Hello and welcome to another exciting episode of Bridge the Gap connecting business perspectives with your hosts, myself Colton Cockerell, and Trisha Stetzel our goals to bridge the generational gender and life experience gap in business through our unique styles of gathering information from our guests. This podcast is sponsored by Jim Butcher, who is a relationship banker with the Alligence Bank. Now let's get it started. Hello everyone and welcome to Bridge the Gap. My name is Colton Cockerell. I'm a Certified Financial Fiduciary and independent financial advisor with Sharer McKinley Group. Now I'm here like always with my lovely co host, Miss Trisha Stetzel.
Trisha Stetzel :Thank you, Colton. You're always so kind to me, at least until we start the show. Hi, everyone, Trisha Stetzel. Here owner of Results Xtreme Business Solutions and I am super excited about our guest today. I feel like she's my friend. She's so complimentary. And it just makes us feel so good. We were having this great discussion before we started recording today. So, Tara Mason, my friend is a business law attorney. She's been practicing law for 23 years. She has a passion for helping business owners proactively protect their business plans for sustained growth by drafting for them strong corporate governance documents and contracts. Welcome Tara to Bridge the Gap. Thank you. So glad to be here. Thank you, Colton. Thank you Trisha very kind introduction. So happy to be here.
Colton Cockerell :And you know what, this is a special occasion, Tara because you are actually on our first episode of season two. So welcome. Now you have a ton of information. 23 years, that's a lot of experience. So we're going to jump right in because we want to make sure that we can milk all the time that we we have with you Okay, so then I'll go ahead and get us started. Trisha I know we'll just do age before beauty. Oh, I guess that
Trisha Stetzel :haha
Colton Cockerell :okay, so let me jump right in. So as you know, really whenever we're talking about business law, there's not a lot of generational differences, right businesses business no matter how old you are. So regardless if you're starting off or you're looking at getting another business tell me how important is it to be incorporated?
Tara Mason :Well, there's three different structures, business structures for businesses. incorporation is just one of them. Another structure that you have is your standard LLC. And then you have an LLC with an S election. So I can talk to you about how those different structures are applied in regular businesses, would you like for me to go over those?
Colton Cockerell :Absolutely.
Tara Mason :Okay. Perfect. SoGenerally you'll have your your LLC, and that'll be your sole proprietor, proprietor. So those are the persons that have decided to take advantage of a tax benefit that they could receive. By being an LLC besides just a DBA. You have a tax benefit associated with being an LLC. And so I always advise my to speak with a tax professional so that they can decide whether or not it's even cost beneficial to them to form an LLC, because if your business is so small, you may not want to incur that expense. The next structure versus LLC the next structure is an LLC with an S election. You see that structure more often when you have a partnership. And then with the selection again, that's associated with a tax benefit. So a really simple example is that with an LLC by itself, the income of the business goes straight to the business owner. It's a, it's an automatic distribution. And the business owner will pay distribution taxes, income taxes on that distribution. Whereas when you have an S election, you don't have a straight pass through all income. under an S election situation, we'll have one of the member owners identify a reasonable salary for the position that they occupy in the business. That reasonable salary is then taxed at an employment tax rate. The rest of the distribution will be taxed at an income tax rate. So again, I always advise my clients to speak with a tax professional so that don't know what is most beneficial to them. So hypothetically, on a first example, if you have $100,000 income coming to an LLC, it would just go straight through to the business owner, and that would be tax income tax on $100,000. Whereas if I have a partnership, and I choose an S election, then me and my partner can choose a reasonable salary for the positions that we occupy. And it doesn't have to be equal to our percentage of ownership. So say hypothetically, I have a $40,000 income. My partner has a $40,000 income and then the remainder of that is a $20,000 in his distribution for $100,000 income on the business, and that situation we both would be taxed employment taxes on The salary, the reasonable salary that we've identified for the IRS, and then the remaining 20% would be tax income for the business. And that's going to be at a lower rate. So again, need to discuss with your tax professional, what's the best benefit? what's what's most cost beneficial to the business for us to do that. A lot of small businesses find that if they choose to S election, it benefits them more to go that route, because they don't have to pay employment tax on the full amount of the income for the business. That's the big difference. When you talk about incorporation, that's going to be the third common structure for small businesses when you talk about that type of structure that comes up in situations when you want to have different kinds of stock or the business. So for example, I've had a situation recently where because of COVID-19 a business Owner want to restart their business however, they're just flat out of money base have spoken to some people who are interested in investing in the business to keep him afloat. However, he can no longer contribute to the business financially. My recommendation was that if you incorporate you could have different shares of stock in the business. Well, how would that benefit him? It would benefit him because he could have a sweat equity share agreement in the business entity itself. That would allow him to acquire equity in the business based upon the work that he's putting in over time. There will be a vesting period that could be negotiated and those terms could be worked out in the contract, such that he could acquire more equity and then based upon the agreement, exchange that equity in time for a different type of stock, which would be your common shares of stock, in essence, he would be able to buy his company back from the investors and that's what he's looking to do. You cannot have different kinds of stock or interest in the company in an LLC, or an LLC with an S election, it has to be incorporated. Now, the negative tax side of that is that with a corporation, when you're Incorporated, you gotta pay corporate tax. So you're going to have a double taxation. And a lot of times people smaller business can't handle that. But in a situation where I was working with a client, it was a large enough business that over time, that will pan out in the wash, and again, it will allow him to buy back the company from investors and it was somebody who was going it was a close friend of his and was willing to help him out. So that's an option as well so just to recap the three kinds of structures that you normally See, are just an LLC or a sole proprietor, second, an LLC with an S election and a partnership. And third, when you're incorporating because you want different types of stock.
