How Marketing Agencies Structure Finances: C Corp vs. Pass-Through LLC

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Hope I was actually reading No Man's post on school and I kind of have same question. It's, I was wondering how people run marketing agency. What's the structure of the marketing agency? Because I know that in the companies, in the entities in the US would be different with the entities that I have in my country. There are different laws and different tax, tax legal works are totally different. But I was wondering, what, how do you guys keep your finances? How do you guys pay yourself? Is it by distribution or is it by the monthly salary? Or yeah, that's, that was, that was the kind of question that I had. I think Noman has more to say on that. He has, I think, more in-depth question. But yeah, no matter if you want to say, if you want to add on something.

Yeah, sure.

No, man, I had the same thing. I think I've been operating an agency and I've been kind of like using the, like a salary-based model, but I was just kind of curious of like how other people do it.

So I can put my 2 cents worth there. So we're a C corp in the States and the C corp is basically we pay ourselves a salary and then You know, you can choose to pay. So it's a salary, then if you disburse profit to the owners at the end of the year, there is taxes on that. So it's like double taxed, right? So what we do is we actually basically have a minimum salary for us that basically goes into our 401 and maximizes that and maximizes profit share. And at the end of the year, we just bonus ourselves a huge amount, whatever we need. Then whatever we left is we put in into and keep it to the business knowing that if we pull that out, that will be taxed again. The reason why we did this was, you know, we structured as a C corp at the start so that maybe if we sell, it'll be much easier. But I do know like other companies, marketing agencies are structured as a pass-through LLC, which basically means Whatever profit the company is making is basically taxed as it was part of your income tax and basically maximize that way. So it's up to you on how you want to structure that. The challenge there is that if you decide to sell that pass-through LLC, then you'll have to convert it to a C corp and you'll have to go through the hoops there.

What country are you in, Elian?

I'm in Japan. Japan. So in Japan, usually the companies are structured on— majority of them are on C corp in the US terms, not really a lot of LLCs. I noticed that a lot of the American companies are based on— are structured on LLCs. So yeah, that was kind of a different outlook. But yeah, Kevin had something I think I would love to hear. His thoughts on that.

Sure.

Yeah, I mean, definitely crawl, walk, run. Um, I think, uh, David's got a great point. If you're looking at the outset to build something, it's like a house. If you're looking to build a house that's gonna be 3 stories, you want to make sure the foundation can hold 3 stories. You don't want to go back and kind of build the foundation. So if, uh, you know you're gonna sell eventually and you're— and everything you do is structured in that way, as you grow and as you bring people on, then you want to set up a C corp right away. I usually don't like— I get this asked from a lot of my customers who are setting up corporate entities. I'm not a lawyer. I've got 5 startups under my belt. I've done this all the different ways. And what I try to tell people is don't focus on the minutiae. Just get the business going, get some revenues in the door so that you have money to pay lawyers. Because sometimes you can spend all your money setting everything up And then you're starving trying to get going. So, um, if you're— and most everybody here is 6 figures, 7 figures, so they're beyond that. So, but it sounds like you're in startup, you know, trying to think this through. If you were— if, if I was to do this over again, and it's kind of the way I structured EverSocial, is I do a pass-through LLC. You have a year, I think, to convert it to an S corp. Um, so you can determine, like, if you know that when you're starting out and you think you're going to be needing that corporate protection, then, then convert it to an S corp and you're going to be double taxed. Um, C corp, uh, is great for structure of shares and, um, share-based distribution. And, you know, um, it's very— you know, a lot of companies acquiring companies like that clarity. Um, for me, I have a pass-through LLC on this one because I like to put all my expenses through the company. So I, I, if I'm traveling, I'm going to Europe next, next 3 weeks, you know. Um, that's a conference I'm going to for, I think, half a day, and then I'm going to Italy. I'm going out elsewhere with my mom, taking my mom, and it's all company, you know, it's going through the company, you know. Just, it probably technically you're not supposed to do that, but as much as possible, I put it through the company. I'm just giving you the Kevinology here, so don't take it as legal advice. But, um, but I found that doing it that way— now, if I'm buying my groceries and stuff on my company credit card, that's not good, you know, kind of thing. But as much as that there's duplication of could be business, could be things, this is just transparency. I push it towards the business. I have a credit card for my personal stuff, but I do put stuff on the company credit card And sometimes that does get attributed to me, but at the end of the year, my accountant will look at it and go, we need to give you some more income 'cause it'll look too lopsided. So we're gonna move that over to shareholder loan or whatever. So I could go into this offline, Aliyan, and give you a lot of practical stuff, but I'm just saying structurally, I would say crawl, walk, run, get some revenues going. Don't— like, I didn't have a business license in my local area for a year, you know, kind of thing, because it was just another expense that I would have to spend. And when I needed it, I went and got it because I won a deal where they needed it. So I went and spent it because I had money to pay for it. That's my philosophy in the scrappy startup part of it.

