Should You Set Up A Limited Liability Corp (LLC) For Your Online Internet Business [LNIM219]

Should You Set Up A Limited Liability Corp (LLC) For Your Online Internet Business 

This Week on the late night internet marketing podcast, we're going to tackle the topic of whether or not you should form an LLC. We're going to come at this from the non-legal business owner perspective and cut out all the mumbo-jumbo all this and more on the late night internet marketing podcast. 

Transcript

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Episode 2 1 9 This Week on the late night internet marketing podcast, we're going to tackle the topic of whether or not you should form an LLC. We're going to come at this from the non-legal business owner perspective and cut out all the mumbo-jumbo all this and more on the late night internet marketing podcast. Hey, how is everyone doing? I am your host, Mark Mason, coming to you from the little studio in Dallas. I know you must be almost as excited as I am. I hope you're having an absolutely amazing week. Things have been crazy busy here. Lots of drop shipping stuff going on.

Mark: 1:43

I'm also experimenting with yet another business model. A secret project that I will reveal to you most certainly if it's successful and maybe not, if it's not, but now it's, I'm getting back into some things that I've done in the past. So things have been really busy. I've also made some big commitments to one of my mastermind groups about things that I'm going to get done in this. Third quarter. I've already done my third and some of my fourth quarter planning to finish out the rest of the year. We've discussed those goals in my masterminds. So I've got some big commitments around that, and we'll be discussing that as we move forward in some of these episodes. But today day I wanted to tackle one of the big. Questions that I get from people all the time. They ask me something like this. I'm a solo entrepreneur. I've got my own little business and I am wondering if I should form a limited liability corporation. Now, if you're outside of the United States, it may be called something else. But this is the idea that you take your solo preneur activity. And you make it into a corporation. You form a business entity. It's true that particularly in the United States, but everywhere else in the world, you can run a business without forming a corporation. There's nothing stopping you from planting vegetables in your yard and selling them on the side of the road. And calling that a business as a solo preneur, you don't need to form a corporation, but oftentimes as solo entrepreneurs, we decide to form corporations and instead of forming. These big corporations, like you think of Exxon or apple, where you've got a board of directors and, vice presidents and all of the CEO and all this stuff. There's this idea of a limited liability corporation, Basically the intent of it, as you can tell from the name is that it gives you the advantages of being a corporation, whatever those are. And we're going to talk about that and it's structured in a way where it's at least in theory, designed to limit your liability. We'll talk about that a little bit and whether or not that makes sense, but that's the idea is that you're trying to separate your personal situation and your personal finances and your personal life from this corporation. Just if you were an employee, if you're an employee at burger king and something happens at burger king. That's a burger king thing, not a, your personal life thing. The two things are separate as a limited liability corporation. The idea is to separate these two things. And the question is why would you want to do that or not want to do that? And so the first thing I wanted to do. Was give you a total disclaimer, in that I'm not an attorney and I'm not a tax expert. Okay. That's not my area of expertise. And before you make a decision about whether or not. To form a limited liability corporation for yourself. I recommend that you talk to an attorney or a tax professional about this because they are people who've studied the law, both the tax law and the liability law around this topic, and they understand it. And the term of art is they are competent. To advise you, I'm not competent to advise you. But what I am competent to do is to tell you about my experience and that will prepare you for that conversation. It'll tell you what questions you need to ask and in cases where you might. Feel like the attorney or the tax professional has something to sell you. For example, the attorney is going to be selling you a service to set up an LLC. The tax professional may be selling you a service. For the LLC, this will give you the perspective, the untainted perspective. So you can ask the right questions to determine whether or not those people are working in your best interest. So that's the purpose of this. It's not to give you advice it's to help you understand what questions to ask. So the first thing, and I don't want to call it a myth because it's not a myth, but the first thing that people say is I want an LLC. Because if in the name of LLC has limited liability and I want an LLC, so that if someone sues me. There'll be suing my company and not me. So they won't be able to get to my personal finances. They won't be able to take my house away from me. They won't be able to, get to the things that belong to me. They'll only be suing the company and that will limit my liability. And indeed it is true that one of the purposes of a limited. Liability corporation is to manage your risk around topics like unpaid debts, legal judgments other legal obligations of