Transcription
An entrepreneur never has one freaking business. They have multiple streams of income.
If I've got 10 different business type ideas running through my main S corporation and something goes wrong in one of those little 10 business lines, well, everything's exposed and at risk. We had a client and they had an airplane and they thought, "We're going to set up the subsidiary to own the plane and if anything goes wrong with the plane, they can't touch the big multi-million dollar company." The plane crashed. Come to find out, the main company had the pilot on the payroll.
Welcome everyone to the Main Street Business Podcast. This is Matt Sasonson, joined by the incredible Mark J. Kler. We're so excited to be with you talking about business entities. How many do you need?
Yeah, this is a, I'm excited about this topic and, and some of you may be like, "What, what do you mean? How many entities do I need?" For example, uh, an entrepreneur never has one freaking business. They have multiple streams of income.
Right. I think of it like a realtor that's doing property management or a restaurant owner that might be doing catering or what were you saying?
Or Yeah. Or the realtor's doing a flip or some construction stuff or some interior design or some staging, you know.
And, and there's a lot of issues here. And I want to just say this to everybody so that you can see the, the where we're going to go with this is you might have multiple businesses and having them in one LLC, call it Colar Enterprises and all these DBAs or trademarks or who, whatever URLs. We'll get into that a little. But you might want a separate entity for branding. You might want a separate entity because I'm going to exit that part of the business sooner. Or oh, I'm going to partner with someone on this part of the business. So, that's going to maybe need its own entity or I might be shutting down this operation and I want to close out that liability or I do have liability exposure. I'm going to, I don't know if I want to do bungee jumping in my flower shop business, you know. So, all these different issues could play into it. And so, it's not about rental properties and how many entities, it's about a business.
Yeah. Yeah. So, I think the, let's just kind of start with the framework here maybe for a second. Um, I do like, if you're someone that just does one thing and that's all you're doing. "I just do consulting. That's all I do, Matt. I don't do anything else. It's just consulting. I have these type of clientele. That's all I do." Cool. I, I'm not telling you to go out and do multiple. But like Mark said, if you're that entrepreneur, you're going to have a decision to make that has lots of different things that you do. You serve different customers. You might have different branding. It's a different product or service that doesn't really fit to be delivered to the same customer, different partners, all different exit reasons, all these different reasons. You may want to have multiple entities. But there's one foundational thing you might want to consider, which is having an LLC or an S corporation, which an LLC taxes an S corp as the foundation.
Oh, I was just going to go there. I love it.
We got to start there. Now, we've talked about the S corp before. We have lots of video. Mark has a chapter in his book on it, multiple chapters in different books, tons of content on that on why you need an S corp. If you're making more than 50k net a year, you should have an S corporation or an LLC tax as an S corp. And you can do certain business activities right in that. But I might want to have a separate LLC that S corp owns to do other activities.
Yeah. And, um, we, by the way, we will not be able to do this justice in just a half hour, uh, for this show today. Uh, we, this is a whole class in our annual 360 conference and I'd recommend any of you that are interested in coming to, um, our event. It's in Dallas the first week in June. Uh, you can go to mainstreet360.com. We have over 22 classes, 17 different instructors, mainstage parties. Matt and I are going to have the band going. Oh, it's going to be awesome. It's going to be good. But, um, this is a class that we would teach there for an hour. I don't know if it's on the agenda this year, but these are the types of things business owners are like, "Okay, I cannot do this on Legal Zoom." And so, this is probably where our tax consultation or legal consult at our law firm does the, has the biggest impact. So, again, as we dive into these issues, I just want as a precursor say there's a lot to learn here. Come to our event anyway. You will freaking love it. And number two, as you notice these issues, this is why a consult with a small business tax lawyer that could be extremely affordable should be on your radar every year because you're moving and shaking. You're a business owner and you're going to have these changes happen. So Matt, I'm going to, I want to set the stage for you. You're exactly right. I love the S corp at the foundation no matter what you do because you want to minimize self-employment tax people and that S corp could be an LLC taxes S corp, but that's your foundation. Why would you set up a subsidiary to that? Even though it funnels in, we call them subsidiaries, but why, what would be the first reason why you might peel off a different entity?
I think for liability protection.
Okay. I might be doing something different in that entity where I want separate liability treatment. Maybe it's a little more high risk. Maybe it's new. It's got different customers that might be a little more risky. Whatever it may be, but I want liability protection and, um, so that, so, so I can isolate that liability in that new LLC. Okay, let, let's say it's, you know, importing exporting business. All right. I'm going to call it Vanderlay Industries LLC.