When you—

once you're operating, you have employees and stuff, you might want to take a smaller salary And then take those distributions as a way to know, because you got to pay, you know, a lot of times it's always, you're always behind the 8-ball and you're going to be paying yourself last.

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Uh, let me ask Alian, where, where are you at in terms of revenue right now, or in terms of number of employees, or like just where, where are you at?

Uh, still in the 6 figures phase. I do have, uh, 3 full-time employees, uh, employees, and, uh, 6 contractors. So yeah, but I don't have that much expenses, frankly, because I think relative to the people, because I have a lot of contractors, my profit is quite good and I pay myself quite well, I think. But yeah, I think Kevin, what Kevin was saying was quite practical. What do you buy? Uh, Norman, what do you think? I think you, you had that question.

No, that's so— okay. Uh, yeah, my question, so I'm with Kevin a bit on this. Um, like I've had a pretty good tax advisor who's like very aggressive in working in my favor, in my family's favor. Uh, so the way he puts it is like, hey, just operate your business as close to break-even as you can, especially the early days. We're 6 figures. Right now. And then he's saying that, look, you can use those if you're operating as a loss, then you're not— your pass-through taxation is a bit lower and you get a bunch of other benefits. And so that's why just doing more things at close to breakeven is a good thing in the early days. But like, I'm with Kevin. I pay out my employees first. I pay myself last. So if, if hopefully we do well and we continue to grow, then, you know, we get— I can— that operating at breakeven becomes a bit more beneficial in, in my favor. But I mean, expenses, like he said, you know, like if you got a car and you're gonna— or, you know, you're buying something, put it on under the, the company, you know, don't put it under yourself like this. If you got cell phone, bills, put that under the, under the company. If you use like a home office like I do, you know, put part of your, all the, you know, like utilities and bills and mortgage, put that partially underneath the company. So, so yeah, I'm just kind of, I'm learning too, but that's my, my accountant's, that's the way he's been directing me and advising me.

Japanese version of IRA is very strict. They don't let me do that.

Oh, he also said if like you make 401, if you— so to do a self-directed 401, so you put whatever is excess into that self-directed 401, and then if you want to make investments out of that, you can, you can direct those investments even back to your own company or to other places. It's— I don't know, I'm just learning. Like, this is all just like real— really new to me, and I'm just trying to like figure out, you know, what other people do. So—

I'm not an American, but I'm curious about how you— in America, borrowing power increases or decreases depending on how you pay yourself. Like, in Canada, if we pay dividends, your borrowing power for a mortgage is lower than if you pay yourself a salary. What's in the salary contributes to your pension fund, which I don't want to contribute to because I don't believe in government's ability to sustain that fund. So like, is there the same thing in a mortgage? Is the same in the United States? You guys exactly the same situation?

Same situation.

Yeah. If you, if you wanted to— sorry, no, man. Yeah. But if you wanted to use your income, like you have to be able to compete like for a mortgage. You're going to have to play with everybody else and show a W-2 or self-employment you can do, but it's a lot harder. And usually you're not getting traditional funding, you're getting more riskier type fund or, you know, people who fund those riskier type of mortgages.

