Sole Proprietor, LLC, S Corp, C Corp - What You Should Be and When

#70. In today's episode, a reply of a popular past episode of when Sevana and Tiffany talk about Sole Proprietorship, S-Corp, C-Corp, and what you should be and when. Famous Example - Hulk Hogan and Gawker Media Rihanna and Fenty Videos - Explanations on entity formation: https://youtu.be/uXOHnZy0y4Ahttps://www.youtube.com/watch?v=H3BcB1r5h74 Books: LLC vs S Corp vs C Corp Explained (https://www.amazon.com/LLC-vs-S-Corp-C-Corp-Explained/dp/1950967093/ref=sr_1_1?crid=12ZSR3DWZTY9L&keywords=LLC+Vs.+S-Corp+Vs.+C-Corp+Explained&qid=1658193309&sprefix=llc+vs.+s-corp+vs.+c-corp+explained%252Caps%252C63&sr=8-1&_encoding=UTF8&tag=bbsb0e-20&linkCode=ur2&linkId=62737ff95a3ded3c79cbbd5151a9f171&camp=1789&creative=9325) Advice - Talk to your CPA and business lawyer to help decide what is the best business entity for you, but don't let that stop you from starting your business! Just don't forget to revisit your entity setup later on. **************************** Listen To Our Podcast On - Apple Podcast (https://podcasts.apple.com/us/podcast/the-business-behind-small-business/id1581881387) Spotify (https://open.spotify.com/show/3w1hi24SZ24zmFNJnB4wbw?si=RTHzSRvlRHCpgFdHnuENgg) Pandora (https://www.pandora.com/podcast/the-business-behind-small-business/PC:66374) About BBSB - We are two business owners with two very different perspectives on building business, and the business behind that in order to achieve your goals. One of us built to sell, and will continue on the serial entrepreneur path, which means your focus and drive should include very particular tools and tips in order to achieve your goal. The other, is building a generational business, one that can go on long after she’s let go of the wheel. This type of business also requires very specific tools and platforms to achieve this goal. Both women have been successful in their own right, but in honesty - haven’t scratched the surface! Sponsorship Opportunities - Email us here: thebusinessbehindsmallbusiness@gmail.com Website - Check out our website! https://www.thebusinessbehindsmallbusiness.com Notice - As an Amazon Associate, we earn from qualifying purchases. These earnings contribute towards the costs of creating this podcast and we greatly appreciate your support! Disclaimer - We are NOT licensed financial experts, nor do we give financial advice. Anything we share with you here on our podcast, whether it be a personal experience or submission, or advice/tips that have worked for us, or that we believe would work for you should not be viewed as either financial, business, or tax advice. We ask for you to do your research, have open and honest conversations with your company’s own support providers and make decisions based upon that. Throughout this broadcast we will share our knowledge and give suggestions and hope you will receive them as part of your overall research to better your own company.

Transcript

SPEAKER_00 0:00

Hello and welcome to The Business Behind Small Business, a show that reminds you that just because you own a business doesn't mean you are a business owner. In each episode, we will discuss common issues small businesses face and offer tips and advice from the perspectives of two business owners, one that is built to sell and one that is built to inherit. We are your hosts, Silvana Stone and Tiffany Kao. There's a lot of business behind small business, so let's get to it. When starting a business, we're not always sure what type of business we want to be. Sure, you know what you want to do, that's the easy part. But what about the way you're set up? What's the right way? Is there a right way? And if you choose one way, should you stay that way? It's so confusing, and so many companies get caught up in the details that they end up spending a ton more on taxes than they should. We're going to talk about sole proprietorship, S-Corp, C Corp, and what you should be and when. Before we begin, please note our disclaimer. This is available in both our show notes and on our website and should be referred to before and or after this podcast.

SPEAKER_01 1:21

So I'll start by saying the fact that this question of what entity you should be is confusing for everybody. It doesn't even matter if you come from like a tax background or you come from a uh legal background. It it's it's just confusing. There's quite a few choices out there, and you know, people typically tell you, hey, talk to your CPA. And you know, my personal opinion is that's a little tough sometimes because guess what? Your CPA who does taxes sees everything in the world from a tax perspective. And then some people say, hey, go talk to your business lawyer. Well, then you got the other side of the coin, which is they look at everything from a legal perspective. And we all know that your business is not that one-dimensional. So, again, going back to our fictional disclaimer, we're gonna tell you what we think and how to help you out here. But of course, you know, without knowing your full history and where where you are with your business and what you're gonna do and all this stuff, yeah, you'll have to make the decision on your own and certainly consult all of your professionals and your support network. But maybe what we say here is gonna help you decide so you have a little bit of a better idea before you walk into either your CP's office or your business lawyer's office to kind of discuss what's the best way forward for you.

SPEAKER_00 2:36

Yeah, you gotta you you do you.

SPEAKER_01 2:39

You do you. That's that's man, that is that's the truth, isn't it? When it comes to small business owners, like you you do you. I think Savannah, I think you're the one who said um what there's no army coming or something along this line. Like nobody's coming to see you.

SPEAKER_00 2:52

Um yeah, no, no one's coming. Yeah, no one's coming.

SPEAKER_01 2:56

It's you you gotta buck up and figure it out yourself.

SPEAKER_00 2:59

No one's coming to rescue you. There's no Prince Charming or Princess Charming. No one's coming. So you gotta figure it out. Princess Charming, nice.

