Episode Transcript
[00:00:00] Speaker A: In this, our first ever social media Money episode, we talk about limited liability companies. What they are, what they aren't, and why you can't believe everything you hear online when it comes to llcs. Let's get started. Let's get some money from new money new problems. It's the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation, purchasing your first investment property. Helping your family with money. The highs and lows of, uh, entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the new Money New Problems podcast.
Hello. My name is Brentsen Harrison of new Money new problems and your host for the new Money New Problems podcast. On this week's episode, we are going back to the well of a concept that we actually introduced on our YouTube channel prior to the start of the podcast a few years back. And we'll put a link to this playlist, we did a series on social media money myths, things that you see online, whether it's TikTok or Instagram or Facebook, that tell you ways that you can manage your money for things that are just not really likely to occur or if you try to pull them off, is an easy way to get yourself in trouble with the IR's. So, in episodes in the future, you're going to see this concept where if you have something that you want us to cover that you've seen online, just send it in and we may do an episode about it. Because this episode sprung from a friend of mine, Elle, who sent me a video about llcs that I gotta share before we even get into the episode. Check this out.
[00:01:42] Speaker B: Stop taking family vacations. Instead, do this. Set up your LLC and put your family members as your board of advisors. Just like big companies can have board of directors, we LLC owners can have board of advisors. And when you have your board of advisors, the IR's allows you to have quarterly board of advisor meetings anywhere in the world. And these meetings are tax deductible. So if you want to take your family to Disneyland as one of your board of advisor meetings, take your family somewhere for Thanksgiving as one of your board of advisor meetings, you can have the same experiences with your family and make the flight tax deductible, the Airbnb tax deductible, and 50% of the meals you get catered to that location is tax deductible, too. Now, if you want to do this strategy you want to document your board of advisors. You want to take pictures and meeting minutes to make sure you document m and have everything legitimate. But stop taking family vacations. Instead.
[00:02:36] Speaker A: Do this now. If that video seemed ridiculous to you, and hopefully it did, I can tell you that this is not something that you want to try in your own life again. This is a very easy way to get yourself in trouble with the IR's. This is not by any means the wildest thing that you can see about llcs online. As a matter of fact, LLC Twitter has become like a subculture of Twitter where you see all these people online sharing all these things that they feel an LLC suddenly allows you to do, whether it's walking away from a loan somehow coming into millions of dollars that you wouldn't have had before you open this LLC. And it just can get really ridiculous. Here's another from back in the PPP era says take dollar 150 out of your stimulus check. Go get you an LLC. Now you own your own business now go online and get the 5000 small business grant from the SBA. That's how you turn $150 into 5000. Now you have 5000 in your own business. Take out a credit card in your business name, use half, then pay it off. Make your business credit perfect. Every time you spend a dollar, file it under the business end of the year, file those taxes, pay those taxes, start living good. All off of $150. Thank me later. This is free game. So it is clear, even with a cursory review of your social media accounts, that when it comes to llcs, people have somehow overnight turned themselves into both tax and legal experts. And in my opinion, there is a fundamental misunderstanding as to what an LLC is, how it works, and how it differs from other forms of business ownership. So let's get into what it really is. An LLC, which as we share stands for limited liability company, is a type of business ownership that really exists as a hybrid between two different forms of other business structures. One of those forms that it kind of molds itself from is either a sole proprietorship or a partnership because each of those entities are what's considered pass through entities. Now what do I mean? From that, we'll talk about what an LLC is and what isn't after the break. But what I do want you to know is an LLC is something that you open when you actually have a valid business purpose. It is not something that you do simply to get a tax deduction for things that you want to buy in your personal life. And when you generate business through that LLC or that sole proprietorship or that partnership, there are certain things that you can use to lower the business income on which you pay taxes. So you may generate, as an example, $100,000. And you may have business deductions that lower your taxable income for that business from $100,000 down to 50,000. Whatever you get to that net business income amount, that entire amount is passed through to your personal tax return. You cannot leave that amount in the business itself in terms of when you pay