your business and liability for negligence and malfeasance and stuff like that. So someone sues you there's, when someone sues your company the intent of an LLC is to help insulate you. that's what people think. And they think that by forming an LLC, then they're going to be magically protected, like the shields on the Starship enterprise. you turn the shields on and all of a sudden the phasers can't I get you so that's not how it works. And so the problem with this thought is that. If you do something to screw up, usually in a solo entrepreneur situation, you are the company. You may have some VAs that do some stuff for you, but usually you are the company. So if you do something. Then it was actually you, the person that did it and probably what's going to happen is when your company gets sued, you will also be named in the lawsuit that As a specific person who's at fault because in your company, your, probably the person who did the thing now in a larger company, let's say you're running a landscaping company. You're running it as an LLC and you've got a driver and that driver was off doing something and crashed a car into someone. And now your company is being sued. Because of that accident, the LLC probably does protect you a lot better because you weren't personally negligent, especially if you provided the driver with a safe truck to drive and he had the proper credentials and the proper training and everything, you probably do enjoy some protection from the LLC. But if you wrote a blog post and you defamed somebody and then you get sued. And for that, you're the one who wrote the blog post. So even though you wrote it as your company, you're the, also the person who did the thing, your going to be named in the suit. And one of the things that amazes me. About the United States, particularly is you can Sue anyone for any reason you don't even have to be right. And so that's still going to bring all of the court costs and all of those things along with it. So an LLC, in my opinion, again, not being an attorney. It is not a magical thing that magically protects you and your personal assets from being sued. It can help in many cases, really, it's not a magic thing. The second thing people always say is I want an LLC because this is going to help me with my taxes. Because LLCs will allow me to set up something better for my taxes. And that. That will make it so that I can pay fewer taxes. I hear this all the time. But the problem is, LLCs that are owned by a single person again are usually taxed usually. And again, I'm not a tax attorney, but they're usually taxed the same as a sole proprietorship. The same as if you were running a company as yourself, because. When you're just a single person, LLC, the LLC is treated as what's called a disregarded entity, which is exactly what it sounds like. There's no special thing. in the United States, you follow a schedule C on your income tax and your income is taxed as income There are options that having an LLC gives you. And one of those options, for example, would be to be taxed as a regular CRS corporation. There's lots of things that you can do, but most people don't. And most of us that are running these LLCs until it gets really big. There's not a lot of tax benefit now later. When the company's big and you've got a lot of employees and so forth. Sure. But most people that I talked to that are thinking about starting an LLC, they're very small in a lot of cases, they're not even really making any money yet. And they're expecting that somehow the formation of the LLC is going to magically change their tax liability for their business. My experiences that's generally not true. Now, this is definitely a case where when your business is bigger and you're making a lot of money, you definitely can, and should already be affording a CPA to help you with your taxes. And they will tell you whether or not an LLC will help you. But if you're sitting there and you're just starting your business and you're thinking I might make a thousand dollars this year and I want to form an LLC. So that can protect me from a tax perspective. That doesn't make a lot of sense. Okay. So those are the two main reasons that a lot of times people get into forming an LLC. So should you, if you're a solo and you're listening to this and you've been thinking about an LLC, why in the world should you do it because there's cost associated with it and depending on where you form your LLC, Those costs can be significant because some states, when you form an LLC, you've got to pay to form the LLC. Then you've got to pay a franchise fee every year to keep the LLC maintained. And then on top of that, there may be state income tax implications in your state. At least in the United States, I'm not sure about outside the United States that come into play when you form the LLC. So there's cost involved in forming an LLC and there's paperwork and upkeep and maintenance and all that kind of stuff that you've got to deal with. There's overhead. A lot of times in forming an LLC should to do that. That answer is going to vary state by state. I've already told you that the benefits of this thing may not be what you thought due to misconceptions about how much protection an LLC can offer you. And then you've got this cost on top of it and it can cost a few hundred dollars. To form the LLC depending on your state and what the startup costs are in your state, and then there's maintenance costs on top of that. And so my advice to you is just make sure that before you go to the trouble of forming an LLC, that you understand the costs, because what I see a lot of people do is they form the