker:just use stocks, so you just buy or sell the stocks for the company, and that's
Speaker:how you transfer ownership of the company.
Speaker:That's a very easy way to transfer ownership.
Speaker:It can be much more difficult when you don't have that, because it's just...
Speaker:How does this change?
Speaker:How is it shifting hands?
Speaker:Who is responsible?
Speaker:And it's just a lot more in depth where you can just buy and sell
Speaker:stocks for that transfer of ownership.
Speaker:There's a couple other things that go along with that, but the
Speaker:ease of the transfer of ownership is a lot simpler with a C Corp.
Speaker:Do you have to be making like a certain amount of money to qualify?
Speaker:Like is this another one that you have to prove that you should be one?
Speaker:Yes.
Speaker:Yes.
Speaker:And again, I would say you need to look at the state by state requirements
Speaker:because it is different state by state.
Speaker:Andbecause you do have to adhere to stricter like regulatory reporting
Speaker:when you have stock and investors and you're filing as a C corp.
Speaker:You do have to file the annual tax return again, just like, pretty much all of them.
Speaker:But this one is subject to that double taxationbecause you're taxed
Speaker:on the corporate level and on.
Speaker:Interesting.
Speaker:Yeah, absolutely.
Speaker:So that was a lot.
Speaker:My brain feels stretched.
Speaker:That was meaty.
Speaker:That was a lot.
Speaker:But I feel like it was really informative.
Speaker:So we talked about choosing your business entity.
Speaker:We talked about EIN numbers.
Speaker:We talked about registering your business.
Speaker:Yes.
Speaker:State, local.
Speaker:State, local.
Speaker:Absolutely.
Speaker:Anything else that we think we should cover in this first series?
Speaker:The first episode?
Speaker:I also think that whenever you register your business, you should also have in
Speaker:mind if there are any, licensing and permitting requirements in your business.
Speaker:So if you're a therapist, there are different licensing requirements.
Speaker:You need to have certain licenses in different states.
Speaker:If you are opening certain consulting, if you are opening a CPA firm and you
Speaker:are, you're held to certain licensing requirements by certain governments.
Speaker:Okay.
Speaker:State governments.
Speaker:Um, and then there's lot of different pieces to that.
Speaker:So if you are opening a business, I would just look up what your
Speaker:business is, what the general type is, and also what that means for you.
Speaker:Do you have to follow certain standards?
Speaker:Do you have more filing requirements?
Speaker:Nonprofits do.
Speaker:There are just, again, there's a lot of different.
Speaker:When it comes to licensing and permitting, there are a couple
Speaker:different segments, a couple different business industries that require more.
Speaker:I would say for the majority of my clients, there's really not.
Speaker:My clients haven't really interacted with a lot of that.
Speaker:So from my perspective lot of the clients that we work with don't have
Speaker:really specific licensing and permitting that they have to go through, but it's
Speaker:something you should absolutely be aware of when you're starting your business.
Speaker:That's something that you should look into it just to make sure you're.
Speaker:registered with the right bodies and that you have the right certifications for it.
Speaker:Yeah, what I've taken away from this episode is To stay in your lane and
Speaker:know what you don't know and find the people who know what you don't know.
Speaker:Yes, absolutely Absolutely.
Speaker:It's always worth it to consult with a professional so consult with your
Speaker:lawyer consult with your tax accountant Consult with Google and the internet
Speaker:too start from there to get a basic understanding, but then take that
Speaker:knowledge and talk to some more people that can give you some good insight.
Speaker:Talk to other business owners.
Speaker:What are their positives and negatives from?
Speaker:Either the way that they're structured or the way that they're paying themselves.
Speaker:Did they go through a company to register for these?
Speaker:Did they go through a lawyer?
Speaker:Did they fill out the paperwork themselves?
Speaker:And how they got started with some of that.
Speaker:Yeah, absolutely.
Speaker:This is a lot.
Speaker:It's a lot of information.
Speaker:It's one of those things that once it's done, it's like a one and done, right?
Speaker:Exactly.
Speaker:For the most part until you level up in the way your business is growing.
Speaker:Yeah.
Speaker:But you're also learning as your business is growing.
Speaker:Yes.
Speaker:And the people who you do hire to take care of these things
Speaker:are keeping an eye out for you.
Speaker:Yes.
