Turning Your Hobby Into a Business | Live Q&A with Mark J Kohler

Welcome, everybody, to a Facebook YouTube Live. Are we good? Should I say that again? We may have delay. I'm going to say welcome again. Thank you, everybody. Don't go anywhere. Let me tell you what the topic is. And so you know, I'm legit and it's going to rock. I am a cpa, an attorney that actually speaks English. I help small business owners all day long. I've got an awesome accounting firm, law firm and trust company with amazing partners and staff. And we've been doing this 20 years. And I know sometimes you don't want to listen to a stuffy old guy, but I'm trying to look fresh, new and cutting edge. And I've got some awesome info on how you can take your hobby and make it a legitimate business. Make money. And in this weird COVID pandemic world we're in right now, making some money on the side with a hobby could be a lifesaver. No pun intended. But that's what I'm talking about. Today, I'm taking live questions from YouTube and Facebook. Throw them down there below. What's today? 29th 30th. I don't even know what day it is. July 29th. That's what I got. I just want to know. This isn't recorded. You're here live, so write down your questions below, give me your first name and the city you're calling from or the country or state, and we would love to hear from you. Now the topic. Hobby to business. I've got three phases, multiple parts and steps. I want to answer your questions. You're going to love it. Don't go anywhere and have a yellow pad handy. I want you to watch this over and over again if needed. It is so hard to get a straight answer from an attorney or a CPA or someone that actually, I'll be blunt, knows what they're doing. I am so sick and tired. These yahoos out there with stuffed animals on their couch that have never been to college don't have any licenses or degrees or credentials to be teaching how to run a business. Not that you have to go to college for 10 years to do it, but for crying out loud, there are certain legal, accounting, and technical tax steps that have to take place to run a business properly. And I'm going to answer them here as best I can. Also going to give away some books, try to wow you, and do the best I can to make that happen. All right, so let's go through the three phases. Phase one, and I'm just going to lay them out. So you see them here. Phase one is deciding if the idea makes sense. And I'll give you the steps that I go through to do that. Phase three, I'm sorry, phase two or my head's going to three. Phase two, I'm going to go through one, two, three or four options. Option one, being a sole prop dba, just going for it out of the basement in your underwear. Number two, maybe setting up an llc. Number three, doing an S corp. And four, some of you may set up an entity because you're going to have partners and they're going to bring money to the table. Think Shark tank. So of these options, we're going to decide which one fits you best. Some clients burn all through four of them. Some jump straight here, some of them go some variation of two or three of them. We're going to talk about it. I'm going to answer your questions. Phase three, using your strap plan and your marketing plan and making money. See, this is kind of the organizational stage, this is the testing stage and this is the making it happen stage. And when you start with a hobby and you're trying to make it happen and make money, that's our goal here. Tricky. And so I want to help you there. Whether you have an accounting question or a bank account question or a trademark question, a dba, an llc. Do I set up in Nevada or Delaware? Do I really do that? Can I do this in a trust? I live in California. I don't want an LLC. It's 800 bucks. I lived in California, so I know you're paying, but we got to look at these options. So I'm all here for you again. Write your questions down below. And we're going to field it now. Testing stage. So I'm going to go to phase one and let's just break this down. Phase one really involves and you're going to hate this word, don't freak out. The business plan. Now, a business plan is a one time event. It tells you if it's a good idea or bad idea, please do it. You can't imagine how many clients I've met with that have said, man, I wish just three years ago I would have looked harder at my competition. I would have tested the product. I would have gone out and just done it part time or maybe a few hours on the weekend and found out how easy, hard, all the problems that I was going to face. And I would have saved three years of my life. A business plan can be one page long, it can be 50 pages long. But What I want you to go and do in this process is, and I've got a business plan template that comes with my eight steps workbook. I'm going to give one away here during the broadcast today. I've got a staff member running from the office with an eight Steps workbook to give away. But I give you