Ep. 2 | Talking Single Member LLCs
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Speaker 2:Welcome everybody back to teaching tax flow, the podcast. We are believe it or not, we're in episode two. Doesn't seem very far, but but we got a lot of info as always. So, I'm your cohost, John Tripolsky, here with Chris Pacuro. CPA has every, you know, every acronym.
Speaker 2:How many letters do you have in your credentials?
Speaker 3:Oh, jeez. I don't know. It just means I'm old, and I've been doing this a long
Speaker 2:time ago. It's y y is in season, sir. Wise in season. So alright. Well, let let's talk about something here.
Speaker 2:So I'm gonna I'm gonna bring this topic up. So I I won't say what it is yet. Obviously, you guys can read it in the show title. I don't wanna say it too early because Chris may throw something at me. So if you hear a crash, yeah, it's from him.
Speaker 2:Throw throwing a candle or something at me. So here we are. Again, episode two, we're gonna talk about I'm gonna say it, Chris.
Speaker 3:I know. I'm
Speaker 2:gonna say it.
Speaker 3:I got wrangled last time.
Speaker 2:Are you ready? I know. I'm stepping you guys, I have full hockey gear on right now to protect myself.
Speaker 3:Well, now you're revealing that you're from Detroit.
Speaker 2:Oh, that's not a bad thing, though. Right? No. No. It's it
Speaker 3:seems we both are.
Speaker 2:It means it means I'm a little temperamental sometime. It's okay. I I think I'm just angry because it's cold up there right now. And and here we are in in Panama City Beach, Florida. It's warm.
Speaker 2:Yeah. Okay. Obviously, I'm avoiding saying the topic here. So let's say let's get it over with. When here we go.
Speaker 2:When is it appropriate to file a LLC? Crash. Boom. Nope. You didn't hit me.
Speaker 2:Alright, you guys. Let let's get into it. I'm not gonna say anything. I'm gonna step away. And, Chris, let's let's talk about this.
Speaker 2:Well, tell me how you really feel.
Speaker 3:So I you know, I don't hate LLCs at all. The thing is this, this topic came up at dinner and, I don't know. Things got a little heated, but that's okay. And and for the record, I'm not again, I'm not opposed to LLCs, but what we're talking about specifically in this episode is a single member LLC. We'll have additional content on multi member LLC's, LLPs and different types of entities.
Speaker 3:But when we're talking about a single member LLC, we get the question all the time, when should I form it? And what we get more often out there as CPAs and tax professionals is, if I form an LLC, can I deduct let's fill in the blank?
Speaker 2:Hey, Chris. Let let's say this. So just so everybody knows, I literally walked away from Chris. If it sounds like I'm far away from the bike, it's because I'm giving myself safety space. And let's be honest, I'm the one that asked him this question the other night at dinner, and, yeah, I was I was scared.
Speaker 2:So so let's talk about it.
Speaker 3:Alright. So so the thing is, what everyone needs to remember is that a first of all, let's talk about what an LLC is. And I am coming from a tax perspective. I'm not an attorney. So consult your attorney or legal advisor if you'd like to learn about the legalities of an LLC.
Speaker 3:But from a tax perspective, an LLC stands for limited liability company. Now if I had a dollar, every time in the last twenty plus years someone said limited liability corporation, I don't know that would well, maybe we'd be doing the podcast. I don't know. I don't know. Maybe we'd own an island instead of being in gorgeous Panama City Beach this week.
Speaker 3:But that's okay. We're still building up.
Speaker 2:A bad place. Fiji is not a bad place. Yeah.
Speaker 3:Exactly. So, as long as I could, you know, as long as I could watch my sports, we can get cable down there. But anyway, so limited liability company is a filing that is done at at the state level to create an entity separate from yourself. And that could be filed for a variety of reasons. Typically, it it means that you're involved in some type of business activity.
Speaker 3:So regardless of what the business activity is, be it, a retail shop, a professional service, a hotdog stand, a real estate venture, a limited liability company is filed with a state and then you typically file what's called an s s four form with the Internal Revenue Service to get a federal identification number. So once you file the LLC and assume you're the only member, the thing you need to remember is that a single member LLC is a disregarded entity for federal tax purposes. And I realized that because I get this question a million times, I zip through that answer too quickly. So let's say it again. A disregarded entity for federal tax purposes.