SPEAKER_01 3:10

So um, from those two perspectives I was talking about earlier, yes, you do have to consider the legal perspective and you have to consider the tax perspective. And toward the end of kind of my little spiel here, there's also a couple other considerations you just probably want to think about for yourself. And again, this is all to help you prepare for the conversations and the final decisions. Certainly not something that you can make a decision after this talk. So let's start from the legal perspective because hey, that's kind of important. Uh you started a business, and the last thing you want is to something to happen in your business, and then somebody suing you, and not only just your business, but you personally. So the best place to start with this is at least from a legal perspective, is ask yourself how much personal liability are you comfortable with? So if you are really not that concerned about too much about personal liability, then and you're by yourself, then the quickest way for you to get started is with a sole proprietorship, because there is really very little paperwork, if any, and you can just hang out your shingles the next day and get started. Now, if you have other people in your business, meaning that you have partners, then there's a couple more options for you, right? So when you have partners, it gets a little messier. And um honestly, if you haven't heard us said these before, if you have partners, certainly you know, have a partnership agreement because hey, we've all heard the horror stories. So let's say that you have multiple partners and everybody in the partnership are active partners, meaning they're managing, they're doing something, they're supporting clients, whatever the case may be, they do marketing, whatever the case is, they're active like managers of the business. Then what you probably want to do is do some form of general partnership. Now, the other flip side of that is maybe you don't have not well, how about let's say maybe not everybody is active. Maybe you have some silent partners or people who are maybe just putting in money or they're just kind of laying back and they're not really actively involved in the business, then you may end up exploring something called a limited partnership, which means that you kind of just limit the liabilities depending on who's involved in what. Now, that's all to say that all this should be nailed down and written in black and white letters.

SPEAKER_00 5:22

Yes. You might want to get it notarized too while you're at it.

SPEAKER_01 5:25

Yes, yes, yes. So this is one of those things is it's it's not it's you don't want to save money on this by trying to save up on legal fees and not talk to a lawyer and try to figure out how to do a partnership agreement yourself. It's just it's not worth it, no matter what.

SPEAKER_00 5:41

Agreed.

SPEAKER_01 5:42

Now, going back to the personal liability, let's say that you are somebody who are who is concerned about having you know personal liability in a business. You want to make sure that, hey, let's just say if you know things don't things happen and somebody wants to come after your business, you kind of protect your own personal assets from whatever it is that that occurred. Now, you have a couple options here. So this is the the so when you um if you're if you're a company like you're a startup, like an IT startup, meaning that at some point you're gonna take on investors, complicated investors, and you're going to probably maybe go public at some point, right? Like super big company. There's a reason why all those folks usually go for a C corporation. There's a lot of um, there's a lot of flexibility and there's a lot of protection when it comes to a C Corp. And so that's usually a very popular option if you are thinking about going big. And I'm talking about going big in a sense that you're gonna add investors, there's gonna be a lot of money flowing through. Consider doing a C Corp. Now, let's say that that is not where you want to go, but you still want to protect yourself from personal liability. Now, there's a couple things you can do here. You can either be a uh limited liability company, also known as an LLC. Um, this is a very popular option because one, it gives you the liability protection, but then it's really quick to set up. So uh very similar to probably a little bit, well, not as quick as a sole proprietorship, but certainly you can kind of get running in less than a week and get all the paperwork and everything filed. Now, the only thing about the uh limited liability company is that there are a few restrictions and what and why people may also consider doing an S corporation instead. The reason why you want to choose between an LLC and an S corporation is again, um, S corporation just has a bit more benefits in terms of how you can pay yourself. And again, we kind of get into taxes at this point, but you are certainly still afforded the same kind of liability protection as you are with an LLC. Now, all this is to say that there's a few caveats because there are a few things you you are personally liable for no matter what the heck you set up. So, easiest thing to start with is taxes. So, regardless of whether or not you have a you're incorporated or you're not incorporated or you have all the paperwork filed, if you do not pay your taxes, it does not matter. They will come after you personally, especially if your business cannot pay it. So we're talking about sales and use tax, we're talking about payroll tax, we're talking about withholding tax and any kind of other tax-related fines and penalties. They will find whoever is considered the responsible person in your business, and that could be either by title, which means like CEO, CFO, or it could just be by roles and responsibility, which means accountant, bookkeeper, somebody who signs the checks. There is really very little protection against unpaid taxes. So um just keep that in mind. The other liability consideration is if you don't treat your business like it's a business separate from yourself. Phrase for this is called piercing the corporate veil. Savannah, you probably heard this a few times. Yes. It's it sounds really fancy, doesn't it?

SPEAKER_00 9:00

It does. It sounds poetic.

SPEAKER_01 9:03

It is, and it sounds so like lovely, but it's not. It really just means that, you know, even if you are incorporated, it means that you don't treat your business as a separate entity from you. So very popular, what people do, I've seen this even myself, is let's say you go out and you set yourself up a nice, nice little LLC. Well, then in your LLC and on your corporate credit card, you're putting through expenses that are really of a personal nature. Like, for example, shopping at Macy's, probably not a business expense for just about any purpose, uh, especially if you're just buying suits.

SPEAKER_00 9:38

Yes.

