Ep. #840 - Setting Up a Business Entity

00:00.00

Matt DeCoursey

And we’re back for another episode of Startup Hustle Matt DeCoursey is here to have another conversation I’m hoping helps your business grow. So whether you’ve been in business for a long time or you’re thinking about starting a new one. 1 thing that you’re either going to go through or already dead was the process of setting up a business entity. You know this is something that I’ll just be upfront about. This is not always the most exciting part of your business. But then again, it also is because once you create an entity for your business and there are so many different reasons why you do this or why you do that. Um, you have something real and you are moving forward with this now. 1 thing I want to let you know is that every Monday in may we’re going to be bringing you episodes that are sponsored by a company called URA that’s universal registered agents and we’re going to talk about a whole lot of different stuff and today we’re going to go ahead and get right into. Talking about setting up a business entity now if you listen to the show regularly. You know I’m not an attorney and I’m not going to give you legal advice because I can’t but my guest today will now before I tell you who that is I get a quick question for you are you thinking about starting a new business or expanding a current one. If you are then it’s important to get it set up and maintain properly. That’s exactly what the folks at Universal Registered Agents do LLCs, corporations, nonprofits what is all that but I’ll tell you what it’s not a problem when you go to universal registered agents dot com. There’s a link for that in the show notes you can learn more about. By clicking that and with that I’m going to go ahead and tell you that with me today I’ve got melody Ashby and she is a senior attorney at Myer law. Which is in Chicago Illinois you can also learn more about our guests in that practice by going to http://meetmyerlaw.commelody welcome to Startup Hustle.

01:47.16

Melody Ashby

Hey, thanks so much for having me. It’s great to be here. Excited to talk about setting up business entities.

01:53.20

Matt DeCoursey

Yeah, and you are licensed to talk about that right? Yeah, well, there’s so much that goes into that and we’re going to talk about that plenty of that. But before we get into that. Let’s get a little bit more about your back story So tell us.

01:56.82

Melody Ashby

Yeah, I am yeah.

02:10.78

Matt DeCoursey

Who you are and what brought you to being a senior attorney.

02:12.68

Melody Ashby

Yeah, so I um started out my career in corporate and have been with Meyer law now for the past almost ten years Meyer Law we are a boutique firm. Specializing in helping technology companies really from startups to corporations in a few key areas in corporate contracts employment intellectual property fundraising and then privacy matters and so we’ve really helped thousands of companies from startups all the way up to larger organizations. Um, and we mentor across the US at various incubators and accelerators. So happy to be here and share the knowledge.

02:55.21

Matt DeCoursey

Yeah, and I’ve got a couple of other things to go with that. You know Myer law according to my notes is an award-winning women-owned law firm that specializes in what you said helping technology companies from startups to large corporations. But you guys have helped thousands of companies and. You know, even companies have been featured on shark tank to companies have been in the inc 500 and ah, you know with that you know you’ve also mentored a lot of companies through incubators and as you mentioned such as.

03:24.79

Melody Ashby

Yep.

03:27.99

Matt DeCoursey

Yeah, more specifically such as 1 71 WeWork labs and the very well-known tech stars. So yeah, a lot going congratulations on all that, and oh man if those walls could talk I’m sure you have experienced a lot of stuff so you know we’re talking about you know? so.

03:34.86

Melody Ashby

Um, yeah, are sure.

03:46.80

Matt DeCoursey

Ah, business entity. What does that even mean, let’s just start there like what is an entity?

03:50.18

Melody Ashby

Yeah, So it’s gonna be anything separate from yourself right? So the simplest way to do business when you’re just starting out is just by yourself which is considered a sole proprietorship. So What that means is that there’s no legal distinction between you and. Ah, business because it’s just you. So, when we say setting up ah an entity. What we really mean is taking a step and setting up a formal filing you know with the state to do business under anything other than yourself really.

04:24.75

Matt DeCoursey

Yeah, and so now by default pretty much anyone’s a sole proprietor. So if you are making potholders and selling them on Etsy. You are by default a sole proprietor of a potholder business in many regards correct.

04:37.95

Melody Ashby

That is absolutely correct and what some sole proprietors do is if they don’t want to operate. For example, if I just didn’t want to operate under Melody Ashby what I could do is file a fictitious name or Dba which stands for doing business as to operate under a different name. But the problem with so proprietorship, in general, is that you’re just taking on unlimited liability. So it’s going to be recommended to set up a separate business entity from yourself.

05:04.75

Matt DeCoursey

Yeah, and 1 thing that comes with sole proprietorship and for those of you that aren’t unaware of my book, Million Dollar bedroom is an educational narrative about the walkthrough of myself starting up a business and the extra bedroom in my home which I did. Well over a decade ago with nothing other than a credit card with an $8000 limit and you know and so technically that was at first a sole proprietorship but when it grew legs and started doing business I realized that I needed added levels of protection. So when you’re a sole proprietor. You are also providing a direct line of sight from the business and the problems or liabilities that could be created as a result of this to your family your home your personal bank account and a lot of stuff so part of the. The process of setting up an entity is to protect yourself from some of those things on a personal level.