an actual business plan to play with and fill out in word format that you can just work with. Sba.govsba.gov has a lot of resources on doing it. You don't have to go out and pay someone to do your business plan. I want you to do it. It's not that hard. You're going to look at your competition, you're going to look at your product mix, you're going to look at your pricing, what am I going to price my products for? And then the big one that is going to tell you whether you do this or not is the break even analysis in my little workbook. I do an hour and a half live workshop that you watch right there on your phone with a QR code or on your computer. And I take you through this little churro shop, churros, you know, that cost like $20 at Disneyland and $2 at Costco. Anyway, those churros, this place opened up and they went out of business. And I go through a break even analysis on the cost of the churros, what they were selling. And then you start looking at volume. Good case, worst case, best case. And you start figuring out, can I make money with my hobby? Now some people say, why ruin a good hobby and turn it into a business? You're going to hate it. But sometimes we got to do what we got to do in this COVID pandemic world. We got to go out and make some money. Unemployment is going to. If it's not out for you in the next three days, we're going to see what's going to happen with Congress. You may get a little bit more unemployment. For those that are on unemployment, some of your business is still struggling. We got to find other sources of income. So phase one is just taking the weekend, running the numbers, going out and counting how many customers are walking into your competition. How are you going to differentiate yourself? You don't have to go open a bank account, you don't have to go see a lawyer, you don't have to go see an accountant. But you've got to go through that business plan process. I've got a little workbook sells on Amazon. It's great Kindle, 49 bucks. Live, hold it in your hand. Deal. 99 bucks. Same as Dave Ramsey's Financial Peace University. Great little workbook, 60 videos in it you can watch with a business plan that you can fill out. Find something that works for you. All right? Now, any questions, guys on this business plan part so far I've got my helpers here. Max, Jack. Okay, if no questions, I'm going to go on to phase two. Now, phase two is where we start getting into the structure. Now you're going to open a bank account. That's really what it comes down to. You got to start business, you got to make it easy for people to pay you. Are you doing Venmo? Are you doing PayPal? Are you doing Square? Are you going to have a merchant account? Are you going to have a website? Are you going to have a shopping cart? That's right. This is what I help people do every day. This is what my tax attorneys and CPAs do. We actually do this. We don't sell how to do it. We actually help clients do it. So this is very, very common. So in phase two, option one is you're going to open a sole proprietorship, which usually involves filing what's called a dba, doing business as and wherever you're at. You're going to file this little dba. You might get a tax ID number with the feds ein, you might just use your Social Security number, but you're going to open up a bank account and you're going to start selling your crap. You're going to see does it work, this service, this product, whatever it is. Maybe you have a URL, a website, maybe you don't. Some people, it's a website based business. You're going to become an affiliate marketer on Amazon. I don't know, are you going to sell on Craigslist, on ebay, on Etsy? What is it? We're going to get out and kind of really in. I say in option one, we're testing it, but you might do a few product here. You're actually opening the door in phase two and you're like, am I going to make money at this? What are customers? What are their, what's their experience? Now option 2, 3 and 4 involves setting up an entity, maybe raising money from others. LLC or S Corp. Where you at? Let's talk about it. I'm all here for you for free right now. So this is attorney hotline, so use it. I got you. Did you have a comment? Max? We got someone. Okay, this is Bella in Florida. Now what I love about the just, it makes me laugh if any of you saw the news this week. A guy that got over $2 million in PPP money, seven different companies, innocent until proven guilty, but whatever. The government says a couple of the companies were fake, whatever, I don't know all the facts, but he did use PPP money to go out buy a brand new Lamborghini two or three hundred grand, whatever. And I just love the comments on the buzzfeed that were going around and someone said surprising. As soon as I saw the word a Florida man, I knew it wasn't going to be good. So Bella, hopefully you got a good man down in Florida. I don't know, I thought it was kind of funny. All right, what do we got?