Colton Cockerell :I was gonna say, like, we can just hand you the show, and you can just keep like you knocked out like that was I think four questions are like, what is an LLC? You know, what's the difference? What's the tax? The tax liability? You literally answered so many questions in that one answer that was perfect.
Trisha Stetzel :I was awesome, like Mind blown Tara
Colton Cockerell :I'm just like, taking notes
Tara Mason :as simple as possible so that people can understand well, what do I want apply a certain structure for my business because they have different tax benefits really is what's making the determination is the tax benefits?
Trisha Stetzel :Sure. So can you sure have a question for it? Yes. So I have a question. I know tons of people. They have small businesses, they have DBAs. And they don't have any kind of structure in place. Right. So what I want to know, I understand the tax implications right behind having these formations, but don't they protect us as they separate, right? The my personal income or my personal property, if you will, from my business, even if I take that DBA and form an LLC? Is that where I mean?
Tara Mason :Yes, Trisha, you are absolutely right. And that's why you would want a more formal structure for your business rather than just keeping it as a DBA. When you create an LLC aside from the tax benefits, that LLC is a completely separate entity, and the law, it is identified as a separate individual, that corporation is completely separate from you. And that's how you're able to separate your personal assets from the business assets of the LLC. that's why it is so important. However, I also caution my clients that yes, you can go online yourself individually, create a new name, and pay the filing fee to establish a new LLC. However, if you don't have the corporate governance documents in place to show that you're actually operating as a separate entity from the individual, then you may be exposed to risk of liability down the road. So having corporate governance documents in place for the LLC is a way to further protect you personal assets from any type of liability associated with a business. So, the same way it's a very akin to the same way that you would think separating your bank accounts, no commingling of your personal funds with the business funds it's a way to define it if there's ever any type of liability situation to show a court that this is a separate entity a separate individual all together it has its own liabilities and assets that are associated with it is completely separate from the individual so yes, you're absolutely right which you that's one of the key benefits that you have from when you formally incorporate you know, or create an LLC for a business owner.
Trisha Stetzel :It sounds to me like Colton, we should have an attorney help us with that and not just go online.
Colton Cockerell :Sure, what do you mean Can I just go to like a online you know, like a [...] and take care of it is yeah,
Tara Mason :oh my goodness gracious. Yeah.
Colton Cockerell :We we've had that conversation before. Now, now, first off, I'm letting you know you're 23 years of experience is definitely showing you what you're bringing let's a lot of knowledge that you're bringing. And that's why we're so appreciative of having you Now let me ask you this. Now, whenever it gets, I know it gets a bit more difficult when it's a sole Prop, just one individual. I know that, you know, it's it's pretty streamlined. It's just deciding what kind of way you're going to structure your business. But now, when you get partners involved, tell me how does that work, especially towards the back end, if someone was wanting to leave or if someone were to pass away? Tell me how that works.
Tara Mason :Thank you for asking that question. Because that's really, really important for people to think about on the front end, rather than the back end. And that's why I let people know them very, very passionate about helping business owners be proactive, rather than reactive to a situation. So how are you proactive in a partnership scenario, the way you are, first is don't have equal amounts of ownership in the business. can't break a tie when everybody has the same ownership percentage in a business, whether that's everybody's got 50 5033? And a third, no. You can't break a tie in those type of situations. So I counsel, my clients at someone's gonna have to be a majority owner. Let's negotiate that now. So for the minority owner, what other benefits what other authority Could I give the minority owner so that they feel that they are equally contributing, even though the membership ownership itself the percentage of ownership does not equal? How can that person feel as a minority owner, I'm equally contributing and equally getting a benefit out of the business. So that's number one. Everybody can not have the same amount of ownership in the business. Number two, I negotiate with them. The terms of any type of buyouts if there is a dispute, and it doesn't even have to be at this view, it can be a situation where one of the partners investors in the business said, I've got enough I've been in this is the return on my investment and I want to get out, I want to get out. You want to negotiate on the front end, then first, how are those shares going to be fair valued? Meaning we identify who gets to select a business appraiser ahead of time, we identify the terms on how those shares are going to be valued, at what point in time, they're going to be valued, those type of things. We negotiate who can buy the shares, oh, if I want to get out and only a family member, buy those shares, and anybody in the public buy those shares? Does it have to be somebody that's in the same industry? Can it be somebody who's looking to get into the restaurant where they've only been into retail. you negotiate those things upfront. And why is that so important? It's because some people may not want to let the business go, it's remained profitable. They put a lot of time and investment in it. And they don't want. They don't want one person who's pulling out of it caused the whole thing to fail. And I don't I don't think that's right. And I don't think that's necessary. If you negotiate on the front end, the business can continue to thrive and grow. You can have the terms and pace that allows people to buy the shares quickly so that we don't end up fighting about it. And we can get an investor in the new partner in and take that place. But the problem comes in is when you don't negotiate upfront, who can buy this shares, so For example, we've had this a number of times in our firm. You have a family owned business or restaurant. And it's been in the family for years. Well, there's been a divorce. And now we've got a new wife. We've, you know, they she's gotten new kids coming in, and then the original family, the original siblings. Normally how it is, is that they don't want the new step. Or they don't want the new stepbrothers and stepsisters sisters being able to buy those shares into the business because somebody is is leaving. You want to negotiate doesn't have to remain a family owned business, you know, can't do those. The persons that are buying the shares do they have to be by blood relations and the moms and dads that come by when you do those things on the front end again, the business can continue to thrive and grow and you don't expend money disputing an issue about who can buy the new shares. So that those are the type of things you want to think about ahead of time to be proactive.