05:59.15

Melody Ashby

Yeah, That’s absolutely right? I mean the biggest disadvantage with the sole proprietorship is that there is no legal distinction between you and the business and so a sole proprietor in that Essence is going to be personally liable for really all of the debts and obligations of the business and since by definition only one person runs it. You can’t issue equity to key employees or you know seek investment or and also upon death or incapacity. The business is going to stop existing.

06:27.64

Matt DeCoursey

Yeah, and that’s and you know so once in my opinion and once again I’m not don’t take anything I say in this episode as legal advice I’m just giving you my own experience and the reason that I knew I needed to move from that away from a sole proprietorship was for the reasons you mentioned. And you know, really one of the most common things that could occur is just simple lawsuits that exist because a lot you know a lot of businesses that are sole proprietorships get started because people are providing services to other people or businesses where you know that love like something could happen I don’t know like I mean you know like.

07:07.23

Melody Ashby

On.

07:07.42

Matt DeCoursey

Like to say shit happens any attorney knows that they’re kind of in business for that reason, but you never know what that could be, and the thing is is is at the same time. Ah, the US government and our economy, in general, want to.

07:11.83

Melody Ashby

Right.

07:23.75

Matt DeCoursey

Encourage people to start businesses and be entrepreneurial and not have to feel like their entire everything is on the hook. So yeah I think that’s one of the more important things when it starts ah to occur now. But if we’re going to start an entity so we’ll move past the idea of a sole proprietorship. But. When it is kind of 1 of the first steps of setting up a business entity we have to determine in some cases determine an actual location for it to be set upright.

07:48.50

Melody Ashby

Yeah, that’s absolutely right? You know in my line of practice I often will get customers or new potential customers I should say that will come to me and say well I need to set up a Delaware C-Corp. And you know that’s a common occurrence and my first question is always well. Why do you want to set up a Delaware C-Corp you know to understand where they’re coming from. Um you know a Delaware C-corp is not meant for everybody and there’s no one size fits all um because it’s always going to vary on. The different forms of business your goals for the business what you plan on doing and so from that perspective you know you always have to look at where you’re planning on doing business is it where you’re located then look into initially the state where you’re located right? you save on some fees. Based on keeping where you’re located, there are reasons to do business in other states to take advantage of state law so there are some nuances to consider. Ah you know, depending on where you want to start.

08:51.90

Matt DeCoursey

So, and one thing, in my opinion, need to be careful of is sometimes it can seem super clever to set something up out of the area that you’re in, and then if your business gets traction and you want to get support from. Your local anything business development. There could be grant investments sometimes now you’ve positioned yourself out of that world and you end up having to move the business legally back to wherever you’re at now you mentioned some of the more popular states Delaware being you know one of the most Montana South Dakota Florida Texas and Idaho which. All ah, upon first glance are states that are very friendly from a tax perspective.

09:32.25

Melody Ashby

Yeah, that’s right? So a lot of folks are like oh I’m going to set up in Delaware because of the tax benefits. But it’s sort of 1 of those things where unless you’re in Delaware physically sometimes you’re not really getting those tax benefits and then the other thing that I often you know.

09:44.32

Matt DeCoursey

Yeah, yeah.

09:49.95

Melody Ashby

Ah, where I think a lot of startups fail is to understand that if you start in Delaware but let’s just say that you’re operating in Florida what that means is you have to take your Delaware entity. Get it registered to do business in Florida which then means you’re paying double state fees to keep the company in good standing. And so just starting out now. You’re paying additional fees that maybe you didn’t initially intend to pay and so some folks starting out I don’t think to realize that so you know thinking through where you want to do business. Um, and where you’re at you know, keeping in mind that nothing is set in stone. Everything can always be changed if needed but it is an added cost to doing business in a different state.

10:31.34

Matt DeCoursey

What is this specific reason that everyone’s in love with Delaware or has been in the past what is in the end is that the only attractive thing about Delaware.

10:36.29

Melody Ashby

Um, yeah, yeah, so Delaware has a separate business chancery court where really everything’s been litigated under the sun and so from an investor perspective. They know exactly what their rights are with respect to their holdings.

10:52.30

Matt DeCoursey

M.

10:55.31

Melody Ashby

Um, you know they know what informational rights they have when they are seeking investment and so a lot of times you’ll get investors who when they’re investing in your business. Want you to be in Delaware for that reason and so Delaware has positioned itself to be kind of the hub and mecca of business. Formation from that perspective and so that’s why you’ll often hear that.