Bella, she asks, can partners bring in any. Anything else other than money?

Yes, she says no one knows what she says yes to. Yes, Bella, she asked, can partners bring in other items than money? So now let's look at our. I'm going to jump to option four. So option two is we might set up an llc, which does the trick of a dba. So you're going to set up as an LLC in the state where you live, where you're doing business. Do not get sucked into freaking Nevada or, or Wyoming or Delaware. None of those need to happen in a brand new little business. I set up any of these in those states, but there's for specific reasons for that. Keep it cheap, simple, easy. Set up a new llc, get your bank account going, get an ein, get your Venmo going, your merchant account, get your website going, yada yada. Now the difference between an LLC and an S corp, that's an S corporation, we'll come back to that. Bella says on this partnering idea, what can my partners bring to the table? Now, when I go to partnering, this brings up a lot of options. Usually what I do is set up an llc. So we have a partnership for the LLC and we have the different partners are typically different entities, but they could be a person. But a lot of times they're their own LLC or their own S Corp. And think about this. If you're watching Shark Tank and you get Mark Cuban to buy into your business, do you think he's going to take ownership of your share if it's 20% of your company on Shark Tank, let's say you get them to come in and 20% for 100 grand or whatever you're doing, you know, and you say, mark Cuban, I'm going to do my deal with you. Do you think he's going to come in in his own name? No, he's going to have his entity, and it's probably going to be an llc. And here's Mark Cuban down here. And is it with a K or C? I think it's a C, but I can't remember Mark Cuban. He's going to come in here and he's going to take ownership here. Now, Bella, you can have a partner that puts in money. You could have a partner that puts in credit. You could have a partner that puts in labor. You can have a partner that puts in contacts. If it's worth. Now, cash is king. Most partners that put in cash are going to get the most percentage of ownership. That's how we set up these LLCs. But S Corps are not good for partnerships. S Corps are good for your share of the partnership. So this might be you over here, and you're going to own your share of this partnership through an S corp. And then an LLC is the partnership or the parent, if you will. Very, very common. This is the dental group. These are dentists. This is the law firm. These are lawyers. This is the brokerage. These are realtors. Very common to go this route. Thanks, Bella, for that question. Hopefully that helped. But I don't care if your partner says, I'm going to throw in office desk, furniture and computer, then. And you're going to give them 20% for that, and that's cool. All right, Ian in California.

Okay.

Ian says, I'm in California and doing real estate investing. I'm sorry, I'm doing buying HDs and flips. Is it worth the extra fees and hassle to set up a Wyoming LLC and register that as a foreign llc?

Okay, Ian is in California. He's doing real estate. Fix and flips, primarily. That's right. And did he say HD rentals? What was that?

HDs and flips.

Housing development. HDs to me would sound like housing developments, Fix and flips, rehabs, that sort of thing. Now, this is very important for everybody out there. He asks, should I go set up a Wyoming llc? Let me make it easy for you. No, you're not going to go do this, Ian. It's not worth it. You don't need it at all. Not at all. Now, if some bozo out there is recommended, I'll go on with him. Head to head where Wyoming LLCs help. Oh, and I set them up. They're for holding companies, for asset protection, not for operational entities that are coming and going and flowing and flowing. No. So now this is good for everybody. So Ian's in California. He's doing fix and flips. He's like Chip and Joanna and fixer upper. He's out there doing operations in California, not, you know, illegal plastic surgery or anything. He is doing operational business with fix and flips. Rehabs, developments, wholesaling, whatever. It's short term real estate deals. Less than 12 months in and out and in. And it's less than 12 months after you finish the rehab too. You can't say, oh, I was doing this rehab for two years, so I get capital gain. No, no. Okay, so this is, he's doing all these things. He's going to set up an entity in California and the reason why he's going to do that is he's got self employment tax. If he makes 100 grand on this, he's going to pay self employment tax at 15.3%. That's 15 grand right out of the gate. So doing fix and flips and rehabs is bad? It's not bad. I mean good money. But you're paying the most in taxes here. If he was going to go buy rentals and let's say he was going to buy rentals in Arizona, might set up an Arizona LLC and have it owned by a Wyoming entity, or set up a Wyoming LLC and register it foreign in Wyoming or foreign in Arizona and then own my rentals there. See, we use the cope, the charging order protection entity in Wyoming when we're dealing with holdings, not operations. But over here in operations innovation, where you're going to ultimately be is an S corp. Now that could be an LLC taxed as an S corp, but Ian's going to be over here. We're going to take a salary and we're going to get rid of this self employment tax. He's only going to pay the F word, FICA self employment tax on the salary portion and everything else. He's going to push out as profit and he gets a 20%199 a deduction on that, which is huge. Joe Biden wants to get rid of that. Isn't that right, Max? He's getting rid of the 199A. Yep. So Biden wants to get rid of that again. So I don't know if you're a Biden fan and I'm not trying to be political here. Your self employment tax goes up if you make more than 400 grand and you're this 199A gone. No 1031s either. That's part of Biden's plan. So, and I've got An article coming out on Entrepreneur hold, hopefully by tomorrow morning. It's brutal, right, Max? But there's some tax problems. If you're a small business owner, you may hate Trump, I get it. If you're a small business owner, you got to grit your teeth, people. I voted Democrat and I voted Republican in Times. But when I'm a small business owner, my bottom line matters. In the tax foundation, all the major think tanks out there, they've analyzed Biden's plan. Every tax bracket is going to have less money in their pocket with the Biden tax plan. Now, some of you may say, well, it's necessary because we just spent freaking $2 billion on Covid and unemployment and PPP and EIDL. I get it. It's true. We're gonna have to pay that back. It's ugly. Just telling you. Okay, so Ian, you're gonna deal with an S corporation in California and LLC taxed as an S corporation. You are not going to worry about Wyoming over here. It's going to be in California. You're going to worry about Wyoming over on this side. I hope that helps. Ian. I've got books on this and articles on it. The best book for this would be the Tax and Legal Playbook. Tax and Legal Playbook that you can get on Amazon or at my website, markjkohler.com I've got a whole chapter on the asset protection and the LLC versus S Corp. Okay, we got Gaunt Tum. Go. Got him in California as well.