SPEAKER_01 9:38

Right? Or um I've seen companies where they're um they incorporate it as an S-corp and they run through their travel expenses, which is really for the family vacation.

SPEAKER_00 9:51

Mm-hmm. I've seen that so many times.

SPEAKER_01 9:53

No, yeah, no, no, no. That that's not gonna fly in any case, right? Again, this only comes into problems when let's say that you are, you know, for some whatever reason bought bought a lawsuit against you and you have to like defend yourself. Um, the court will take a look at your company and see if you're treating it like your own little personal uh, how would you say like your own personal like your bank? Your bank like you're treating it like a bank.

SPEAKER_00 10:19

Yeah.

SPEAKER_01 10:19

Yeah, you're treating like your own personal bank rather than actually setting up the entity. Now, other things they also look at is also um kind of how you keep your record keeping, right? So if you're gonna be a business, you gotta you gotta act like a business. So that means that you need to do all the administrative record keeping and um also filings, tax filings, your um annual company filings, whatever is the requirement for you to upkeep yourself as a business, you need to do that to actually show that you're running your business like an actual business. And not your own piggy bank. That's what I was trying to get at.

SPEAKER_00 10:57

I got one of the words.

SPEAKER_01 10:59

That's right, piggy bank. Okay, so a couple other things for you know, just kind of this liability talk is um you can still be personally liable for um company debt or liabilities if you yourself co-sign something or person put a personal guarantee on any kind of debt. I've seen that's happen even with larger companies. If a bank feels more comfortable that the partners or the owner of the company personally guarantee a business loan, then when you sign that data line, you can be personally liable regardless of what your entity is and how you set up. Um, same thing goes for if you're using your personal property as collateral for business debt, say you put up your house or something along those lines. Again, you know, you're still personally liable, regardless of what what company, what type of company you incorporated. And then last but not least is you are personally liable if you commit fraud, right? So don't do that, please.

SPEAKER_00 11:54

That should go without saying.

SPEAKER_01 11:56

That that goes without saying, but like I think people forget that like if for whatever reason you just have bad business ethics to the board like to the point you commit fraud, like they can come after you for everything and anything. It doesn't matter what you set up. Okay. Now, outside of legal considerations is the tax perspective. Okay, so after you kind of figure out how much uh liability you're willing to take for your business, the other consideration you should have is from the tax perspective of what kind of entity you want to be. So some of this runs into uh the the thinking of one, how you want to take money out of the company for yourself. Every entity is different, right? So meaning that some entities you can take out draws, some entities you take out things called guaranteed payments, others you can take out distribution, and only a certain entities can actually pay you a W-2 income as an employee of your own company. Now, Savannah, I think you're gonna kind of get into this a little bit more in depth. So I'm gonna leave the leave the technical stuff to you. The only thing I will say is why I thought this was really important to point out is uh for whatever reason, like people get so excited about starting a business, they kind of forget that hey, there's only so many ways you can take money out of the business. And again, a lot of this goes back into whether or not you're treating your business as a business, but there's a lot of tax implications of how you can draw money out. For new business owners, especially if this is like kind of your primary source of income or your primary focus, let's just say, right? This is your full-time focus, it's not a side hustle, it's not a hobby or anything like that. Um, if this is your full focus and you're trying to draw money from it, uh, you'll find that having a W-2 income is really helpful uh in life. So there's a lot of things you need in life that requires a proof of income. So if you are trying to go, you know, rent a place or you want to get a mortgage or you do some credit uh credit application, you really get to consider, you know, whether or not that you want to set up an entity which allows you to pay yourself a W-2 income. And like I said, not every type of entity out there allows you to do that, or not. And if that is okay, depending on what your plan is in life. The other consideration is how much taxes you will need to pay. Yeah, a lot of this depends on how you're gonna pay yourself, what your overall tax return looks like, both business and personal. And sometimes you also have to consider your estate tax laws. And all this kind of factors into kind of what kind of entity you want to end up with. And I know again, like I'm being a little vague here, but that's because this part you really do need to talk to like a CPA or somebody who can kind of look at it a little bit more holistically for you and kind of figure out kind of like tax-wise what makes the most sense for you, um, lower your tax liability, which is what we all all want.

SPEAKER_00 14:48

Yes. Yes.

SPEAKER_01 14:50

The one thing I will say, just kind of leave you on this one note before we switch over to Savannah, is you know, talk to your CPA and talk to your lawyer. But the thing is, don't don't you don't have to overcomplicate it until you kind of have like a sizable company. And I don't know, Savannah, I don't know if you agree with this. I would say that sizable would be like if you're kind of like pulling in about 100K a year in like revenue, yeah, you're kind of getting there, right? Like you kind of want to like kind of set yourself up a little bit better. And so that's probably a good time you can talk to somebody, plus you can afford to talk to somebody about it. But it's a good time to talk to somebody and kind of get yourself set up, meaning that you know, don't allow, don't let this thing stop you from starting, but certainly don't forget about it until it's a little bit too late or you get a little too complicated and then becomes expensive where you kind of find yourself somewhere you don't want to be.