11:16.18

Matt DeCoursey

So I like to give real-life examples whenever I find one that is related to me so my business Full Scale if you sign a master service agreement or a service contract with us. There are lines in there that say in the event of some kind of dispute. This will be handled in the state of Kansas which is not super convenient if you live in Maine or Florida or somewhere like that.

11:34.11

Melody Ashby

Right.

11:48.81

Matt DeCoursey

Buying equity or putting money into your company or whatever like okay here’s the stark reality of it and we’re so committed to telling the real story of entrepreneurship hey look the numbers are not in your favor as an entrepreneur starting a new business. So if things go off the rails and I think that the 1 attorney that is on the show will agree that any good contract has sunny and rainy day provisions in it. So what you’re saying is from an investor standpoint. There’s a stronger understanding of understanding what possible recourse there could be in either direction that the business goes.

12:20.20

Melody Ashby

Yeah, absolutely excuse me. Yeah I mean everything has been litigated in Delaware when it comes to ownership from an equity perspective and shares perspective and so understanding that recognition is why. Sometimes you want to take advantage of that state law to be the home state so to speak I often think that it’s easier to you know, depending on where you’re at, but let’s just say that it’s just a complete startup and there’s no.

12:39.95

Matt DeCoursey

Okay, so.

12:52.10

Melody Ashby

Plans, for example, investment or whatnot. You know you could always start in the state where you’re located to keep things easy and then as you need to make changes. You can make changes and there are many states that allow for things like statutory conversions and Domestications where you can move that entity easily. And it’s not a huge undertaking from a cost perspective.

13:11.45

Matt DeCoursey

So with the different types of entities and you know I rattled through a less pretty quickly at the beginning you obviously saw Proprietorships kind of the default the de facto where you start. Ah, you then you this is where some people I think begin to become confused.

13:20.31

Melody Ashby

Okay.

13:30.94

Matt DeCoursey

What the options are it feels like oh my God So an overwhelmed or confused mind almost always says no and I’ve talked to so many people that have a business and I’m like well how’s it set up. They’re like well it’s not I’m just like doing business I’m we got to change that.

13:34.39

Melody Ashby

Yeah.

13:41.96

Melody Ashby

Yeah.

13:44.34

Matt DeCoursey

This is not the best setup for you and they’re like well what are my options I’m like well there’s LLCs, corp, blah, blah, blah, and you know you just see the eyes glaze over you know when we get into the different types of entities and the llc and the corporation have some inherent differences between them. What are the ones that stand out the most in your expert opinion?

14:05.48

Melody Ashby

Yeah, so I mean with a limited liability company. What it really is is a hybrid entity and so it takes the benefits of a corporation and then it takes the benefits of a partnership and kind of merges it together into this nice one entity. And so it’s great in the sense that it protects against personal liability which is similar to a corporation but it has general partnership flexibility for tax purposes now assuming you have more than 1 person forming an LLC the default would be that you would be taxed like a partnership and so you’re probably wondering. Well, what does that even mean? It means that you know about partnership taxation. Everything’s kind of passed through to you and your partner from an individual capacity and your report on your individual tax. Return. So it flows through to the owners whereas with the corporation. What happens is the corporation itself has to pay a tax to the Irs. And then the only time that the shareholders or owners in the corporation would report on their taxation would be if there’s some type of dividend or distribution There is double taxation that happens with corporations. Um, so sometimes that could be a disadvantage if you’re going with a corporation but for an LLC. It’s probably 1 of the most flexible forms of doing business. You know I think one of the biggest selling points is the fact that it has this flexibility. There are no ownership restrictions on who may be a member. There’s also no requirement that profits and losses get distributed strictly based on ownership percentage. You know, an operating agreement for a limited liability company can include allow or allow for any disproportionate allocations decided amongst the owners. So. There are definitely some advantages with the flexibility within LLC I would say one of the disadvantages for a limited liability company. You know in order to be treated as a partnership from a tax perspective. You really need at least 2 members and so you know what that means is if I’m the only person and I’m setting up an llc although I’ll receive limited liability protection I really don’t get any tax advantages. Because you’ll automatically be considered a sole proprietor from a tax perspective if you’re setting up an LLC by yourself.

16:17.73

Matt DeCoursey

So really? Ah, unless you’re through my experience unless you’re planning on having a bunch of people involved like it is I don’t know they may have taken it down I believe at the time that the last LLC I formed I could have up to 70 like the seventy-fifth person was the threshold that like there was a maximum that went with that meaning like the corporate. So so 1 actually 1 thing. We also should mention in LLC you have members so you’re members of the LLC and in corporations, you have shareholders.

16:45.43

Melody Ashby

You have a group.

16:52.25

Matt DeCoursey

Share and corporations issue dividends where LLCs distribute profit to said members So now are they one and the same for what you’re probably going to experience. Yeah, kind of yeah.

