Do I need an LLC? - 006

This is Law and Wit, Episode 6: Do You Need an LLC? Welcome to Law and Wit, Creative Counsel for Entrepreneurs. I'm your host, Brittany Rettell, mother of 4, entrepreneur, naptime lawyer, and attorney for creative entrepreneurs. I'm here to share inspiration and action so that you can tackle your business blocks and confidently own your business in every sense of the word. Thank you so much for being here. Okay, I have to throw my disclaimer out there. While I am an attorney, I am I am not your attorney unless you want me to be, in which case please go over to BrittanyRettell.com and sign up for a free consultation. I do free 20-minute by phone or Skype if you want to talk about your business, and I'd love to have that. But aside from that, anything I share here is just for your information only. So best of luck. Okay, hello and welcome back. I'm so glad that you guys are here joining me, and I really appreciate it because if you're not here, again, I'm just a weird girl with a microphone. So really appreciate you being here you listening, tuning in, downloading, all of the things, and working on your business. So, 'cause I know that this stuff is important, but it's not always the most exciting part of working on your business and working for your business so that you can really succeed. But I've got a good short and quick episode today. I promise I'm gonna get to the meat, all about LLCs. You know me, I'm always trying to find a way to jazz that up, 'cause you know, you need some TLC. About some LLCs. And whether that makes you think of chasing waterfalls or, you know, the good old days of What Not to Wear on Trading Spaces— do you remember those days, you know, when TLC was at its heyday? Gosh, I have some really good memories of, you know, college. Those are my college days of just wasting away my afternoons, you know, doing homework and studying while watching that TLC. But today we're talking about giving some TLC to LLCs and why you need them, what are they. People throw those words around as if you're supposed to know what they are, you know, is it a sandwich, does it have avocado on it, you know, who's to know. Well, we're gonna dive into that today. So basically an LLC is an acronym that stands for a Limited Liability Company, so LLC. And the reason why they are so popular and they get a lot of airtime and face time and talked about is that they're kind of the ideal ideal vehicle for registering your business as an entrepreneur. So if you have not registered an LLC, if you have not set one of these up, then right now you are a sole proprietor. You know, hooray! But you didn't know that. You are a sole proprietor. It is the Times New Roman of entrepreneurship. So it's the Times New Roman of being a business owner. If you haven't done anything, it's just the default. That's what you are. That's what the IRS thinks you are. That's what your state government thinks you are. You're just a sole proprietor. But you can be more than that. And I, and I'm going to try to convince you today why I think you probably should be more than that. And then here's why. If you set up an LLC, you are essentially setting up a business entity. So it's a formal recognition that you have a company that you are going to put assets in. And now this LLC is going to be a new kind of person. So a new we call it, you know, an identity. So it's not a real person, obviously, but it's a kind of corporate person. So it's a new thing that's going to exist that didn't exist before, and now this thing is going to be the one that decides to do business, that hosts a website, that owns property, that makes deals or breaks deals, or does all the other business things that maybe you've been doing on your own. So, but the reason why you want your LLC to do those things is not you, is that your LLC can then take the heat when things go wrong. So if you don't have an LLC set up right now, basically what happens is that— and I'm going to credit Rachel Brenke with this analogy. I heard it on her podcast, Business Bites. I thought it was great and it stuck in my head. So if you don't listen to that already, that's another one, a great one to reach out to, because she gives a lot of great tips about being an entrepreneur. So she talks about that you're, you know, say you're at the beach and, you know, waves are coming up and you have a bucket of sand toys. If you haven't set up an LLC, you've just got one bucket and you've got all your sand toys in there. And what happens when a big wave comes and crashes it over is that everything just spills out onto the beach. It's all there and it's all mixed together. What happens when you set up an LLC is you now have two buckets, and one of them is your personal bucket. And this is your personal bucket that has your mortgage, your house, your car, car payments, your retirement accounts. Your maybe spouse's money and their assets. That's all— that's your personal money. That's your stuff. Those are your assets and your things that go under your name. And that's your personal name, things that are linked to it. The other bucket is your business bucket, and that's where you have your business assets. So it means if you are a lawn mowing business, that's your business truck that you have. If you run a company online and run, you know, if you do digital downloads of calligraphy, well, that's your website and that's your artwork that you've copyrighted, and that's your contracts that you have with people. That's all the stuff that's in your business bucket. And when a wave comes along, whether that's a lawsuit, whether that's a tax liability, something else that comes along that just rocks you— unfortunately, waves come, you know, they come whether we, we think they're going to come or not sometimes— and knocks over— it can knock over, but it can't touch your personal bucket, and it's not going to mix those two buckets. Okay, does that make sense? It can only mess up and touch the stuff that's in your business bucket, which sucks. You know, it stinks that it happens at all, but what sucks even more is if