SPEAKER_00 15:41

One can hope that you have a relationship with a CPA that will give you a heads up, saying, Hey, uh, you know, in the last couple of years you've been growing exponentially. I'm gonna have to assume that by next year you're gonna be over 100K or two or three or whatever, it's time you start considering to switch over to something else. Maybe, maybe you shouldn't be a sole proprietor anymore. Maybe it's time for you to become an S-corp. Uh, another thing that um I want our listeners to know, that especially if you're very new to business, you know, if you accidentally bought something for, you know, if you if you accidentally bought like your coffee with your business card and you were with your friend, you know, the IRS is not gonna come after you. Just know that it's there's there has to be a sizable amount. It's not like one transaction or two transactions, because I know I've caught been caught in that. Uh, well, you know, my my teenage son sometimes will take my my uh personal card and forget to give it back. And then I'm like, well, man, I gotta buy my groceries with my business card now. So I will make an indication saying, you know, it was a personal expense, and then I re get, you know, reimburse it. Um, just because that's how I am. But, you know, once in a blue moon is not is not going to bring the walls crashing down for you. It's when you um are starting to show a very clear pattern of consistently spending business money on personal items. That's what's gonna get you. Um that's a good point.

SPEAKER_01 17:17

They're not really sitting around, and nor are they gonna spend the time to come after you for something little.

SPEAKER_00 17:22

No, no. I always say that uh the IRS goes from sloth to pit bull. It takes them a while. It takes them a while to catch you, but once they catch you, they will never let you go. So just be aware of it and um do your best to not commingle.

SPEAKER_01 17:45

Yeah, I used to learn clients that um like the way the IRS treats somebody who's being audited is that they're you know they're considered guilty until they prove themselves innocent.

SPEAKER_00 17:56

Yes, yeah.

SPEAKER_01 17:57

So it's yeah, very much to your pit bull metaphor. That's true.

SPEAKER_00 18:03

Which no offense to pit bulls, they're generally sweethearts, but uh, you know, I think because of that reputation, that's why I say that. So no offense to all those pit bulls listening out there. Uh so I want to start. I want to start with describing what a sole proprietor is and what an LLC, S-corp, and C Corp is. So some of the things I'm going to say are going to mimic what Tiffany was saying, uh, but you know, I'm going to go a little bit more into detail. A sole proprietorship or sole trader, as it is also referred to as, is an unincorporated business that has just one owner. This person pays personal income tax earned from the profits of their business and oftentimes does business under their own name because creating a trade name isn't necessary. Meaning your business is your name, not some other really cool name. So proprietorships are the easiest, least complicated companies to have, and they don't require much regulation. Most often, these kinds of businesses are consultants, contractors, singular brick and mortar stores, you know, simple, uncomplicated. Complications start when the company starts to have debts or taxes owed. These debts are also the owners. There is no discrimination between the two. Also, if you plan to get funding from a bank or another financial institution, this can be much more difficult as they prefer to work with companies that have more credibility as an LLC. So, what's an LLC? The LLC exists separate from the owner of the LLC. Members of the LLC, as they are known, are not personally responsible for business debts and liabilities. Consider it a screen. Instead, it's the LLC that's responsible. A screen or a net, if you will. Now, an LLC is a business structure, not a tax structure. It offers limited liability protection and pass-through taxation. And what does that mean? It means that your business would not pay taxes on the entity level. Instead, it's the owner of the business who pays personal income taxes for the share of their business. So if you're paying yourself money from your business, then you're going to pay taxes based on the money that you paid yourself from your business. It's your personal income. In my opinion, I believe every company that has no partners, no complications, a true startup should start as a sole proprietorship LLC. You're protecting yourself and your business and not further complicating the tax structure. But when your company starts turning a really good profit and things start getting more multi-layered, you should really consider choosing to be an S-corp. A major advantage you gain is limited liability protection, regardless of your company's tax status. What does that mean? It means that your own personal assets are protected from business creditors who make claims against your business. And this is really important because if you do find yourself in a pickle, you won't lose your house or your car or any of your other personal items. So, you know, keep that in mind. The biggest disadvantage of an S-corp is that you cannot exceed 100 shareholders. Partnerships and corporations are also ineligible from being an S-corp, and it's harder to raise equity financing than it is as a C Corp. So it's a C Corp. If your company is planning to be publicly traded, it is owned by its shareholders, your company should be a C Corp. This is the most common type of structure in the US. These are taxed separately from the business owner or owners, and the structure offers unlimited growth opportunities, meaning there is no cap on the amount you can make, there's no shareholder limits. And when the company reaches $10 million in assets and 500 shareholders, it's then required to register with the SEC. Both C Corps and S Corps offer limited liability protection. Both require articles of incorporation to be filed. And both are made up of shareholders, directors, and officers. The real difference is in the complexities of taxation and corporate ownership. And by the way, if you are the only owner and you are an S-corp, you can be 100% shareholder. You don't need to have other people owning shares in order to become an S-Corp. So which is right for you? We've added links to the show notes that will help you discern the advantages and disadvantages of all of the different structures so that you can be informed as you make your decision for the growing business. So, Tiffany, let's talk about what path you took and the path I took, which I think is about the same path. But let's let's talk about it.

SPEAKER_01 22:59

It's a very common path, let's just say that.

SPEAKER_00 23:01

It's a common path, yeah. It's a common path, and I feel like it's a pretty safe and responsible path. But um, why don't you why don't you start?