17:03.49

Melody Ashby

Yeah, for sure. Yeah I mean I would say LLC is actually I think what you might be referring to are s corporations they have limitations of how many owners there can be but in an LLC. There’s you could have an unlimited number of members. Um, but I will say you know I would say one.

17:11.20

Matt DeCoursey

Yeah, correct. Okay.

17:22.69

Melody Ashby

It’s a blessing and a curse with an LLC when you have more than 1 individual in it. Although you get all of this flexibility which is great LLCs tax is like a partnership. You know there are complex partnership tax rules and have you know tax implications. It can trigger pages and pages of tax provisions and operating agreements and on. Going compliance costs and so one of the other I guess disadvantages in some views would be that earnings of most members again members of an LC or the owners. They’re generally going to be subject to self-employment tax since LLC is not subject to that double taxation that I mentioned with the corporation. And so the profits are automatically included in the member’s income. So there’s a lack of kind of uniformity around limited liability company statutes as well. This means operating in more than 1 state could mean that your Llc is treated differently. So. There are some nuances with LLCs. Additionally, if you’re going to be raising capital and you have a limited liability company. You may want to consider alternatives depending on the type of investment that you’re seeking as well.

18:27.83

Matt DeCoursey

Yeah, one of the things that you’ll see a lot when venture Capital or institutional money comes in is they may want you to switch from and may want you to turn from an LLC into it Some level of corporate status. Yeah.

18:41.23

Melody Ashby

Yeah, that’s right, a lot of venture capitalists actually have fund documents that prevent them from investing in a pass-through tax entity. So a tax entity would be a limited liability company. And because they have these restrictions. That’s where you’ll often see LLCs having to convert to a C Corporation exactly

19:02.30

Matt DeCoursey

Yeah, they don’t want the K one and we’ll talk a little bit more. We’ll talk a little bit more about that and I’ll give you some real examples with it first off just, ah, you know setting up a new business and maintaining compliance isn’t easy. That’s why it’s important to have. Expert help along the way and that’s exactly what you find when you visit the universal registered agent’s website. There’s a link for that in the show notes you can type in the letter you the letter r and the word agents dot com. For all of your business setup and maintenance needs, they can help you set up an LC Corporation or nonprofits wherever you’re located in addition to helping you create the right type of entity http://universalregiedagents.com can also help you with registered agent service and a wide variety of corporate services as well as helping meet. Needs of independent directors. Um, so you know we were just talking about some of the tax provisions. So if you own so I personally via full well via full scale the company that I owned we’ve invested in some other businesses that we took part in ah an ownership manner that requires that we get a k one form which is if you own a percentage of the company. Um, you need to get a k one so their wins or losses transfer through to you now here’s where that becomes an inherent headache. I can’t file my real taxes until I have the k ones from all of these companies which means if one of them for some whatever reason decides to file in an extension I got to wait it out. I gotta be honest, it’s a pain in the ass it really is because like I’ve had that happen each of the last three years and it just kind of slows things down. It’s just kind of it’s an annoyance now you get to think from terms of like a venture capital setup if they have to collect 40 of those.

20:45.10

Melody Ashby

Yeah.

21:04.80

Matt DeCoursey

Becomes a completely different thing. So yeah, yeah, and yeah, and that’s what’s good.

21:04.93

Melody Ashby

Absolutely and then also oh I was just going to say from the company side if you had a hundred members in your LLC issuing out all of those k ones could equally be a headache for you. So.

21:18.62

Matt DeCoursey

Yeah, yeah, and that’s it gets hairy so you know one of the more important things that many will say is you start projects or things with the end results in mind so you know now. There’s also you don’t want to overcomplicate things if you don’t need to have a Delaware -based S-Corp or C-Corp if you have a cleaning business that comes over and cleans my house twice a month. You know you don’t I mean you really don’t so.

21:47.18

Melody Ashby

Right? exactly.

21:53.50

Matt DeCoursey

Let’s talk about s like the latter s which in return in regards to corporations is a Buzzword but really, what s says is an election that you take that makes you that. A pass-through entity that we were talking about so I want to before the experts continue to weigh in those license to give this advice I will tell you that for my from my experience that that s selection is what exactly what melody was explaining earlier which it allows the end it prevents double taxation. Is the bottom line of that and it’s there for that purpose to not create an unfair or unadvantageous situation where a business or small business and by the way most businesses are a small business. So they don’t want to. They don’t want to take away from that. So as I have this written as a corporation and so it can be incorporated as it can be set up as an LLC as well. I mean my business is an LLC that takes an s selection. And it makes ah you know it’s a special It’s a form you fill out with the IRS and ah a CPA or any registered accounting firm should be able to help you handle that and what that you do still retain the same benefits of LLC and but the wages that would. As melody mentioned earlier, they’re subjected to self-employment tax can remain as profits or are distributed amongst the owners as well. It says dividends in my notes but in an l’ll see you get distributions. So you know like now. No overall I mean is as an ah s selection something that all that most.