something like that happens and now it affects your personal liabilities. Okay, now you're worried about, gosh, are we going to lose our house? Are we going to lose our car? Are we going to lose our home or our retirement that we've built up, our nest egg? You know, all the other plans that you have and savings that you've had in your life. So it's likely that you might have heard from someone, you know, a friend or mentor or someone else that you need an LLC and have maybe even thought about doing one, but maybe you've been stuck up on, you know, hangups or I'm not sure how much it costs or is that really right for someone in my position. So let's dive into a little bit more about why it probably is a good choice for you and how really you go about doing it and what you should expect in terms of cost-benefit analysis. If you want to set up an LLC, the way you do it is you basically go to your— it would be your Secretary of State website for your particular state that you live in, or sometimes it's the Secretary of Business. But, and you would look up to see what the costs and what the registration procedure is like. All the states have, you know, online portals that you can do this now, but there are some variations in terms of the cost. So I happen to live in a very entrepreneurial-friendly state in Utah, which is really great because our costs are really, really competitive. It only costs $78 here to register your LLC for your one-time, first-time registration fee, and after that, your annual maintenance on it is $15. $15. That's right. You heard me right. So nationally, the average is around $110, and so that's kind of what it is. But in some states, it's more expensive. You know, back east in Massachusetts, it's a lot more expensive. In California, they have a, you know, a middling registration fee, but their annual fees, because they have franchise tax and other things that kick in, are more than $800. So it is something that you need to plan for and look at to see what is it going to cost in your state. And the reason why you should stick to your home state where you're actually doing business and not be fooled by these claims, these BS clickbait claims that, you know, you should start your LLC in Nevada or Wyoming or Delaware is because if you are not doing business in those states, I mean, honestly, if you're not hiring people there, if you're not making stuff there, if that's not where you are located, that's not where your home is, if you have a home-based business, you're not doing business there. And so what's going to happen is that even if you set up your LLC there, you're also going to need to set up an as a foreign, basically, LLC in your home state to divert back because, um, It's you, because your business isn't actually located there. So what you could end up there is two LLCs, and now you have double the paperwork and hassle and fees. So please don't be fooled by claims there. You know, there are states that are trying to, you know, raise their revenues, and it's a really easy way to make kind of a quick buck is to say that like, oh, we have, you know, preferential treatment here. And I know there's rumors on the internet like if you register as an LLC in Nevada, you don't have to pay taxes. That's not true. Okay, the rule is, is that taxes are paid where the money is made. So if you live in Utah and you're making money in Utah, guess what? You're gonna have to pay taxes in Utah, and you should just be okay with that and be at peace with that. You know, I'm not gonna be able to give you any magic formula here to get out of paying taxes. So, and if you find anyone who's selling that, then good luck, because that's just, that's just not the way it's done. Okay, you make, you have a business, you're gonna have to pay taxes. That's just part of it. So be at peace with that, and please don't fall for a trick of trying to register in another state and then ending up with more hassle than it's worth. So be aware of that, that you should just register in your home state and be okay with that. If you, I had this recently come up with some people I was working with, they had multiple partners in different states and were wondering what state would they go to, and it's a completely online business for them, then yeah, you could maybe do some shopping around and see where is the most competitive in terms of the rates, because you could really argue that there's a nexus, a business connection to any of those states. So then it'd be worth looking into what are the costs and what's going to be maybe the most easiest process in terms of registering your LLC. So you're going to go to the state website. It's going to give you the protocol of what you need to do in terms of how you're going to fill it out. It's likely that they're going to fill out the articles of incorporation for you. You'll probably go through an online portal that will answer those questions, and then The other document that I would suggest having is an operating agreement, and that's one that I really suggest having drafted by an attorney. And the reason why is the operating agreement is actually, for an LLC, is actually an internal document. You don't have to file it with the state, but it's the document for you that details how your business is going to be run. And it's still, you know, a legit document that you sign. You should have it, you should sign it in front of a notary so you have your official seal on it. But it'll set out terms for What happens if someone wants to get out of the business? And how are we going to be taxed if we want to be taxed in something different than just what the default status is? How are we going to handle, you know, if this comes up? Are we going to— when are we going to have meetings? Are we going to have issues with people disagreeing about control of the business? All of those issues can be addressed in an operating agreement, and that can be really detailed in terms of what's your vision for how you want your business to be run. And I think it's really important when you're taking these steps to formalize your