taxes on it, it all passes through to your personal tax return on which you will pay personal income taxes at the federal and state level. This differs from a corporation. If you have a C corporation as an example, you have the ability to retain some of the earnings of that business so that it all does not pass through to your personal tax return. But when it comes to that hybrid status of the LLC, the characteristics that it shares with the sole proprietorship and the partnership is that net business income passes through to the personal tax return. Now, the other part of this is the corporation. Like the C corporation, and with a corporation, you have limited liability for the owners of that corporation. And this is the characteristic of corporations that the hybrid structure shares with an LLC. You can see it in the name limited liability liability company with certain limitations, which we'll talk about after the break. If you have an LLC, you are protected to a certain level from your personal assets being on the line in the event of a business loss or litigation on that business. So, for example, if you have an LLC and you have not done anything that would put your personal assets at risk, or if you're not what's considered a personal guarantor, which we'll cover after the break, then if you have, say, $100,000 worth of assets in that LLC and you have $10 million worth of assets elsewhere. The concept of the LLC is that if someone sues you or any type of other litigation or judgment, the only thing that would be on the line is the $100,000 worth of assets owned by the LLC as compared to the 10 million of assets you own in your personal life. It limits your liability to the basis and or the assets that you have inside of that company. Now, under the umbrella of llcs, there are many types of llcs in which you can operate. You can have a single member LLC where even though it's a limited liability company, in reality it's just one person who is setting up this structure to protect themselves in the event of a judgment. You can also have a multi member LLC where you can have individuals that are co owners of that LLC. You can even have llcs where the members are other llcs. And it's an umbrella organization that keeps everything under that one awning. And when you establish that LLC is going to have two documents that share all of the information as it pertains to who are the members, what are the membership percentages. Um, how often do you meet? What's the purpose of the LLC? It has to have a valid business purpose. There's things like how voting rights are handled, how you can expel a member who has different membership interests in terms of who brings the initial capital to the table. And those two documents are the articles of organization and the operating agreement. And the operating agreement, especially if you're doing business with friends, with family, or just in general business, is something that you really want to pay attention to because there are things that when forming an LLC, you may not think will occur, but you just don't know what happens when you go into business with anyone. So these two documents are really, really crucial when it comes to how you run your LLC. So those are the like big, broad strokes of an LLC. We're going to talk about this a lot over the course of the next year or so, but after the break, what I want to talk to you about are the things that an LLC is not. So you have an understanding of its true purpose and what you see online. That's worth clicking over to the next video.
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M all right, let's get into some of the things that an LLC is not. The first thing that an LLC is not is an LLC is not a tax status. This is something that we alluded to before the break where we share that with that hybrid structure. The LLC has the ability to kind of go back and forth between sharing some of the characteristics of a sole proprietorship or a partnership or corporation. And because of all the things that people hear about when it comes to deducting business expenses, it might lead you to believe that you sign up for an LLC so that you can save on taxes. But that is not a case. The LLC is a legal designation and it has the ability to receive certain taxable deductions. But those tax deductions based on how you structure your LLC can be found even if you have a sole proprietorship or partnership, or in some cases, a corporation. Deducting the amount that you spend on ads is not limited to an LLC. You can do that if you have a sole proprietorship buying a car for business use, which is something that you see online where people tell you that you can somehow buy a mercedes g wagon for free because you have an LLC. Not only is that not accurate in a misinterpretation of how that deduction works when it's eligible for you, but it is also something that, if you are eligible for it, you can do as a sole proprietorship or a partnership. It's nothing limited to an LLC when it comes to the ability to structure how certain business income goes to your personal tax returns. There are subchapters of llcs where you can make certain moves that will positively impact your tax burden when it comes to net business income. Things like an S Corp LLC, which is something that, again, we'll talk about in future episodes. But if you are doing an LLC, the primary reason that you're