Speaker 3:That means that if you form a single member LLC and you own a business or rental properties or investments on a federal level, there's no separate tax filing for that entity. Even if you have a federal identification number, you just slap it on your personal tax return form ten forty and you go on. Now on this on a state level, there could be some tax filings. You also have to make sure you have a registered agent in the state that you are filing in and that you pay the appropriate annual tax. In some states do require some type of franchise excise or our friends in California required $800 per year tax even if your LLC is not doing much much business.
Speaker 3:So so understanding that a single member LLC is a disregard entity tells us what? There's no tax advantage of forming a single member LLC. Mhmm. Now that doesn't mean you shouldn't do it, but there's no tax advantage.
Speaker 2:So so to that point, Chris, and I have sat down now, so that way I know you're not gonna you're not gonna throw anything at me. So so let's talk about it too. So, I mean, really I mean, we've all seen Facebook ads. We've seen TV ads, radio ads, things that companies and there's services out there. And and, obviously, individuals can can usually form an LLC on their own, kind of the the DIY approach, but there's obviously plenty of services out there.
Speaker 2:Some of our strategic partners with teaching tax floor are there to to help individuals. So as far as for an, an individual, say starting a landscaping business,
Speaker 3:you know, a
Speaker 2:perfect example. Obviously, there there's some liability in there. But is that if if say you did wanna go that route and and form an LLC starting this business, is that a is that a good first step usually or
Speaker 3:Well, what I want everyone to consider, and we always talk about all we're asking for is an open mind and a little bit of time. I want you to consider this. There are no tax advantages to forming a single member LLC. So, now, there are some advanced strategies where the LLC could be you'd like to be taxed as an s corp or c corp, but let's let's throw that out because those are gonna be separate episodes when we get in the weeds deeper deeper into the weeds. If you feel there are the non tax advantages of forming an LLC far exceed the costs and complexities, then it might make sense.
Speaker 3:So what are some of those advantages? Risk mitigation and asset protection. In a in an industry like landscaping, there's a high degree of risk associated with that. In an industry such as let's say you are a the computer, you code software. You work out of your home.
Speaker 3:You have a couple vendors. There's not much risk there. You don't have a facility. You don't have a company car. You don't have employees, you're a subcontractor.
Speaker 3:It's probably not necessary to form a single member LLC. So what you have to consider is what state are you in? What are the state filing fees? What are your legal fees? I do advise almost all the time to use some professional assistance, even if it's self guided.
Speaker 3:So what are the the what are those costs associated with it? And and then is there a state or local franchise excise, some type of tax filing that is going to, going to be required? You know, there are negative consequences potentially. Mhmm. Now some so like I said, some of the advantages, like I said, are are going to be the, that you get some asset protection and you can get some anonymity.
Speaker 3:So it makes you look maybe more professional. Let's talk about your landscape. Instead of John Chipolski landscape, it could be I don't know. You're a creative guy.
Speaker 2:J JT Outdoor Services. Exactly. JTrip. There you go. Now we're getting a little out there.
Speaker 3:Now we're getting and and consider this, if you have a business where you're issuing ten ninety nines to people or w twos, at at that point you might want to consider an entity because if you don't get a federal identification number and have that LLC, your your social security number is gonna be on all those w twos and all of the ten ninety nines. Mhmm. That's what I want everyone to understand that the advantages of forming a single member LLC are absolutely non tax related. They're all about the potential asset protection, anonymity, appearing that you might be a larger organization that you are. The profit and loss from a single member LLC on a federal level is reported on your personal tax return.
Speaker 3:So it doesn't give you any type of tax savings or necessarily tax detriment other than the cost on the federal tax. Awesome. Every state's different, my friend. Right.
Speaker 2:So and and that's a good point too. It's, you know, really looking at where you're at. So your so your locality, really what you're doing, and really how you're structuring it. And as you mentioned too, and and this is something that that me and Chris have have talked about a ton, and I I've heard him say it probably, I don't know, 2,500 times over the past couple days at a conference. But, you know, building your board of directors.