23:20.54

Melody Ashby

And.

23:29.92

Matt DeCoursey

Small businesses take.

23:31.30

Melody Ashby

I would say that it depends on the business I’m going to give you a lawyer’s answer of it depends but um, with an S corporation. There are certain requirements that you have to meet.

23:36.54

Matt DeCoursey

Okay, okay.

23:44.66

Melody Ashby

And so as you mentioned it’s passed through status with the IRS. So how you would set up an S Corporation is you would essentially set up either a limited liability company or a regular corporation and you lack elect the pass-through status with the Irs as you mentioned just filling out a form but to qualify as an s. Corporation status. The company has to meet a few requirements you have to be a domestic company. You’re only allowed shareholders that are individuals of certain trusts or estates. So what that means is if you have another corporation that wants to be an owner you cannot be an s corporation at that point you can’t have partnerships as owners in your s. Corporation. It has to be individuals and those individuals have to be permanent residents or Us citizens and then you’re not allowed to have more than 100 shareholders and you’re only allowed 1 class of stock. So for most small businesses as you mentioned you know it probably works out. You know what? what happens with an S corporation and why it’s beneficial from a tax perspective. Is because you are required to pay yourself a reasonable salary. So reasonable is kind of a gray area and it’s going to be dependent on the business your income and all of that but you pay yourself a reasonable salary and then outside of that if you make a distribution to yourself. It’s going to be then tax-free right? And so there’s. Tax benefits that you would get as opposed to say ah a single-member LLC text as a sole proprietor and so so long as the formalities are you know, followed and S Corporation has an effective shield of liability, the shareholders or owners depending on. How your underlying entities are set up is only going to be liable for the debts and obligations of the company up to 2 their investment profits and losses flow through to you on your individual tax return and so I would say you know it’s ideal for anybody who can meet those eligibility requirements. Um, providing you with strong protection for personal liability and that pass-through tax treatment. So if somebody has incoming revenue like consulting revenue or generating business on a regular basis. You know a lot of times it makes sense to make that selection.

25:51.30

Matt DeCoursey

Okay, so what? but I don’t want to skip over this before we get into the rest of what will be kind of a rapid-fire list. But there are quite a few steps that we still need to run through when it comes to setting up a nonprofit or a not-for-profit. How and when does it. How And when do you qualify for that.

26:11.78

Melody Ashby

Yeah, so if you are you know if if you look at a nonprofit There’s always going to be a purpose and so depending on that purpose and if your purpose is the goal is not to essentially make money but to further a specific charitable organization. The educational goal then you can form a nonprofit now nonprofits I would say is heavy lifting from a paperwork standpoint from an entity perspective upfront because there are quite a few steps and depending on the state of where you’re forming. There could be additional filings that have to get completed after the initial entity is formed. And then if you’re looking to qualify for a tax exemption then there’s a separate step with the Irs that has to take place as well. But with the nonprofit. You know what’s key is that there’s really no owner in a nonprofit but there are directors and typically most states require at least 3 individuals to act as your board of directors. And the board of directors is those individuals that ultimately are operating the entity and making those decisions so there’s although there’s no owner the board kind of furthers. The goal of the nonprofit.

27:21.63

Matt DeCoursey

Yeah, and for those that I’ve been around that have gone through that process, it’s from the outside looking in it. It felt and seemed long and arduous like it would like it wasn’t as straightforward as setting up an Lc or a corporation.

27:30.66

Melody Ashby

Yeah, yeah I mean. Yeah.

27:40.21

Matt DeCoursey

I mean that’s the whole thing like you look at the sponsor of today’s show like I mean there’s ah and yeah, that’s ah, the interesting thing is like some people wait. There’s a different attorney on this show. You know what? what? I’ve found is a lot of attorneys don’t even like doing that kind of setup kind of stuff because. There are sites like u agents that make it pretty fast and painless. This is just about filling papers and paperwork. And yeah, it’s kind of the same boxes now you know I mean you know I don’t know there’s a lot more interesting stuff to do after this stuff is set up but you know the advice on. What to set up and how to do it is important so okay, then next we get to choose a name. This is like naming your child or maybe not because you know you used a 3 letter acronym.

28:15.24

Melody Ashby

Yeah.

28:28.84

Matt DeCoursey

DBA Earlier so you can call it kind of call your business. Whatever you want, but the name that you file under probably the best and most interesting example is did you know that Google’s corporate name is the alphabet.

28:41.24

Melody Ashby

Um, right? Yeah I mean yeah.

28:44.26

Matt DeCoursey

Which by the way you can. You can find it at http://abc.xyz that really is going to http://abc.xyz and that is actually Google’s corporate website which last time I went was like a 1-page thing that was kind of like haha but you know, but with that, you have to check and make sure.