LLC. The business doesn't go the way they thought it was going to go. And after a couple of years, they decide to dissolve the LLC because it costs money to keep it running and they don't want to mess with it. And they've, things have changed for them and so forth. So sure. You know what you're doing there now? So why I have an LLC? Why, what is the point of having an LLC? If all of these things are the way I've described? Reason to have an LLC aside from whatever possible tax benefits there are or are not. And aside from whatever legal protection there is or is not, again, that's something that you need to be talking to professionals about, but the benefit is there are an increasing number of situations, particularly in online business where. LLC is will help you. It make the difference in whether or not you can do the thing that you want to do only because it gives you the credibility that you would not have as a sole proprietor. Let me give you the latest example. So I mentioned in the last episode, I talked about the fact that my son and I had been doing drop shipping on Facebook and we've been following. This methodologies discussed in this course that I talk about at late night. I am.com forward slash Tom T O M. So we've been doing that and we're looking at expanding that business in two ways. One way that we're looking at expanding that business is by bringing wholesale suppliers on. And those wholesale suppliers will be able to sell to us at a cheaper rate than what we're able to buy goods from in the retail marketplace. So the other thing that we're looking at doing is we're looking@expandingthebusinesstosellonwalmart.com. Now, particularly that last thing, walmart.com will not accept you as a seller. Unlike Amazon, walmart.com will not accept you as a seller unless you are an actual corporation. So that's pretty interesting. So that's just a case where Walmart is saying, look, we only want to mess with the serious people. And one way we can judge whether or not people are serious is whether or not they've actually formed a real company. That really doesn't have much to do with really how serious you are. Really, all it has to do with is whether or not you wrote a check to legal zoom or Delaware, LLC, or whoever that you use to set up your LLC. that isn't a real measure of how serious a business you are. There are many very successful solo preneurs, but Walmart has chosen to use that as one of many things in a list that they use to screen potential sellers on their marketplace. So what that means. For me, is that the only way we were able to get approved on walmart.com was to leverage the fact that we were a corporation and not a solo entrepreneur. We were not a sole proprietor. So that's one case where you want to form an LLC is when you need to. And then the other thing that I've found. Has to do with wholesale suppliers. So if you approach a supplier and you have to, in order to buy wholesale, usually have to open an account. You have to provide a tax ID and do some other kinds of paperwork. Typically a wholesale supplier is using a screening process that is similar to what Walmart is doing. What I just described. They're getting inquiries from quote, unquote, the public all the time, trying to buy. And they've got a limited amount of resources to deal with new clients. And if you come to them wanting to set up an account and you're presenting as an LLC as a real corporation, as opposed to coming in Joe, the online entrepreneur. That gives the impression that you're a serious business that they should consider doing business with. Now it may not be true as an LLC person. You may be someone who's brand new to internet business, who just heard this podcast and went out and set up an LLC as opposed to a sole proprietor solo entrepreneur. Who's been doing online business for a decade and is doing a hundred thousand dollars a month. In e-commerce business, right? It doesn't mean just because you have an LLC, it doesn't really mean that you're better to do business with, but there is this perception that you generate whenever you have an LLC that can be useful. To you when you're doing business with other people and there's that other thing in there that may or may not be important to you when you're telling people what you do and you want to have some pride in that. I've had a lot of people tell me they just feel better talking about the fact that they're a legit. Corporation and LLC, you say I own this company, it's called something, LLC, that sounds different than I've got my own business. It's a side hustle, and I don't even have a name for it or whatever. So that's also not really a tangible thing, but it's can be really important to people in their mindset and the way they feel about themselves in their self-esteem around them. And so that's one of the intangible benefits of having an LLC. Now there's a couple of more technical benefits of an LLC that you should ask your tax provider about. One of them is there's this thing that came in 2018, called the 20% pass through deduction and under certain conditions. When you have an LLC, you can qualify for this thing. It allows you to deduct for income tax purposes, 20% of the net income of your business. And so this is a kind of a complicated thing in basically it's important if you're a profitable and if your business is profitable, then you can reduce your personal income tax burden in that way. So that's something that you want to ask your tax provider about at a time when you're profitable and you're filing your taxes. How does my LLC qualifying me for this pass through deduction. So that's a technical benefit that you want to