Okay, so he starts off by saying that he's been a long time client of yours since 2015 and is eternally grateful for all your help and guidance.

Thanks. Gautam says he's been a long term client for since 2015 and eternally grateful for all my advice and help. I appreciate that, man. You're awesome.

So he says I have a single member LLC taxed as an escort.

Okay.

And my entity, which is known as Zenith Solutions and my entity description was real estate when it was established. Now I want to start another small e commerce business online. When I start this new online e commerce business, what name should I use? My personal or my entity for optimal tax benefits.

And what was the name of Zenity?

Zenith Solutions.

Venus. Like Zenith, like in the Zenith tv. Okay, so Zenith Solutions give you a little plug there one. Okay, so Ghana says he's got Zena Solutions LLC taxed as an S corp in California. All right. And he started the business to do, just like Ian, short term real estate deals. If you're going to have an S Corp. You're going to be doing short term real estate deals. Rentals are over here. Rentals are in the LLC on this side, so rentals over here, operations here. S Corp. Salary dividend split is what I call it. I know you truist out there. It's the K1 salary split. Making sure you have reasonable shareholder compensation. I get it. I teach it, I've read it, I've known it. Any case on shareholder compensation, I read, I have the Kohler payroll matrix. I make sure my clients save with an S corp. I'll go head to head with anyone on it. Sorry, I get a little excited about it. Gauntam says I'm starting a new line of business. It's going to be E commerce. He says, should I start a new entity, start a new name, put it in the llc, all the above. Right. Gauntum. Probably the first thing I would do. And it's just me. I'd set up a URL, get online, let Zenith Solutions own it. That's how my Mark J. Kohler Inc. Works. I've got multiple lines of businesses flowing into one S Corp. That's the cheapest and the easiest. You're in California, you got that $800 minimum tax on the net. With an LLC, it's on the gross. But once you make the S election, you're good there. So I would use DBAs up here. I would use your URLs, which are, you know, website addresses. You could use trademarks up here if you. Now that's option one and the cheapest. If you want to get crazy, probably the one thing you could do is set up a single member LLC that's owned 100% by your parent. So you could have this own the subsidiary. If you want that veil of protection and you think you need it, maybe if. Oh now if you got a partner, if you got a partner. Got them. You're going to have a separate LLC because you got it. But your S corp would own your share. So if Gonton called me up and said, mark, let's do it together, then it'd be 40% for him and 60% for me. No, I'm just joking. We go 50, 50. I guess so anyway. 50, 50. And my S Corp would own my 50% or I guess this has gone to them over here. My S corp would be over here, so my S corp would own my share. So 2s Corps One LLC. If you're going to have a partner. If not Gauntam, just. I keep Zenith Solutions very generic. I don't know what the freak you're doing with it, you can do real estate, you know, export, import food. I don't care. All right, Andy from Duluth, Minnesota. All right, Andy, what do we got? So Andy says, mark, I'm back here in phase two. I'm making money. I've started my business. How much money do I need to make before I start an entity? Wow. Ian. Oh, what was his name? Andy. Okay, Andy, that could be a guy or girl. So I, you know. You think it's a guy? All right, so it's on Jack. Andy, if you're a girl, I feel bad because apparently the way you spoke, you felt you. You sounded like a guy. All right, let me give you two examples. There's two considerations here. The first one is asset protection. The other one is tax savings. So, Andy, the first thing I would say is, before you even made money, I'd say, what are you doing? If he says, oh, I'm selling jeans on ebay in my underwear at night. All right, is there any asset protection exposure? No, no one's probably gonna sue him. But he goes, yeah, I'm doing a bungee jumping school, or, yeah, I'm at the county fair, and I get this crane up there and I let people jump off and there's a bungee jumping thing, or I'm doing skydiving lessons, or I'm opening a food truck, or I'm. I'm out doing landscaping, and I've got kids with lawnmowers running around. Sounds like a possible lawsuit to me. So, Andy, at that point, it doesn't matter how much money you're making. If your business could create a lawsuit where someone would sue you personally, get a freaking entity, and now you're protected. Anything that goes wrong in the business, they cannot get at you. Your house or your bank account. That's a big deal. So that's the issue number one. So now the real question is, Mark, I've got a small business. I did an LLC because I wanted that