Speaker 2:So looking at that, you know, anytime, not just in, you know, business formation, just kind of in life. Right? Building your board. So building the best people around you for, you know, your most most resourceful, information. So your CPA, your insurance guy, your attorney, etcetera, etcetera.
Speaker 2:So that's it's a big part of that. Right? Even if you're just forming a business, I think it's great, you know, it's a great piece of advice. Right? And this this would kind of flow out of those conversations with those individuals if it's appropriate, if and when.
Speaker 3:Absolutely. And I and I would say if you do form a single member LLC, you have if you're gonna be a duck, you have to walk like a duck, talk like a duck. So obtain a federal DID number, have a bank account, have a separate set of books and records for that business. Because if you're trying to obtain asset protection, and again this is the CPA talking not an attorney, you need to you have to have that separation of church and state. Doesn't mean that you can't take draws from the LLC bank account or you can't personal funds in there when the business needs more money, but you you can't really use your LLC bank account as a personal account because you you might lose that asset protection.
Speaker 3:But again, we're we're not talking about the legalities of it. I just as long as everyone understands the positives and the positives of it and the cost associated, I wouldn't say that there's negatives other than just the cost and the and the complexity. So, but yeah. Definitely like you said John, check with your board of directors and, one of the great things that Teaching Tax Law Podcast is gonna offer is access to an amazing set of potential board of director people. Absolutely.
Speaker 2:And look at it. It's it's funny that we say that too, kinda rolling into it. Looking at our agenda here literally written down in front of me, we have some of our each of our board of directors on here that I think we're gonna we're gonna have on without giving out some names. They know they're coming up. And a couple of them are gonna hound a little bit to make some time for us whether they like it or not.
Speaker 2:That's what they have to do for being on our board, and having them on here really to give us, you know, their their specific words of wisdom or as I like to call it, their wow, their wow information. And we look forward to that. So, obviously, Chris, as you mentioned, though, too, like, there's there's a lot more to this. So the not looking at multi member or anything real estate related. I mean, this is great information really for those starting up, looking at it.
Speaker 2:And again, it's it's consulting consulting your board. Right, Chris?
Speaker 3:Absolutely. And that's where we want to make sure that what I see a lot of times is I I I don't know if I've ever heard this term, but people over entity. That they create all these, you know, understand that there are different rules in different states for LLC's and, and yeah, consult your board of directors. And just consider consider the costs and and, and then definitely talk to your, talk to your advisors and talk to your accountants and CPAs and attorneys.
Speaker 2:And if you ever want to watch Chris's blood pressure go up, ask that question over dinner.
Speaker 3:Well, exactly. Well, you know, I guess we should have red wine. It would have calmed it right down. But one more thing. And if you're if you're if you're stuck and you don't know what to do, then definitely reach out to us at the podcast.
Speaker 3:We have some amazing strategic partners that would be very happy to have those discussions with you.
Speaker 2:Excellent. Excellent. Well, thank you everybody again for joining us. Episode two, this this is number two. And looking at number three here, we're doing very, very soon.
Speaker 2:That'll be up. Everybody will will obviously have access to that. This is a a free piece of information out to the world. I mean, Chris has has been a friend of mine and a mentor and and one heck of a member of my board of directors, whether I knew it or not, for about twenty years now.
Speaker 3:So Chris
Speaker 2:Chris is always, you know, you know, I love having you in my life. The information you provide me is fantastic. Although, I I do remember it was probably about, I'd say, fifteen years ago, I asked you about an LLC and, you know, setting up a a mailing address for a business I had started. Seems seems like it was just the other day. So, hopefully, this information ends up in in some great hands, which I know it will.
Speaker 2:And thank you again for everybody. Be sure to be sure to like, follow, and rate this podcast as we start to grow our audience here. Those of you that are are members of Teaching Tax Flow already, obviously, you get this in your inbox with a couple other pieces of information, but keep the questions rolling in. That's really what fuels us. We're we're doing this for everybody, not just ourselves.
Speaker 2:So
Speaker 3:Yep. Check us out. Teachingtaxflow.com. Have an awesome rest of the day. Excellent.
Speaker 2:Thank you as always, Chris, and we will talk to everybody soon. Have a great week.