try and understand. And right now, to my understanding, that is in effect right now, it started in 2018. And to my understanding, it's going to last for a couple more years, depending on what. The Biden administration decides to do in the U S whether or not there's something comparable to this in other countries. I really have no idea, but things like that are why eventually you need to take information from a guy like me and bring it to a person who really knows. Not only the details of what an LLC does for you, but the current details, because one of the problems with this area of the law is that it changes all the time. I'm not interested at all in keeping up with LLC tax law, somebody else needs to do that. And you can pay those people to do that for you. So that's one advantage, the other advantage to an LLC. And this is not something that I've done personally, but a lot of my friends, when they bring on actual employees that actually make a salary and actually work for the company, the LLC gives you. The structure that you need in order to do that and to have a payroll and all that sort of stuff as a sole proprietor, you don't really have the right structure to make that work. And so that's another thing you're going to want to discuss with your tax accountant when it comes time to actually hire an employee, not a VA or a contractor or someone that you're just paying directly, but an actual employee. The LLC provides the infrastructure that you need in order to set all that up. And so that can be something that you absolutely need to do if you're going to have employees. So I hope this helps. So if I were going to take away just a few things from this discussion, I would want you to take away the following one is don't fall into the trap. Of believing that an LLC is some kind of magic bullet. That's going to protect you from all taxes and all lawsuits. That's not a thing it's not true. And it's probably even considerably less benefit in those two areas than you were imagined. And you need to talk to professionals about that. If that's something you're concerned about, but it's probably not what you thought. That's the first thing. So make sure you understand that. The second thing that I would want you to take away from this is when it comes time to do this stuff, you really need to talk to people who understand what's going on, particularly. On the tax side, I think it's pretty straight forward to use an internet based service to set up an LLC. I think it's nice to have an actual attorney that you can talk to. So I don't want to diminish that, but your tax professional can also help you set up the LLC. And unless you're doing something that you believe is particularly risky. I think that's a good way to go so that you can talk to the tax professional about how it's going to impact your taxes, but when it comes time for you to do whatever you're going to do, I definitely want you to talk to professionals about it. It's worth the few hundred dollars that it costs to talk to people. And the third thing is there are some benefits to an LLC that are interesting and particularly intangible, like how people react to you and your business and whether or not they want to do business with you, that you should keep in mind. So that's what I have for you today regarding an LLC. And I hope that helps. Now if all this LLC stuff seems foreign to you because you don't even know where to start your internet business, you don't even know how to make your first dollar online. I've got a free course for you for that. It's a course specifically for people who are just getting started in trying to figure out what the different ways are that you can get started from someone who in general is not trying to sell you a particular thing. So that's me. So I generated the course that I wish I had. When I got started back in 2007, it at late night, I am.com forward slash start. And it's a nice little free video course that just explains to you the idea of how to make money on the internet and some of the different business models that you can consider. I really get a lot of really good feedback on it. I think it's perfect for you or maybe one of your friends. Who's thinking about getting involved in online business, but they're not sure where to begin late night. I am.com forward slash start. Okay. The last thing I wanted to talk about today was our motivational segment. We talked about, we're always gonna try and work in some mindset stuff, and I wanted to talk to you about straight line success. And what do I mean by that? And I think when we're working on our internet businesses, our online businesses, it's really common for us to look at other people and go, oh, man, That person they're really successful and they've done all this great stuff and they started from nothing and they got to where they are and I want to do that. And so we start off, we set those goals, oftentimes comparing ourselves to what other people are doing or comparing ourselves to where we want to be. I want to make a hundred thousand dollars a year. I want a six figure business, or I want a seven figure business. And the normal thing. For our brains to do is to imagine that we're going to proceed towards that goal, whether it's a goal where we're comparing ourselves to someone else, or it's a goal we've set for another reason, we assume that we're going to proceed towards that goal in a straight line. And. I'm here to tell you that this straight steady progress line, that's not really how it goes. Really, how it goes is we work really hard for a while. And a lot of times nothing is happening because we're trying to get started. And then