SPEAKER_01 23:09

Yeah, I agree. I think a lot of our uh listeners are probably in the same boat, uh, because I mean, unless somebody who's listening to us is going out there and doing an IT startup or they're gonna go through rounds of funding, most likely what we did probably applies to most everybody here. Now, keep in mind though, I think both you and I and still is, I think you are too, is also kind of the sole 100% owners of our business. Um so I was the same all the way up to the cell of it. So I think this this the way we took is probably, like I said, pretty pretty common and um can be easily applied. So uh although I will tell you though, I started as like kind of the long story short, I started as a sole proprietorship, and then I incorporated as a single member LLC, and then I uh elected to be an S-corp. So there is a uh it's it's kind of a tax formality, to be quite honest. You basically operate like an S-corp, but on a tax formality, you're kind of like, I'm an LLC elected as an S-corp. And then there's also another option, there's another box where you're just an S-corp. So that gets confusing. But I think the reason that is just is because like uh before there wasn't that. It was either you're an LLC or an S-corp. And then like years back, the IRS came in and said, Oh, you know, there's this brand new checkbox uh entity you can use now where you can be an LLC, but you can elect yourself to be an S-corp for tax purposes. So that's kind of what happened, and it's it's pretty popular to use that uh way. Um so just in a sense of a timeline, I think I was a sole proprietor for maybe a month or two. I was not a sole proprietor for very long. Um to me, yeah, the protection of the personal liability was pretty important. I didn't really want to mess with that, so you know, I immediately incorporated as a single member LLC as soon as I got my footing, knowing what I'm doing with the business. And uh, you know, this kind of just went straight into a single member LLC. And then probably about year two or three, then I elected to be an S-corp because I wanted to draw down um W2 income. And just so for all you guys out there, what we're talking about is as a single member LLC, you cannot pay yourself a W-2 income as the single member. You literally cannot. Now, people do it and it is absolutely not correct. So if for whatever reason you find yourself in that situation, quickly get yourself out of it. Again, not saying that the IRS is gonna knock down your door tomorrow, but you are exhibiting a pattern and like Savannah say, that's you know, this is the dangerous road to go down. So if you if you are a single member LLC, you cannot pay yourself kind of W-2 income. So that's why I incorporated to an S-corp. So again, I'm kind of getting that paycheck. And for me, it was important because of all this, you know, like finding a new place to rent and stuff like that, all require proof of income. And peop most people understand W-2 income better than they do a tax return for your business. Yeah. And then when I sold, that's what I say as an S-corp. I did, I did. Only the only difference is as I grew over time, um, I took advantage of kind of the tax benefits of being an S-corp, which means that you do a um, you basically do a combination of paying yourself like a W-2 income as well as taking distributions because distribution, yeah. Again, this is not a tax podcast, so I won't get into the nitty-gritty of that, but just know that you're taxed on a different bracket or a different um tax percentage. And so that's one of the benefits of having an S-corp is you do get to pay yourself two different types of um types of income, which affects your taxes, and your CPA will be able to tell you more about what all that means to you.

SPEAKER_00 26:43

Yes. Uh affect you positively. Let's know, let's let's say that. Affects you positively.

SPEAKER_01 26:48

There's some rules around it, so it's not like you can do it like tomorrow once you set up an escort, but you can certainly grow into it and eventually you'll you'll be able to kind of um have a little more tax benefit from it.

SPEAKER_00 27:00

Mm-hmm. So I was a sole proprietor for much longer than you, but uh it was also because I was the only person working in my company, I was doing all of the work, so it made sense. And plus, I was definitely not making um enough for it to make sense for me to be more than that. Uh, even when I started hiring people, um, I was hiring them in as contractors, there just wasn't enough work. And I then became an LLC when I started hiring people. When I started making enough money that it and I had hired enough people that it started to look more complicated, that's when I became um um, what do you call it? An S-corp.

SPEAKER_01 27:43

Yeah.

SPEAKER_00 27:44

And so I oh actually, let me let me back up. I went from sole proprietor to single member LLC to to S-Corp. So uh, and I would likely stay as an S-corp. I mean, I'd be I would love to be in a C Corp at some point, but I think I would stay as an S Corp. On the business, you know, and becoming a C Corp, I understand that it is the most uh common. And there are, you know, a lot of companies that are advised that from the jump they should become a C Corp. But I I feel like your structure should grow at the same level as your company. So to I don't know, it's kind of like buying an eight-seater SUV with the with the idea that you're gonna have like six kids, you know, find a find a partner before you start considering how many kids you're gonna have. Like there's no need for you to have that monstrosity of a car if you're not gonna have that many kids. You know, I maybe that's not a great analogy, but I just I feel like there's no sense in that kind of level of complication if you don't have that kind of complication in your company. If you do, then yes, definitely. But if you don't, then why make your life that much more difficult?

SPEAKER_01 29:04

Yeah, and like I said, I mean, if you know your business is set up to take on investors and you want to give out equity as part of like the enticing them to be an investor and you have like, you know, debt to equity loans and all the stuff that gets really complicated. And again, I mean, unless you're an IT startup with some kind of funded company that needs to do that from off the bat, uh personally, I find that there's very little reason why small businesses need to be a C Corp from the start, right? And not to mention the fact that if you if you like make that mistake and you say you set up a C Corp, it it is a lot harder to come down from that, meaning that you want to reverse that decision into another entity than it is if you were going kind of the route we went, which is a sober prior ship, then to an LLC, then to an elected S Corp. Like that that's a lot easier. And I think because that's a more that's a more common path. I think the IRS probably expects you to go. They also make it easier administratively for you to do that. Whereas if you're like, hey, you know, day one, I want to be a C Corp, and then in a year's time you figure out, well, that was a bad idea. It takes money and paperwork to try to reverse that decision. And um, I'm not saying that the IRS will flag you, but it is it is we it is kind of weird, right? It's it's not complicated.