protection. I wanted to get it corporate credit going. I wanted a tax ID number. I wanted legitimacy. See, there's a lot of reasons people to go ahead and just do the LLC and phase two, just go straight to an llc. So you may say, okay, I did my llc, Mark. So, Andy, I'm going to rephrase your question, Mark. When does it make sense to set up an entity for tax savings? And which entity would I choose? Huh, Andy, do you like that? I'm going to repeat that for everybody. How much money do I need to be making before it's smart for me to set up an entity for tax savings. And which entities should I choose? Let's do an example. Andy, I don't know what kind of business you have, but let's say you're making 50 grand. I'm going to do the break even point, which is I'm going to spoiler alert. The break even point where you need to start doing a reality check is 40 grand net. So let's say you've got three options here. You're a sole prop, and that's Andy right now. This is Andy world, okay? We're doing this for Andy, for you, Andy. All right? He's a sole proprietor and he's going to net 40 grand. Now what that means is Andy may have brought in 60 grand and he had 20 grand in expenses. Cell phone, travel, dining, home office, PDAs, laptops, computers, blah, blah, blah, blah, blah, blah, blah, blah. But he brought in 60 grand on Venmo doing whatever. I don't know. He netted 40 grand. If he's a sole proprietor, first tax, 15.3% self employment tax. Do the math, that's six grand. Then he's going to pay state income and federal income. He's getting dinged three times. Boom, boom, boom. Not good, Andy. Don't like it. Six grand off the top, haircut. Well, I'm an llc, Mark. Okay, let me repeat this for everybody. This might freak out some of you, and I hope it does. Sorry, an LLC does not save taxes. Did you hear that? An llc. Limited liability company in Wyoming, Delaware, Nevada. I don't care where the freak you set it up. An LLC does not save taxes. S corps save taxes. When I compare the two, an LLC gives you protection. Now if Ian, or who was it that said, why Gauntum says I have an LLC taxed as an S corp. Then you have a freaking S corp. Don't call it an LLC for tax purposes, you're already an S corp. Once you take an LLC and make an S corp election, you could be an LLC or an Inc. So here's an S Corp, here's the LLC. And let's say Andy makes the same 40 grand. Same 40 grand. If Andy did an LLC, his tax would be the same. Is that spoiler alert crazy? Some of you are like, well, I went to LegalZoom, they said I save taxes if I set up an llc. No, you don't. No, you don't. And we do. This year we'll do over 3,000 small business main street tax returns around the country. And I'LL tell you right now, Scout's honor. Swear on a Bible, whatever. You are not going to save any taxes with an llc. I'll fight anybody verbally on that. Maybe even do come out in the ring. I box on the side, so I'll take you on. Okay, but once. Here's the question Andy said. I'm going to restate it. Andy's question mark. How much money do I need to make to set up an entity and save taxes and which entity? It's 40 grand. It's an S corp. And here's how it works. We're going to take your 1120s S Corp, we're going to give you a W2 of 20 grand and a K1 of 20,000. We split your income in half. Now I might do a different percentage and some of you accountants there might be freaking out. Oh, that's way too aggressive. Chill out. In 20 years I've never ever, ever had a client audited for taking too little of payroll, ever. And if our clients get audited for too little of payroll, we have them take too little. We'll pay the penalties. We stand behind it. Now am I saying that we're going to do 2020 on Andy's. I don't know yet. I don't know where he lives, what type of business, how hard he works. There are factors but most of the time under 40 grand we're doing a 50, 50 split. I won't lie to you. IRS is fine. They're not going to chase it down for a thousand bucks. It's not worth it. So 20 grand each. Now what did I do? He's going to pay his FICA, his self employment tax on the 20 and nothing here. I just cut the six grand in half. He's going to pay the three grand here, but no FICA on the other half. Now there's an add back of savings off your AGI of your self employment tax that you paid and blah blah blah. But the point is we're real close here with a few points. $3,000 in savings doing an S corp. Now somebody said, well I'm California, I know it cost you $800. Let me see. Spend $800, save three grand. Okay, now this math is hard. Everybody take out a piece of paper, spend $800, save three grand. I think you're okay. I think you're okay. I know that was rude, but this is a big deal. So S corp Andy, think about it. You're making 40 grand or more. You need it. You have liability, do the llc, you can always convert to an S Corp. We charge 125 bucks to make the conversion. Good news. Easy schmeasy. That's how we do it. We got Ethan in Illinois. Thank you, Ethan.