28:52.10

Melody Ashby

Oh, I didn’t know that that was your favorite.

29:02.86

Matt DeCoursey

It’s available and there’s a bit of a process through that.

29:03.53

Melody Ashby

There is a bit of a process I mean so 1 thing is checking to see if your first option is to choose a name for the company itself and then you need to decide whether that’s the name you actually want to operate your business under or do you want to operate your business under something else like I might want to start my business. And just to get it incorporated I’m going to call it Abc Inc but I might want to do business as x y z and so that’s when you would file an assumed name or a Dba for your business so that you can operate under a different name than your legal entity’s name.

29:38.87

Matt DeCoursey

Yeah So then next so assuming that we’ve got a free and clear path to the name that we want which don’t overthink that part but you know I mean just I’ve seen I have seen people kind of get nuts about I’m like con you’re gonna kind of call yourself whatever you call yourself.

29:46.97

Melody Ashby

Yes.

29:56.23

Matt DeCoursey

That’s why you get checks from businesses Sometimes that say like my dog’s name LLC you know and but that wasn’t what that isn’t what it said on the van you know? So so now it comes down to registering your business and that’s back to where like your agents help and you know this is ah.

30:00.52

Melody Ashby

Um, right exactly.

30:14.43

Matt DeCoursey

This is a process that um, you know what? I mean honestly, it can be pretty straightforward technically you can call the Irs and get a tax id number, and last I did that before. Um, it was actually in my million dollar bedroom story because I went to open a bank account and they were like do you have an entity and I was like no hang on, and like called and got a tax id which then by the way created a whole nother world of problems because I kind of broke the process of setting up an entity I wish I had just used. You know like i.

30:36.16

Melody Ashby

Yeah.

30:47.16

Melody Ashby

Right.

30:47.18

Matt DeCoursey

You know like the kit as you get with the company like your agents. But with that, you’re going to. You’re going to be ah, you’re going to file both on a state level and a federal level where you will get different. You will then become a number in their system. So when you hear the TIN tax identification number. Ah, that’s kind of like the social security number for your business per se right.

31:10.62

Melody Ashby

That’s exactly right? It is social. You’re a business entity think of it as a person separate from yourself and it has its own identification number. Yeah.

31:16.46

Matt DeCoursey

Yep, it’s Ein N Ein I, and I know so much better than that. It’s been a long we’re 32 minutes into talking about the law.

31:26.75

Melody Ashby

Ah.

31:29.70

Matt DeCoursey

If you know it’s okay if you really want to throw a curveball at me throw some accounting at me and who knows what’ll happen but look these are important things though. So now by nature as a sole proprietor. You don’t have any of this stuff. Yeah.

31:31.40

Melody Ashby

Oh yeah.

31:42.35

Melody Ashby

That’s right, You’re just operating under your social security number correctly.

31:43.80

Matt DeCoursey

So yeah, not not the recommended approach once again at least for my experience so you know with that. So here’s a question what is there at any point at which doing business on any level. Requires you to not be a sole proprietor.

32:04.42

Melody Ashby

Not necessarily and not and you could always be a sole proprietor operating right? but I would say that what necessitates a change is if you are wanting to bring it. Additional owners in right? There is no ownership in a sole proprietor. You are the owner and you can’t cut yourself in half so you really need to set up a separate structure from yourself If you’re looking to grant things like equity to service providers or bring on a co-founder of sorts. That’s when you would really.

32:21.44

Matt DeCoursey

Yeah, yeah.

32:37.42

Melody Ashby

Want to make sure that you’re taking that separate step from an ownership perspective.

32:42.25

Matt DeCoursey

Now one situation where okay this is a little different than where we’re just talking about but sole proprietors very much and this is gonna vary like no matter we’re like where you’re at there’s no way for any formal melody to I know there’s no way for you too. Advice on this one but every different municipality city-states of that require and some and depending on what you’re doing and how you do it very much require licenses and permits for all people performing certain services or even just existing like and so in the. When we moved out of the million-dollar bedroom into from a completely different state into a new one I had to do like a $10 a year business permit in Leewood Kansas right and you know that was it and every year I got a letter that was like or might have been fifteen bucks

33:30.38

Melody Ashby

Yeah, yeah.

33:38.55

Melody Ashby

Yeah.

33:39.14

Matt DeCoursey

But I had to fill that out and you know and so and these are the thing now that that could be $15 that you just send away that but not doing that could result in like a $2500 ticket or fine or. Someone literally coming and stopping the continuity of your business until which point you filled out the paper because you weren’t compliant and then you had to send it in to the city and wait for someone to put a stamp on it which could and I guarantee you somewhere somehow in the united states right now. Someone just got it. Their business turned off because they didn’t fill out a stupid little permit or they got fined or something that’s common.