SPEAKER_00 30:22

It is, and and it will likely, it maybe won't necessarily red flag you, but it'll yellow flag you.

SPEAKER_01 30:30

Assuming we know that they have different color flags on the IRS system.

SPEAKER_00 30:33

I don't know. I've become a sportscaster now. The yellow flag penalty.

SPEAKER_01 30:38

Well, there's a lot of like AI in the IRS system, right? So they do a lot of like automatic cross-checks. So something like that probably will be marked as unusual.

SPEAKER_00 30:46

Yeah.

SPEAKER_01 30:47

I I've I've I've come across quite a few small businesses that they were advised either by their tax accountant or by their business lawyer to start as a C Corp. And then I'm like, why? Right? Yeah. That goes back to the whole thing of like what I'm saying is you know, that's that's that's the thing about being a business owner, right? Because you know your business holistically, and you're probably the only person who knows it holistically. And so when you go to these uh professionals, you know, just keep in mind they're your advisors and they're specialized, meaning that they're specialized in what they do and they see your business from that perspective and mostly from that perspective only. So you can't expect them to holistically understand your own um feelings and desires about how much liability you want to take on versus how much taxes you want to pay. So if you go to a tax account, like I said, they're probably gonna look at your business from only a tax perspective, and then your lawyer is probably gonna look at it from a legal perspective, and sometimes they don't understand. Like I met plenty of business lawyers who don't understand taxes, and they'll advise their client on something that wholly affects their taxes, and they don't know that because they live in their world and their world doesn't include that. So, as a business owner, like we have to be smart enough to make sure that we're getting all the information, compiling it, kind of cross-checking it, making sure that it still aligns with what we want and actually makes sense, and they're not that your two advisors aren't, you know, um counteracting each other's advice for you to ultimately make the decision for yourself.

SPEAKER_00 32:22

Mm-hmm. I kind of look at it like a doctor. You know, if you go to see a doctor about something, and that doctor just you know, in your gut, if that doctor is not seeing and advising you on all of the things, you can always go to another doctor. If you don't feel comfortable with your CPA or your accountant, you can always go to someone else, but just have someone. Unfortunately, there's enough businesses out there that don't even have anybody that are still using, well, online platforms for for you know their taxes, whatever it is. You know, online platforms. So, you know, I I don't advise that online platforms for their taxes or for their legal advice, and I I get that it's less expensive, but do you really want to trust your company to that? So I don't know. I I don't advise my clients ever to do it themselves. Find somebody who works well for you and adv will advise you. And if you feel as though their advice is not, I don't know, it's not fall, it's not sounding good to you, then see if you can find somebody else. But either way, um, it is important to follow a strategy. Strategy is very important when it comes to your tax structure and your legal structure.

SPEAKER_01 33:54

Right. And at the end of the day, too, remember, don't let this stop you from starting up your business, right? For sure. It's when you get to when you get to a just don't forget about it. That's really what it is. Is you you can start tomorrow and not have this all figured out, and you kind of pick your best path and you move forward with it. Just know you're taking some risk if you're doing it without any advice or you're doing it an online platform, but you know, that's that's that's your risk to choose to take on. Just don't forget about it, that there is nothing that replaces kind of the uh personal and professional advice of a CPA or a business lawyer when it comes to your business, once especially when it gets sizable. Um like Savannah said, you know, you again, as a business owner, you're the only one that's that's that's only responsible for your business. So you better figure out uh who you like speaking to and whether or not you feel like they got your back and they have the expertise and the experience to actually give you the right advice for your business. And I will, and this is probably more like a like a PSA than anything else from my experience when I was starting out, because I was starting out and I felt like I didn't know things, and it was very easy for me to defer to the experts because I felt like, oh, well, if I don't know, well, you do this all day, you must know this, right? So I'll just I'll just you know, I'll just kind of defer to you what you say, and I kind of absorb like I kind of let it go myself as a business owner. But guess what? I'm the owner, so at the end of the day, it still bites me, which is a terrible idea. No one's coming.

SPEAKER_00 35:31

No one's coming. No one's coming. Exactly.

SPEAKER_01 35:34

So what I one of the lessons I've learned is that you have to know enough to be dangerous in every aspect of your business, right? Like you don't have to be a lawyer, like you you don't need to be like the like the point where you can go take the bar and be a lawyer, right? But you need to know enough just so that you can balance or um I want to say double check, but maybe like uh I don't really know what word I'm looking for.

SPEAKER_00 36:05

Confirm.

SPEAKER_01 36:06

Not double check, but basically like know enough to know whether or not you're getting kind of like shysted by bad advice. Let's just be honest.

SPEAKER_00 36:13

Right. Right. Agreed. In each episode, we like to connect a famous example to our discussion to help you relate our talking points on a more global or well-recognized scale. Sometimes we use exact examples of either famous persons or successful business owners of today or in history. And sometimes we use examples of people who inspire us and have inspired today's discussion.