Very creative name. I like that.
Yeah. Okay. Vanderlay Industries LLC. I might have some issues with export import. I might have some disgruntled clients with tariffs going on. I don't know. All right. So, so but, but if something happens in that LLC, they can only sue that LLC. If I've got 10 different business type ideas running through Sornson Enterprises, my main S corp corporation, and something goes wrong in one of those little 10 business lines, well, everything's exposed and at risk. So, if I got a separate little business or service product that where, where I do have some different liability risks, it can make sense to isolate that into its own.
Subsidiary. I'm actually kind of surprised you went with this one first. I, I thought you were going to go with partners. That's going to be mine. I'll go there in a moment. Okay.
But, um, the reason why you brought this one up first, I'm surprised is cuz we have the most amazing story that it'll be a made for TV movie someday.
Um, and I, and I, don't want to make light of it because it's, it, it is tragic, but, and I just want to hit the highlight because you can't just set up an entity and say, "I isolated it," and think it's done. For example, and I know Matt, you can add, you'll add some bells and whistles to this, but we had a client, they had a, a financial services company, and they had an airplane and they thought, "Okay, we're going to fly around and do other things besides the financial services and we don't want to expose the main company, even though from time to time we might use it for that primary business. We're going to set up the subsidiary to own the plane and pay the pilot and all these things and the hanger and all that stuff. And if anything goes wrong with the plane, they can't touch the big multi-million dollar company, almost billion dollar company." And so they go charge away well into the sunset and well the plane crashed, people died. It was a, a project that was separate from the financial services. And when they got into it, and Matt was actually a lawyer on the case, I'll leave it at that. Is come to find out the main company was still freaking had the pilot on the payroll. The, all the expenses were paid out of the main company. Yeah, they set up an LLC and the FAA had the, the plane number registered to it, but that was it. If you're going to set up this entity to run this other line of business, you have to have a bank account for it. It has to pay the employees. It has to pay its own rent. You can't just say it's separate and not treat it separate.
Yeah. Anything to add to that? I mean, I just truncated a hell of a story.
Yeah. And I will say we represented some people that were on the plane that died actually. We didn't represent this financial services company and very sad story and multi-millions of dollars of liability of course. But the issue when a plane crashes is there's either manufacturer defect or the pilot made a mistake. That's the only two outcomes of what happens in a plane crash. And so there's going to be liability somewhere. And so what, so when we got into that case, as Mark said, we discovered and it was actually me asking the question. I take a little credit.
Genius.
Yeah. Of asking of, uh, the, what payroll was the pilot on? Because I knew I've worked with entrepreneurs. I know what you're doing. I know you're like, "Ah, that's a whole separate payroll. It's going to be a pain in the butt." And they, and I could just, they answered the question and then right after the words came out of their mouth they were like, "Oh, dank." Um, and so if you're, if your employees in your main company where you're trying to protect kind of the, the big nest egg, whatever it is, if those people are doing the services and work in this other entity where you have risk, just know you're not getting separate liability treatment because that employee is the one that has agency on behalf of you and your company and you're going to still have some liability. If you're going for liability protection and that's your purpose, make sure it is clearly separate. Separate bank accounts, separate income, separate expenses. The money can funnel back down to the parent if employees are working on it or contractors have them separately employed or contracted at that subsidiary.
Well, love it. Okay, my first option of why you might need a separate entity, folks, is you got a partner. So, let's say, um, I'll, I'll use a landscaping scenario. So, you're a landscaper. You're moving and shaking. You're doing all sorts of things and but you don't do sprinkler installs, you know, something you've stayed away from. You're just like mows, yada yada. You're just a machine. You got your trailer set up. You're going. But sprinkler installation. Yeah. Not your forte. But your brother-in-law, the famous brother, I should call this the brother-in-law exception. We, we need to give him a name, too. We need to give this brother-in-law a name, like Brad or something. Or Eddie. Okay, there we go.
Uncle Eddie. I don't know. I mean, he was a brother-in-law. He was Clark's brother-in-law.
Yeah.
Yeah.
So,
I like it.
Eddie. So, Eddie comes along and says, "Oh my gosh, Mark, I know sprinkler installation like the back of my hand. I've even got an RV I can park on site when I'm working on the sprinklers." Yeah.