Trisha Stetzel :Sounds like a prenump for a business
Tara Mason :you're right it's Trisha that's exactly it. It is a prenup it is and if you do your work on the front end, and look if you have to split it's part ways, you're able to do it easily and cleanly. And everybody can go their separate ways.
Colton Cockerell :That's well put, well put Now let me ask you this. This is gonna be a tough question. Okay. So if you have the choice to right now in COVID to have a pet elephant or a pet zebra which one would you choose?
Tara Mason :I would take the pet elephant. I would
Colton Cockerell :For car washing purposes or what?
Tara Mason :I like the size. I think I could do more with the elephant. The size, the Mass would be able to move things with them. He's trainable. They have pleasant dispositions. I'm all about large and take charge. I would want to. Yeah, that I'm here myself. And that's Tara's elephant. I'm all for it. Yeah.
Colton Cockerell :Tara listen. I The thing that I love about professionals is that they are so onpoint but man when it comes to like random questions, they have a reason for it. I love you thought about this before.
Tara Mason :Yeah, I want to Allison I want to make a statement. That's my elephant. Oh, yeah, definitely.
Trisha Stetzel :Oh, my goodness.
Tara Mason :Now, my HOA may not like it.
Trisha Stetzel :as the attorney and I love it. Okay, so, Tara, would you be willing to divulge what generation you are in?
Tara Mason :Oh yeah, I'm in the old people generate
Colton Cockerell :She's not a baby boomer.
Tara Mason :I'm not a baby boomer. I'm younger than the baby boomers, but I've got some time here.
Trisha Stetzel :Yeah, right. So, Colton, I win. So far you do.
Colton Cockerell :She's a Gen Xer, I'll give that to you, but but she's hip and she's cool. So she can definitely pull it off as a millennial, just saying that
Tara Mason :I try. I try.
Trisha Stetzel :Because the next question that I would ask you is what generation do you most identify with?
Tara Mason :Oh, it would definitely be the older Gen.
Trisha Stetzel :Okay. See, Colton? Yeah.
Tara Mason :No shmae in that none whatsoever?
Trisha Stetzel :Yes. So if we could, Tara, in closing, please, again, tell us the name of your business and how people might contact you. If they have questions about the podcast today and we're going to ask you to spell it out for us. We're only on audio so that people can contact you, so forth. So my name is Tara Mason, the best way to contact me is on my mobile, my cell phone 504-559-0499. That's my preferred way of communication. I like talking with people. I like communicating verbally with people, so please give me a call. And if I'm not available at the moment, I promise you, I will call you back. Alternatively, if you don't have a moment for a call, then the best way to reach me is by email. And I'm going to spell that out. It's gonna be my name, Tara Mason, T A R A M A S O N E S Q @ gmail.com. And I will quickly respond to your emails again, my focus is on helping business owners pro actively protect their business assets and I'm happy to help you do that.
Colton Cockerell :So if you're looking for a business law attorney Tara Mason is the bomb. I'll tell you that not only is she knowledgeable, but man if you meet her in person, she does not come off as an attorney and I love that. So thank you, everybody, for tuning in today. This is going to conclude this week's podcast. So tune in next week for another exciting episode of Bridge the Gap where we're connecting business perspectives. Thank you again for tuning in to this week's episode of Bridge the Gap: connecting business perspectives. If there's a certain professional or profession that you want to hear from, leave a comment in this week's Facebook post. Please subscribe and share this podcast. Thanks again to our sponsor, Jim Butcher, a relationship banker with Allegiance Bank. Colton Cockerell with Sharer McKinley Group, LLC is located 820 South Friendswood Drive, Suite 207, Friendswood, Texas 77546 phone number 281-992-5698. Securities and investment advisory services offered through NEXT Financial Group, Inc member FINRA/SIPC. Sharer McKinley Group is not an affiliated NEXT Financial Group, Inc.