SPEAKER_01 36:40

So I couldn't find anything directly related to this. Funny enough, there was no famous story about people incorporating. But uh, I I did I did find uh there was a story that I remembered about this kind of being personally liable for kind of your business, even though that it was set up. And the story is kind of it's it's interesting. So I figure I'll bring it up here, um, if not for a slight entertainment factor. Okay. Years ago, when I say years ago in in the early 2000s, um, anybody remember Hulk Hogan, the wrestler?

SPEAKER_00 37:17

Yeah, of course. Okay, from the 80s.

SPEAKER_01 37:20

I don't know if I'm dating myself, I don't know.

SPEAKER_00 37:23

Yes.

SPEAKER_01 37:26

Well, so Hulk Hogan um at one point sued Gulker Media. And Gulker is like, do you know what Gulker is?

SPEAKER_00 37:34

Oh, yeah, yeah, yeah. Yeah, I remember that. They're like, um they're they're like national inquirer slash TMZ.

SPEAKER_01 37:44

There you go, like very tabloid-ish, right?

SPEAKER_00 37:48

Yeah.

SPEAKER_01 37:48

Um, and they were they're fairly sizable. I mean, they were they were they were doing pretty well for themselves, but Paul Hogan basically basically sued them for violating his privacy because they published a video of him having sex with a friend's wife. And Colk Hogan, you know, himself, I believe, was married at that time as well. So it was quite a scandal. So what he did was he basically took Gulker Media to court, and not only Gulker Media to court, he also sued the owner, Nick Denton, directly uh for basically this invasion of privacy. Um, and this was a really big lawsuit. I remember it was in the news for quite a bit at the time. I believe it took place in Florida. And at the end of the day, uh the Florida Jewelry found the the Gulker Media guilty, as well as the founder, and basically issued a huge verdict of 140 million dollars. Um of which I believe Nick Denton was actually responsible for a pretty sizable part of that, like personally liable for a sizable part of that. And then, of course, after the settlement and I don't know how many levels of appeals they probably went through, he turned out to be personally liable for about 10 million, which is still pretty sizable.

SPEAKER_00 39:06

Still, yeah.

SPEAKER_01 39:07

So um clearly he was found guilty. And again, I guess this goes back to the to you know what we were discussing earlier, is you know, it really doesn't matter what kind of uh entity you're in if you do kind of do certain things that will cross over for you to be liable. So after um after the settlement, uh Nick Denton himself and Gulker Media both filed for bankruptcy. Uh Gulker was eventually um sold to like another media company or whatnot. Everything was sold there, and then Nick Denton, I believe, he just filed for bankruptcy. And I'm not really sure what he's doing with his life now, but I'm sure he he's into other things because you know he was he was pretty well off before the uh before the lawsuit. Um so yeah, so that was kind of like interesting. But the little twist to this, which I don't know, Savannah, do you know this about the story? And the reason why you remember the story is because Hulk Hogan actually like brought out this whole entire lawsuit, but he didn't fund it. Like he had a funder behind him funding the entire lawsuit to go after Nick Denton because the uh his the investor, I guess, in this lawsuit, Peter Thiel, which is this tech billionaire, very well-known tech billionaire, personally held on to just such a vengeance for Nick Denton for like years. It was like 10 years has passed when Nick Denton wronged him in Gulker Media, and he basically kind of waited and waited for the right moment to secretly fund this lawsuit to drive the entire like company into bankruptcy.

SPEAKER_00 40:41

Yeah, I remember that. I remember thinking like who funds a lawsuit?

unknown 40:46

Whew.

SPEAKER_00 40:47

I always say I don't burn bridges because I'm not that good of a swimmer. So I'm not if I can't swim across, then I'm not burning that bridge. But it's true, yeah.

SPEAKER_01 41:00

I remember the business world is very, very small.

SPEAKER_00 41:04

It really is, it really is. And it's funny that um you brought up Hulk Hogan because I remember that, and I remember thinking at that time, like, who's an investor in a lawsuit? Like, who does that? But Hulk Hogan made out, man.

SPEAKER_01 41:26

Yeah, and then it came along and he was like, and it's time to strike. And apparently, like nobody knew about this until after the whole thing kind of wrapped up, and then he finally admitted that he was actually funding the entire lawsuit from behind the scenes. Like he paid for and he funded millions. It wasn't like a cheap lawsuit by any means, but he basically paid for all the lawyers and paid for even other companies to come and sue Gulker Media for like things. Like, yeah, it was it was it was uh it was uh it was surprising to find that out toward the end. But I don't know. I don't I don't know how the guy like Nick Denton felt about the whole thing, but probably regretted whatever it was he did. Do you know what he did though?

SPEAKER_00 42:07

Like no, I don't know, whatever it was he did, but I wonder if he also paid for Hulk Hogan's divorce, because that couldn't have been cheap either.

SPEAKER_01 42:18

Well, that's very true. Uh yeah, no. So uh they uh just to just to uh satisfies everybody's curiosity, what what Gulker Media did what Nick Denton did was he basically outed Peter Thiel be like out of the closet before Peter Thiel himself kind of made it like public like he wasn't like in the closet himself, like he you know, but he just also didn't want it to be in like like media about it. And so um in one of the articles, apparently they they outed him um without his permission, and so he was really mad about that clearly and decided that he was going to get them back, which kind of has a satisfying tone to it a little bit, but also a little a little scary.