Eddie says, "I can do it. Let's partner." Well, do you want Eddie as a partner in your main landscaping business? Hell no. And so all of a sudden, you've got another operation. You got to account for it separately. You're going to split up profit differently. You're going to have different assets. You're going to have to do a tax return for that partnership. And you want separate liability if Eddie screws anything up. So boom, you need a separate entity. But here's the trick. Your S corp owns your half of that new project. So the new LLC is half owned by your parent and half owned by Eddie. Boom. Bada bang. Pen drop. Yeah. And that's very common. And I think when we see any existing business owner that's getting into a new business with someone else that's a partnership, that's the first place to start is particular if you have an S corp. How can I use that S corp and maybe just make it the partner whether it's 50/50 or 1/3 2/3 whatever your profit partnership deal is to just add that in, um, cuz I want that income. It's an operational business. We still want it to come through and hit your S corporation. But let's get that separate entity an operating and partnership agreement. An operating agreement is a partnership agreement in an LLC that outlines, you know, who gets what, what's everyone's responsibility is. And then of course, we're gain the separate liability treatment there. So, I mean, Mark and I have multiple partnerships between us too, right? We're doing that. My S corporation is the partner in our partnerships that are operational businesses. Mark's is is in his. And so, so this is something we're actually doing ourselves in our own trifecta and and strategies. And I, thousands of clients that have done that partnership structure where they're S corps involved, separate partnership entity for a little separate enterprise with someone else.
Yeah, totally. Now I'll say number three and I'll set it up for you because you are,
I've learned so much from you on this topic.
I think number three is exit.
Tell me why.
You might have a separate entity for exit and you, and you yourself have mastered this for clients and in your own life.
Yeah. Yeah. I mean, this is another one Mark and I have done. We've helped clients do this is you might have a business that, that or a part of your business that you may want to sell. All right. And so you could say, "Well, I want to sell this piece of my business, but I want to keep this other part of it." Well, you can essentially spin out that service, whether this is an existing service you have or a new service you may be adding.
And so that Mark and I did that strategy ourselves. You know, we had a company called Main Street Business Services. And that was a separate entity from our law firm, right? And separate entity. And, and one of the reasons, there's a couple reasons we did that. Separate branding. Um, and but then also a way that could could exit as a separate entity from our law firm. So, and I, we've seen lots of clients do that over the years. I had a client that was a dermatologist do that with a med spa. Okay. Didn't want to sell dermatology practice, spun out the med spa into separate business. Those companies work together, was able to sell the med spa. Okay. And we go down a lot of lists here, um, of of how that could work. Um, but that might be another reason whether you're starting up or whether it's an existing service you want to spin out to have a separate NA is you're thinking selling that business or the exit in mind. And that exit could also be maybe transitioning to a partner that's only involved in that service or product. That could be maybe a family member that takes it over. It doesn't, the exit doesn't have to be the sale of it. It could be a couple of other things.
No. Yeah, that's a great point. And I, I would now, we've got other podcasts on how to sell your business, how to prepare to sell your business. Please check those out. But I would say this on this point and then it just briefly is you've got to start right away. Um, when, if a buyer is going to look to buy that line of business from you, the sooner you can create separate financials, separate structures, separate employees, separate procedures, everything's separate because people want to buy a nice little box. They want to make sure everything is in those four corners. And you can't just one day say, "Oh, I'm going to sell this line of business, set up an LLC, and a month later think it's going to happen magically." You want the highest multiple. You want the highest valuation. And you've got to think like a buyer. And the sooner you can create separate that business and start m building it, massaging it as a separate ongoing concern, the better off you're going to be.
Yeah.
Now, I've got a number four. I don't know if you've got one that you're feeling.
All right. All right. Go ahead.
You want to hear it?
Yeah. I want to hear it. That'll give me a second to think of something else.
Okay.
Try to keep up with you.
Well, we did talk about the B word. B word. B as in branding maybe. But I like number, uh, a regulatory issue.
A lot of times we have clients that they might do, uh, might be a doctor and they've got medical billing under insurance, Medicare, this, that, they've got insurance billing. We've got clients that are contractors that want to go do a bid on a federal project and they've got Kevin Bacon wages to worry about. They've got, um, they want to do female-owned business so they're going to put their spouse as the owner cuz they, so they've got this regulatory thing that is going to create this separate need for an entity and put them in a new or better position. You hold, you've heard of Kevin Bacon wages?