we may even go backwards from there and have some setbacks and learn a bunch of stuff that we didn't even know. We needed to know. And that means we have more work to do so we're actually further behind than when we started. And then we start to get some traction and make some progress and maybe we even make that first sale. And then we run into some other obstacle and that sets us back even farther. But then we double down and we go, we make even more progress than we thought was possible. Only to find that there's some of problem we didn't know about. And it's this two steps forward, one step back and some days, one step forward and two steps back. And so it's not a straight line. it's this crazy Jagat up and down thing that can sometimes be both exhilarating and totally disturbing, right? Because he feels so great because you make good progress and then you feel so low when you have a setback. And so I think what's important for us to do is to zoom out and realize that even though. When you're in the middle of it, it's not a straight line. It's these huge ups and huge downs and backwards and forwards. And it's this fight. And sometimes you're winning the battle and sometimes you're losing the battle, but it's the war we're trying to win. And when you zoom out and you look at this line, even though it's bumpy and zig-zaggy. It is moving on average up into the right. You're going to do better today than you did yesterday. You're going to do better next month than you did the month before you're going to do better at the end of the year than you were doing at the beginning of the year, because on average, you're going to move towards your goal, but on a day to day basis, you're going to have setbacks and that's okay. And not only is it okay, it's normal. Because that's how this really goes. And when you're looking at other people's businesses and you're looking at the way, things go, you know, see all this stuff. And so you assume other people are on this smooth trajectory up into the right I'm here to tell you it is not a smooth trajectory. You're going to have setbacks. It's going to be a jagged line to success. That's not only okay. It's also completely normal. Okay. Okay. I hope you enjoyed that episode of the late night internet marketing podcast. I would love it if whatever you're doing right now, whatever pod catcher you're listening in, you would either like, or share or subscribe to this episode. Now, one of the things I heard recently is that. Apple has changed the name from subscribe to like, because people thought subscribed meant money. Nope. This podcast is absolutely free. So if you've got a subscribe button smash, it, all that means is that you'll get this podcast downloaded to your phone or wherever automatically. And if you've got the opportunity to share. Or like this podcast that helps me that tells the people that are delivering you, this podcast that you like it and that other people might like it too. And so it helps the show grow. And I really appreciate that. So share subscribe, whatever it is that you can do. That means mashing a button to signal that you're enjoying the show that helps me out. And of course, if you've got something to say to me, I'd love to hear from you at late night. I am.com forward slash feedback. And until next time I am Martin Mason coming to you from Dallas, Texas. I hope you have an absolutely amazing day. okay. I wanted to expand on this straight line thing a little bit to tell you a story just happened last night. So last night we're playing softball and we're having a really good ending. We got the bases loaded with no outs and one of our guys gets up and hits a line drive to center field. The ball bounces a short hop, a very short hop and bounces into the center. Fielder's glove. So that's a hit in softball. All of the runners advance. The hitter goes to first base. Everyone else moves up a base, the runner on third base scores. But unbeknownst to us, the umpire made one of the worst calls I've seen in the history of softball and called it a cat. So even though the center fielder did not catch the ball touched the ground and popped into his glove. The umpire did not see that and called it a catch. And the other team recognizing this opportunity, threw the ball to third base, then to second base, then to first base executing a triple play because by that time, All of our runners had advanced and we were unsuccessful in arguing Nichol. And all of a sudden we went from bases loaded with a run score to no out to the inning is over. And since that was a force play, no one scored. So why am I telling you this story? This is analogous to the things that can happen to you in business. This Jagen line, things can be going really well and you can have a setback. Here's the rest of the story. We went on to win this game, like 17 to five. So that was a setback and we were pissed. We were really angry, hollering at the umpire, trying to get him to change his call. The guys were really upset, because this happened and it was completely unfair and unfair things are gonna happen. You and your business, things that are out of your control. What did we do on the softball field we regrouped and in the next ending we scored 10 and everything was fine. That's what you need to do in your business. You need to keep scoring. And when you keep scoring in your business, you will be able to overcome those bad things that happened to you. Softball is a metaphor for life and business. And I think there's lots of examples where you can see that if you persevere good things are gonna happen. You just got to keep moving forward and keep moving up into the right.