Speaker:Yeah.
Speaker:And it's okay to say what you don't know.
Speaker:Yes.
Speaker:I email our accountant now that I met you, I email him far less, but
Speaker:I'm sure there are times where he's gotten emails and he wants to beat his
Speaker:head off his desk and just be like, I told you this a thousand times.
Speaker:But keep asking until you understand.
Speaker:Yeah, keep asking until you understand.
Speaker:Absolutely.
Speaker:I mean, You need the information.
Speaker:One of my biggest pet peeves with business owners, and this is, again,
Speaker:this is personal, personal preference here, personal opinion, one of my
Speaker:biggest pet peeves with business owners is when they don't want to
Speaker:learn what they're required to do.
Speaker:So it's okay to not know in the beginning.
Speaker:It's okay.
Speaker:You don't understand what you need to do or what you need to report on and, who
Speaker:you're responsible to as a business owner.
Speaker:But you need to know that.
Speaker:You need to know where your weak spots are.
Speaker:And so if you're a business owner that has, say you're someone that's registered
Speaker:as an LLC, you can have employees when you're registered as an LLC, even though
Speaker:you might not be on payroll, you can have employees that are, but you need
Speaker:to make sure that you are covered.
Speaker:Are you paying 1099 contractors?
Speaker:The right way.
Speaker:Should they be employees?
Speaker:It's up to you to know that.
Speaker:And if you don't know that, you should ask.
Speaker:You should look.
Speaker:Because you could be held responsible for that.
Speaker:And so I think it's, it's tough whenever I get business owners that
Speaker:come and they will ask questions and I give them a response or I give
Speaker:them, what the IRS recommends or what their state or locality recommends
Speaker:and they don't know, nor did if they don't think it's their responsibility.
Speaker:Yeah, that makes sense ultimately it is your responsibility as the business owner
Speaker:to make sure you are set up the right way.
Speaker:You can have other companies help you.
Speaker:You can have your tax accountant help.
Speaker:You can have your lawyer help you unless they are negligent.
Speaker:It's your responsibility, to make sure things are correct and that you're
Speaker:filing the right forms and you're filing the right appropriate things.
Speaker:You, as the business owner, are ultimately responsible.
Speaker:And that's, I think, one of the things that's really positive
Speaker:but also really negative about.
Speaker:Today's kind of day and age, it's so easy to start a business.
Speaker:Everybody wants to be their own business owner.
Speaker:They want to work independently.
Speaker:They want to be in charge of their own schedule and it's so easy to get started.
Speaker:But it's also so easy to get started the wrong way.
Speaker:Yeah, it would behoove you to do it the right way.
Speaker:It would behoove you to do it the right way.
Speaker:Do some googling, do some research, take that responsibility, take
Speaker:that personal responsibility to get set up the right way.
Speaker:Pay who you need to pay to set it up the right way.
Speaker:If you can't do it or don't understand how to, make sure you have a trusted
Speaker:advisor that is there to help you.
Speaker:And you can do it.
Speaker:You can do it.
Speaker:We're rooting for you.
Speaker:Yeah, you can do it.
Speaker:So good luck getting set up.
Speaker:I hope you do.
Speaker:Yeah.
Speaker:Follow your dreams.
Speaker:Absolutely.
Speaker:Start the business.
Speaker:Yeah.
Speaker:We will, we encourage everyone to start their own business.
Speaker:Anybody that wants to, you can do it.
Speaker:Starting your own business also protects you.
Speaker:If you are doing something on the side and just start the business,
Speaker:protect yourself, protect your assets.
Speaker:It's just a little bit of an upfront cost to make sure that
Speaker:you have that security too.
Speaker:So it is worth it later.
Speaker:It is worth it.
Speaker:So good luck and enjoy and let us know if you guys need any help.
Speaker:We have a free guide on our website.
Speaker:Yes.
Speaker:That breaks down each one of these business entities
Speaker:that Sid talked about today.
Speaker:So you can go to KnowYourWorthPGH.
Speaker:com Yes.
Speaker:And grab the Business Entity Startup Guide.
Speaker:Absolutely.
Speaker:It is there for you.
Speaker:For all of your reading pleasure.
Speaker:You'll love it.
Speaker:Enjoy.
Speaker:All right.
Speaker:Bye guys.
Speaker:See ya.