So yeah, usually a longer timeframe. They want like 2, 3 years of income shown as self-employed, someone who's self-employed, and it has to be substantially higher than what you would make as a salary from a full-time job. So yeah.

Yeah, they're looking for that stability, you know. Just think of it that way. They're— the more stable you are in the eyes of the lender, the more easier it's going to be. So, um, you gotta, you gotta pick that. I hate paying taxes. I mean, I'll pay my taxes, but, uh, like, I operate at a loss or slight loss or break even as much as possible.

Yeah.

Um, I get like, if I do work for somebody, I get a big tax receipt. Like, usually, like, whatever the work I did, I ask them for double. you know, for nonprofits and stuff like that, that helps a lot. You know, I just got a $50,000— it was $25,000 worth of work. Um, I— they paid me $10,000, and then I got them to double the amount they owed me in a tax receipt. I got like $40,000 tax receipt, you know, um, from that nonprofit. So they have a little bit more flexibility, nonprofits do, to what the value you offered, you know, kind of thing. If they were to go to the top-level agencies, they would have— that's what they would have paid, you know, kind of thing. So, um, I don't know. I lived in Canada. It is a little bit stricter there, um, and it's like not as bad as Japan, but, you know, America's got so many tax loopholes, you know, that's where you need an accountant.

Yeah.

Um, so that's my opinion. I don't want to take up the whole time, but anybody, uh, anybody else had some stuff? Nathan, I don't know if you heard. Adam?

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So we went through the same thing, trying to buy a home recently. And yeah, it was painful. I kept telling my wife, I was like, no, I'm making money. We're not poor. But yeah, it was painful because you got to show 3 years of tax returns and Like your business is actually, you know, like earning money. But yeah, it's a bit more of a root canal that way. But it's doable. You know, you just gotta— I think in the US we just got— we have to just, you know, it's more business friendly.

Yeah, I'll give you a quick scenario. I got a loan, like they were lending money to small businesses. I was able to get it at a very low interest rate, $50,000. I took that and I gave myself $40,000 to use for a down payment as a shareholder loan. And now I owe the company the $40,000, but I might write that off. I might forgive that loan down the road. So, um, those are legal paths, but I can also pay that back and be neutral. But it all— if I'm going to sell, I want that clean. So those are things you gotta also consider. So anyways, these are just Wild Wild West stuff, but, um, you got to be aggressive to survive as you're growing a business.

Yeah, as we like to say in the family, we're asset rich, right? That's how most of the businesses are, asset rich.

Rich on paper.

Yeah.

So thanks for your input there, guys. David had a question. How do you find new clients online, cold, outbounds, et cetera? Um, let's see.

I can give you— I can give context.

Yeah.

So yeah, so we're a lead generator, right? So we sell more or less product, um, as an agency. Um, and most of our clients come from conferences, right? So like people we meet, um, When we're at the shows and, you know, in those shows, people are very conducive to meeting and basically cutting deals. And it's easy to cut the deals because basically you are paying per product, right? You're paying per lead. You're not paying for services that are a bit ominous and, you know, has a big down payment to see like, well, what's the output, right? That said, like, you know, we try to expand and do and find new customers beyond these shows. And, you know, we use tools such as LinkedIn or even cold calling people in big companies. But I'm not sure it's as easy or successful and would love to understand like how other people are doing it beyond, you know, like a face-to-face conference or show.

Who's your ICP?

What's an ICP?

Ideal customer profile.

So partner marketer on a large enterprise company. Oh, large enterprise. Yeah. So basically we do lead generation. Lead generation usually works best for like products which are a bit complicated cannot transact online, insurance, home services, legal, right? So you can find these people, you can actually transact and buy auto insurance online or even health insurance, but they're so complicated that they prefer to speak to an agent. So we are targeting marketing directors who are in these large companies which have call centers that they actually allocate a percentage of their marketing dollars on third-party lead generators.