business, that you really go through those questions and go through them with someone who can probe you and push you a little bit into thinking and maybe having some of those hard conversations, especially, especially if you are working with someone else. It's good to have if you're on your own. I know it may feel a little silly that you're like, all right, party of one here. I guess I'm going to detail how I'm going to treat myself. I hope I'm a good boss. I hope there's no sexual harassment claims. But it's really important when you're working with someone else that you make sure that you're on the same page in terms of what's the vision for where this is going to go? What happens if one of us is done? And is the LLC just going to have to die, or is there a way that we can dissolve and kind of unwind some of the ownership here so that it can continue, the business can continue, if one of us needs to leave for all kinds of reasons? So those are, those are good questions to have and to have be asked and to be settled. So I really recommend you go through that process. And the other thing I will say about LLCs is that make sure that you are using your LLC. If you have already set one up and you're like, yeah, thanks Brittany, I already nailed it, thanks hashtag, that's great, awesome, glad for you, you know, clappy hand circles all around. But make sure that you are actually using it to do business. And by that I mean, I hope that you've set up bank accounts in the name of your LLC, which would mean that you would take your LLC documents in and your EIN number, which is your electronic identification number, it's kind of like your, your Social Security number for your business that you get from the IRS, that you take those into your bank and set that up and make it very clear that these are bank accounts, business, that are only going to be used for your business and only attached to your business funds. And it also means that when you are signing a contract, are you making sure that you are signing it as an agent of the LLC? You know, are you signing it boss babe of Brittany Ratelle LLC, or are you signing it personally? Because if you're signing it personally as you, then, well, it kind of looks like you're on the hook and not the LLC. And that's not what you want. You want everything to hook and hang on the LLC because if things go south, if there's an issue where performance hasn't been done and someone sues you or they're looking to recover, you want them just to be able to get at what's in the business, business assets. So keep it in the LLC, keep it straight, and make sure that you're not commingling your business assets. Make sure that you don't have a PayPal account that you're using to buy things online, you know, when you see a good deal on, on Instagram, and that you're also getting and receiving orders from, from your Etsy shop. You know, you should have a business account, you know, you should have a PayPal that's just for business that should only go to your business account. So it's not a big deal, you can just set up one with a new email address. So But make sure you're taking those steps to make things legitimate and to really delineate that you have clearly separated your business assets. Because that way, if there ever is a problem or question, no one can pierce what's called piercing the corporate veil. And this is what basically is the idea that someone can actually reach through the protection of your LLC or like your corporation and get to you and say, look, no, we think that this is a shell. We think this is just a fake, you know, it's a fake invisibility cloak— sorry, I've been reading a lot of Harry Potter with my kids— that we can actually get to you, you know, that this thing does not protect you. So obviously you don't want that. That's the whole reason you've gone through this whole song and dance is to have that protection. So make sure that you're actually using your LLC and that not commingling assets, and that heaven forbid if anyone should ever come after you, you have that protection. So, okay, so those are some quick thoughts about LLC. I told you it'd be— we get quick and dirty. So it's a busy time of year and, you know, ain't nobody got time to sit and ruminate about this stuff. Not me, not you. So, okay, thanks so much for joining me here. And if you have any other questions about this, this stuff, you know, I'm, you know, comment on my blog post. I'll have one as soon as it's posted, all about LOC. I'd love to hear if you have some more thoughts or questions. Make sure that you're subscribed to my newsletter, comes out on Wednesday. It's short and sweet and has some tips of stuff that I don't cover on Instagram, if you're following on Instagram, and stuff that I don't necessarily talk about here. So there's a little bit of overlap there, but not, but not always. Sometimes it's just there's stuff I can talk about there in a way that I don't in other places. So make sure you're following. You can subscribe to that at BrittanyRettelm/newsletter. You can also sign up and get my— I've got a little creative business legal checklist that's a quick one-pager, kind of a bird's-eye view of stuff that you should be thinking about for your business. So And with that, I will sign off and wish you a happy, happy day. Thanks for tuning in for another episode of Law and Wit. If you're interested in the show notes for this episode, please go to brittanyritell.com/episode number. So this would be brittanyritell.com/6 for episode 6. There you can find show notes and find details for anything that we talked about in today's show. If you like what you heard, please subscribe. That's how I can get the word out to more people for— so that creative entrepreneurs like yourself, um, can make sure that they're getting the tools that they need to build their businesses and grow. So also, I'd love it if you leave a review in iTunes. Um, I really appreciate it. I read every single one, and it really means a lot to me. I'm just a one-woman shop here, so it all is, um, very meaningful at this stage. Thanks so much.