I don't even know what that means.
What? Okay, I'm going to, Well, you're commenting on regulatory. I'm going to bring up your little.
Okay. I mean, I do like me some Footloose. Um.
Ken Bacon's underrated, you know.
I miss him. He hasn't been anything I do big lately.
I do too.
So, well, uh, yeah, I think that regulatory thing, I think particularly licensed people that can make sense. It could be even a, a product that you have that might be the product is regulated. You might want to have a separate entity for that.
So, what is the Kevin Bacon wages?
Well, I, I use it as a term. I joke about it and I, that's why I sometimes get some laughs. I couldn't remember the first word. People listening to this are like, "Hold it. You guys call yourself real business lawyers."
Okay. It's called Davis Bacon.
Davis.
Davis-Bacon.
Federal wage law that if you're going to have over $2,000 in wages, they get sucked into federal wage rules and all these different things. Got it. And, uh, for paying laborers and it's to prevent.
Easily confused. Easily confused with Kevin Bacon.
Yeah. I mean, nine degrees of Kevin Bacon, you know, you got to know that. So hopefully someone was laughing there. But yeah, Davis Bacon wages, wage law, um, but no, I think regulatory, it could be a really smart move. I've had countless clients that'll say, "I'm going to set up this subsidiary owned by my wife because I want to have a female-owned business opportunity for bids or something like that." And they go down that path. So.
Yeah. Okay. Um, let me hit the other one here before we close this out, which is, as Mark said, the B-word, you know, uh, and branding. So, you might have a brand you're trying to build around the business name. And whether this is subsidiary or it's just entirely separate, building a brand is obviously very important for the business. This could be a nationwide type business. You're trying to get trademarks and, and building a brand around that separate entity can be really important. And, and I've seen lots of companies that as they get bigger, they actually have lots of subsidiaries that that actually provide a different service and they provide different branding to, um, and, you know, think think of like the, the food makers or restaurant chains. I mean, they have one holding group, but they have a separate brand for the restaurant, right? I know the same company that owns Taco Bell owns KFC, but those are different concepts and brands. Yeah, they're all in the food business, but they've kind of branded things separately and it doesn't have to be, of course, on that scale. It could be much smaller. So, just think about, am I trying to build a separate brand for this business and operation? I think sometimes that leads into the earlier one we talked about exit. Sometimes a company with a separate brand is easier to sell or or exit transfer on to other employees or people in that specific brand. Then you've got multiple things entrepreneur going on and I don't want all those things tied up in the one entity.
And I think the reverse could be, um, just as important. You may want to brand your parent company name and, and, and protect it and preserve it and the subsidiary is, uh, going to have a different name so that you can protect your main brand. So the brand, so the brand value could be in the parent versus the subsidiary or vice versa.
And, and, but nowadays you got an, with an established. Yeah. Sorry to cut you off, but you're like an established parent company that has a brand and you're trying something new that's going to have separate branding, a separate kind of target, you might want to, there could be a lot of reasons to have a separate brand and, and, and keep that separate and distinct from just a customer interfacing and reputation as well.
Yeah, totally. Totally good stuff. Well, I think these are, now there could obviously be other reasons. Um, uh, sometimes there's estate reasons, someone passes away, this, that, you've got spin-offs of this, that and another. But I, I think these are the main five. And, um, I just want to encourage all of you again that if you're up against these challenges and you're trying to scale and build, having a small business lawyer that has a tax background because taxes are going to permeate all this, uh, and you don't have one you can rely on. Please make an appointment with one of our lawyers at KKS Lawyers. This is a perfect opportunity to have an annual review and get it on a picture, a diagram, maybe something called the trifecta. And, uh, you would love that. I think any of you listening because when you can see it, then you can show your insurance agent, you can show your family, you can show different providers in your professional world that, "Okay, I get it. You got a separate entity for this," and the little bubbles show everything. So I think it's really powerful. But, um, I hope this has been helpful to many of you that are entrepreneurs.
Yeah. Yeah. Take us up on that. KS Lawyers. We'd love to work with you. We're helping clients across the country. Have an incredible team behind us. So, thanks everyone for listening to the Main Street Business Podcast. Like, share, subscribe, kudos. I don't know what else you can do. Comment if it's positive. You know, we want to help get the good word out on the podcast here and, and all the content we're trying to get you to help you better live the American dream. We'll see you next time.