34:20.31

Melody Ashby

Yeah, it’s a super comment and I’ll say you know it’s funny because depending on again where you live and the various ordinances whether it’s at the County level City or State If you’re so proprietor. Even if you’re working from Home. There are certain permits that you have to have. Quote unquote, work from Home. So absolutely. It’s additional stuff that I feel a lot of folks overlook.

34:40.50

Matt DeCoursey

Yep.

34:43.96

Matt DeCoursey

Yeah, and then and you know what covid through these weird curveballs at businesses that so you look at like a business that’s registered in the state of Kansas as opposed to Missouri now for those of you that don’t know. There’s an invisible line that runs down the middle of my hometown in Kansas City that guarantees that things will be more complicated for businesses and employees because half of the cities are in Kansas and half of it’s in Missouri. And then all of a sudden you had people that were working in Kansas that might have had some kind of employment tax there and now they’re working at home in Missouri you know and there are just all kinds of weird complications and there wasn’t really a true precedent for some of that and then how do you handle it and they’re like I don’t know it goes on and on now melody I got I have some.

35:15.75

Melody Ashby

Yeah, but.

35:29.00

Matt DeCoursey

Disappointing news for both of us because we were going to avoid talking about accounting but we kind of have to for this last step and it’s important. This is not fully accounting but 1 of the important things of this whole process is if you are going to separate yourself. From the business. You also have to do that financially so you know business one a 1 class is going to teach you about a term called comingling which you need to avoid meaning like you shouldn’t your personal bank account and your business’s bank account need to be separate and they need to be 2 different things because of you.

35:53.34

Melody Ashby

Um.

36:06.72

Matt DeCoursey

Co-mingling them or putting them together in the same thing. First off, it’s stupidly complex in many cases for your accountant to figure out later, and second off you can’t really say you are in fact, a different entity if you’re all commingled in a million different places. So. Opening a business bank account is key but you can’t do that without any of the steps that led up to this.

36:29.50

Melody Ashby

Absolutely And I think I alluded to when I kept saying keeping up for formalities that is one of the formalities and when we say that an entity provides you ah for personal liability protection. That really only occurs if you’re keeping up with the formalities and one of those is keeping a business account separate from your personal account if you’re using your business to pay for your groceries. We’re going to have a problem so you want to make sure that you’re signing contracts in the business name and that all finances that are business-related are from your business account. Um, you’re not commingling your assets and whatsoever because in order to get that personal liability Protection. You really have to show that you’re keeping a separate entity from yourself and the only way to do that is to really separate and think of your business as a separate person from yourself.

37:20.15

Matt DeCoursey

Now now now despite all of this advice half of you listening are still going to mess this up because most businesses do start in a sole proprietor state.

37:22.33

Melody Ashby

Even if you’re the only person.

37:34.34

Matt DeCoursey

And then they grow and either they don’t create another and I don’t know it’s just really easy to Commingle. So I actually ah have a section in Million Dollar Bedroom where I talk about untangling the ball of rubber bands where at 1 point my business grew so quickly and so fast that it was almost impossible, ah not to be commingled. When we became an entity it only took us about a month to figure out now what required like now look as a business owner if you’re growing quickly. You’re just hanging on to the rocket on a lot of days and you’re trying to keep going and so sometimes it’s easy to put these things off and I learned a very important and powerful lesson about it. If you feel like you are creating a ball of rubber bands putting more rubber bands on the ball does not help anything so you eventually have to go untangle all of that and in my particular case, I pretty much had to shut down. Ah, you know so we were in the business of buying and selling but we had to shut down that we didn’t want to stop selling because that wasn’t commingling anything that was already going into but we had all these purchases and different stuff in the history of the business that had to be untied and it was just a real pain in the butt and I don’t recommend that anybody go through it so well. Here we are. We’re nearly at the end of the show and so you know once again before we have we’re gonna have by the way folks no founder style today. We’re gonna have closing arguments because well we’ve got an attorney on and why not but you know once again I’d like to give a big thank you to today’s sponsor which is Universal Registered Agents.

38:57.70

Melody Ashby

Books and.

39:07.16

Matt DeCoursey

Agents set up your new business and maintain all aspects of your business compliance. Their goal is to make your job easier so you can focus on what you do best which is running your business connect with them by visiting the Ur agents link in the show notes so they do have long websites like http://universalregisteredagents.com which is. Really long to type in so you can just do the letter you the letter universalregisteredagents dot com and it’ll take you there so now for our closing arguments or maybe we should make the best case or the best advice that we could give to our listeners about setting up a business entity or why it’s important or what to not mess up I don’t know.