SPEAKER_00 43:03

Dang, that was one black parade. Whew. Well then, I thought, I thought with the recent news of Rihanna being named the youngest billionaire, it would be great to learn more about her rise to success. So, although she had a rough childhood with an abusive father, she did gain an entrepreneurial spirit from him. Uh, she sold small things like sweets and stuff to help contribute to the family income. Well, we all know the famous story of how she was discovered, and she went on to have a very successful career in music, obviously. In 2011, Rihanna released her first fragrance, Well Rebel Fleu, Rebel Fle or Rebel Flower, which sold $80 million in the first year. The following year, she released another scent, Rebel, or Rebel, Rebel, I don't know, and continued to launch almost a dozen other fragrances. Over the years, she served as a Did you know this? She served as a creative director for Puma, Mac, River Island, Armani, CoverGirl, and Dior. These connections helped her. I know, right? Um, these connections helped her develop key partnerships and taught her how to learn, taught her how to run a successful business. In 2017, Rihanna founded Fenty Beauty, which focused on women of all skin tones and became the trail-blazing makeup brand for women of color. She also began Savage, uh Savage by Fenty, a clothing line meant to include all forms of women, which has also been a huge success. Rihanna formed a strategic alliance with Bernard Arnault, the owner of LVMH. LVMH, for those who don't know, is a French luxury goods conglomerate. They own literally all of the expensive brands like Louis and Gucci and all of the Cartier, I think, and like every major brand that you know that is expensive is owned by LVMH. And he struck a deal with Rihanna that they would own the Fenty 50-50. Now, her at first at first, when you look at this, you're like, wow, how could you give 50% of your company to somebody out the gate? Well, it wasn't just anybody. He's Bernard Arnault. Like you she knew that he would market the heck out of the Fenty Empire. And I mean, look at how it turned out for her. Rihanna could have easily stuck just with music. She could have, she kept her entrepreneurial spirit to a few fragrances. She could have just sold it Kohl's and just did what no other music, but she did what no other music has musician has ever done before. She became the richest musician in the world, the richest entertainer in the world, all because she wanted to diversify her interests and aligned herself with like-minded people. She never needs to record again.

SPEAKER_01 46:04

I definitely did not know all that about her. I just figured I I figure she did well for herself, of course, but I didn't realize that she. Because I mean it's it's not unusual for artists to expand out into brands and stuff like that, but it sounded like she'd like, she really expanded out and did it right.

SPEAKER_00 46:19

Well, she really wanted to be in the fashion world. That was her, from what I understand, that was her deep love. And music was something that helped fund that for her. And so she catapulted, obviously, because of of Jay-Z and her association with the with the label, but she really wanted to get into fashion and um and beauty. And her she worked towards getting in front of Bernard Arnault. Once she got in front of him, she was like, You can have 50%. You're you, you and I, 50%. And she still controls 50% of her Fenty empire. And 50% makes her what 1.6 billion, something like that. It's insane.

SPEAKER_01 47:09

Smart lady.

SPEAKER_00 47:10

Mm-hmm. She sure is. With each episode, we like to share either books, tools, apps, platforms, or anything we think is a great next step and connector to our discussion. So if you like our subject matter and want to learn more, you'll have a great place to start.

SPEAKER_01 47:30

So no book recommendations for me. Um, I did kind of like search around and found a couple YouTube videos of people kind of describing the different entities and what the what the uh what the benefits are, uh, mostly from a tax perspective, but still it's important to know. Um so I'll link those in the show notes just so you know, just to have just to have somebody break it down a little more simply, um, probably or even more simple um on um kind of a visual format. And then um like I said, really the only piece of advice I have is you know, don't don't let this whole entity structure thing kind of stop you from starting. Just forget about it. Use that kind of 100k mark, as I said, to kind of um kind of trigger you to kind of really think about this and go talk to the right professionals to kind of talk through what you should be doing. But the most important thing is of course, go ahead and get started. Um, well, go ahead and get started, um, do what we say, which is uh maybe you don't want to jump into a C Corp from day one. Um unless of course you fall into one of those one of those business categories we were talking about. Uh it's like like we said, it's a little harder to go backwards from that. So just uh start small, start today, and then um get the get the right people in your support network to give you the advice when it does become complicated enough that you need it.

SPEAKER_00 48:53

Mm-hmm. Agreed. I found a book in my research that's very small and very to the point. It's about 118 pages, and it's called LLC versus S Corp versus C Corp, explained in 100 pages or less by Mike Piper. It's 118 pages, so it's not 100 pages or less, but whatever, that's the name of the book. It's a new book. It came out last year, and it goes into a deep explanation in plain words, making it easy to understand. Piper is a CPA, and frankly, most often this type of advice, as in what type of structure should your company have, uh, comes from your CPA, as we've noted. So I thought this book is pretty on the nose. Speaking of which, I suggest you have a meeting with your CPA to help you select the type of structure your business should have. Your CPA is going to be the best advisor on this and uh and an attorney, and they're gonna help you make the right decision. But I think we've said this ad nauseum. Just make sure that you also trust your gut. So uh please join us for our next episode where we will discuss ghosted what to do when a client owes you money. Please show us your support by following us on your preferred podcast platform, social media, and YouTube. We'd love for you to also share our episodes. All of our links are posted below. Until next time, mind your business behind your small business.