doing it is to limit the liability of yourself and your co owners. It is not because it has some special tax status that is some somehow not available as a sole proprietorship, partnership or corporation. The second thing an LLC is not is a way to shield yourself from all liability in all cases. We've talked about the fact that there are certain instances where if someone sues you or you have an adverse judgment, the only thing that would be at risk are the assets inside of the LLC. But there are also instances where you might get a small business loan, or you may enter into a contract where even though you're doing it as an LLC, it requires a personal guarantor. And a personal guarantor is something who, even though the LLC is the company that's on that contract, the guarantor is saying that in the event that the LLC defaults on what they owe, a guarantor has to come up with the assets to cover the debt. And this is something that you often see when you have single member LLCs or LLCs that only have a couple of members who are applying for financing before the business is really standing on its own. 2ft. And this is why as early as you can, when you have a business, you want to try to separate your personal income and personal savings and personal cash flow from business cash flow because you want to be able to show if you ever need financing that that business can stand on its own. 2ft. That you're not using income and assets from your personal life to prop up that business. Because if you go to the bank and you ask for financing for a small business loan and they're seeing that that small business is really being subsidized by your personal finances, they're going to say, hey, we might offer this loan to your business, but this business can't pay us back because it doesn't have the assets to do so, the cash flow to do so. So we're going to ask you to be the personal guarantor. And even though you're getting this loan, if the LLC defaults, we are coming after your personal assets instead. The third thing an LLC is not is a way to buy things for your personal life that have no business use. Anything you buy for a business has to have a business purpose in order for it to be deducted. You have to think about that when you're trying to claim a deduction. Because for the most part you can file any deduction that you want to. It's all about whether the IR's will check on that deduction. You can deduct every single thing that you purchase in your personal and business life. At least you can try. But that doesn't mean that it's legal. And if the IR's catches you and audits you, that's where the trouble comes. So when you see the videos like the ones I share before the break, where they say, oh, you can deduct 50% of the meals, you can try, but the way that they laid it out in the video, that's not legal. And if the IR's decides to audit that tax return, that's where the trouble comes. So let's say, for example, that you have a business that has an office, and in that office you have certain customers. Customers who will come in and they'll be sitting in the lobby waiting for you to come and serve them in the business. And in the lobby you decide to buy a tv so that they can watch tv while they wait for the person who's next in terms of customer service. Well, that tv serves a business purpose. You can list it as a tax deduction because your customers are being entertained by that television in the process of going to patronize your business. So if you bought that with a business credit card, at the end of the year, you can write it off as a business deduction. Now, let's say that you buy that tv with a business credit card, then you go put it in your house, and you don't have any customers who are coming over to your house. You don't operate a tv business. There's no reason that you would have that tv in your house other than for personal use. You can claim that tax deduction if you want to, but that's not a tax deductible purchase. And if you are audited, is something that would be disallowed. You see people who would try to claim tax deductions for the clothes that they buy, um, under the auspices of saying, oh, I make content online, and this is what I wore in that video. So that's why it's tax deductible. You can try, but unless you are a news reporter or someone who has to be online for the basic functions of their business, again, this would be something that could be disallowed. And when it comes to an LLC, the things that actually help you advance your business interests are the things that can actually be deducted. So I didn't want to go too deep into this episode. I just wanted to open up the door of LLCs and different business ownership structures down the line. We're going to talk about tax deductions for a business. We're going to talk about things like s corps and how you can utilize them to your benefit from a tax perspective. But this is just an intro to llcs and also our first episode in the social media money series. So if you enjoyed this and you have something that you've seen online, just send it our way and say, can you speak to this? Can you do an episode on this? And if it's something we think the audience will benefit from, then we are absolutely game to do it. I'll see you all next week. Let's get some money from new money new problems. This was the new money, new Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