39:42.15

Melody Ashby

Yeah, so I would just say what works for 1 person may not be right for you and so what you want to do is weigh the factors there’s going to be a lot of economic and personal factors that are going to be relevant to the right choice that you make and then just weigh that in combination with those legal and tax consequences. That we kind of alluded to here so look at the ease of formation and the formalities that are needed to form the business and look at the cost. Some entities are more expensive to set up than others look at your ownership goals are there is there 1 owner few owners numerous that might sway you one way or the other to a different type of entity and then of course. 1 of the most important is the tax treatment because ultimately this is what’s going to impact you each entity has its own tax requirements and benefits so look at the various classifications and how they will impact you and decide you know which. The level makes the most sense for you based on that and make that call in order to proceed but I would always recommend not being a sole proprietorship for that long and to really set up a separate business entity from yourself. There’s no reason to put your personal assets at risk when you’re starting your business.

40:52.51

Matt DeCoursey

Yeah, and I agree I know where we said we’re gonna have arguments but I don’t have an argument with that last part because I think that’s a key ingredient. In fact, I give that I wish I didn’t have to give that input to other entrepreneurs. So often you know and the thing is like this isn’t expensive.

41:06.37

Melody Ashby

L.

41:11.59

Matt DeCoursey

Set up an entity in the beginning you know a couple of things that go with this from my own experience and I mentioned prior to hitting record to Melody that I grew up in a family of attorneys like you know my dad and all of his brothers. In fact, they had their own law practice for years and 1 thing I’ve learned is that you know well. Lawyers and will attorneys accountants and specific services. Providers offer areas of expertise that is often unrelated to the others so I have 3 different law firms that we work with at full scale because they have varying levels of expertise. Are really different from the others so you know the best advice that I can give is to go get and find the best advice that you can about your business I like ah you know and like I said I know that. That Melody from a law firm but and I won’t make you speak to this. But what I find is really that most law firms aren’t really they can help with this kind of stuff but it’s not really what they inherently do because there are so many. Ah, you know there are things like you are agents that will help kind of streamline that process and it can be fast and affordable and you can kind of mix and mingle some of these things too now you know overall when it comes to your business I think one of the bigger mistakes you can get is not getting advice from experts. Um. I hear people sometimes say they’re like oh my attorney’s $500 an hour. Okay, so I’m gonna break this down for you. You are not paying for that hour you are paying for the many many many many many many many hours that it took that person to give you the ah to learn to give you the advice that comes in that. A short small block of time so you’re paying for expertise also is that also why lawyers often never retire. They just kind of you know you’re like I mean in some and well in some cases that there’s merit to that level of expertise. You know you’re like they’re bringing in this like.

43:03.42

Melody Ashby

That might be part of it. Yeah.

43:13.82

Matt DeCoursey

You know this guy that looks like Yoda well that in 900 years the dude probably learned a lot of stuff so you know and that same advice goes for accounting.

43:19.14

Melody Ashby

Yeah.

43:25.39

Matt DeCoursey

And a whole and a whole bevy of other things and you know the world of business and entrepreneurship the internet and all of that have ah have evolved to the point where so many people are creating and allowing this level of expertise to be offered on these little fractional slices similar to what your agents do and like. You know like I think the folks that you are agents would be the first people to tell you that that they just send you to refer you somewhere else if you want to say hey you know melody I’m getting ready to raise $100,000,000 in the capital.

43:54.44

Melody Ashby

Yeah.

43:56.70

Matt DeCoursey

You know if you’re going to do that You want to talk to Attorneys or people that have been in and around that space because they have witnessed things that have gone well and other things that have not how are my closing arguments. Are they any good where they do I need a career change?

44:05.16

Melody Ashby

Absolutely, they were perfect I will add I’ll just add to your clothing I think you might um I’ll just add to your closing argument in that it’s just more costly to fix mistakes later.

44:23.50

Matt DeCoursey

True.

44:24.34

Melody Ashby

Then to just get it right in the beginning and so would definitely recommend consulting with an attorney and an accountant and making sure that you understand your options have it clarified and have all of your questions answered before moving forward and making a decision we often as I mentioned mentor. Incubators at incubators and accelerators also give free consultations and talk about this all the time with Startups. So.

44:50.32

Matt DeCoursey

Yeah, and that’s and that’s like I said there’s a different approach like I have 250 worldwide employees. The level that loves and then they’re international and that’s actually why I have to have different law firms because you get some that like deal with companies like mine that do businesses do business overseas.

44:58.26

Melody Ashby

Yeah.

45:08.46

Matt DeCoursey

And other things too is you know like we deal with you know dozens of different clients that have different types of intellectual property and understanding like I don’t know we’re just trying to set ourselves up to not have things be a hassle. So.

45:19.48

Melody Ashby

Right.

45:22.10

Matt DeCoursey

Melody. Thank you so much for joining me and once again, thanks to you our http://agents.com for doing what they do and for sponsoring this episode.

45:27.83

Melody Ashby

Thanks so much for having me.