Once an S corp is dissolved, is there a waiting period to open?

Ethan said once you dissolve an S corp or close it, is there a waiting period to open a new S corp? Now I don't know if Ethan's doing a trick question on me because if he's trying to open another S corp under the same name in Illinois after it's voluntarily or involuntarily dissolved, there can be a waiting period because you didn't pay your fees or you dissolved it at the state. So let me repeat, let's start this way. There is no waiting period to go open a freaking another S corp. I could open another S corp tomorrow. I have 1s corp in my life. I don't want more of them. I have one S Corp. This is Mark Kohler, Mark Kohler Inc. MJK Inc. I own part of a law firm, part of an accounting firm, part of blah, blah, blah, all these other little things I'm doing to make money. I have one S corp. If I close this tomorrow, do I have to wait to open a new one? No, freak. I can open a second one if I wanted or a third one or whatever. But he may be asking, and I'm just going to say if you close down your S corp and you want to set up another one of the same name in the same state, there could be a waiting period issue because the state wants to make sure there's not overlapping male and female filing and all that jazz. Call the Secretary of State. A lot of times they're very, very helpful. If you need help setting up an entity. We set up entities in all 50 states. We have a paralegal service that's cheaper than LegalZoom. That's right. We also have a full service where you talk to a lawyer helping you, a real lawyer. Call our office and you can talk to Susan on the pricing and waiting periods. She's our paralegal. I'll put Susan compey and you can call our main number to get an appointment with an attorney to set up an LLC. 435-586-9366. You might be out a week, but Susan can get started with her team prepping the entity and then you can have the follow up call with the attorney a couple weeks later and deal with the smaller things. And now that it's set up, what do we Do. Okay, we have Kiev. Either a guy or gal calling from Kiev or their name is Kiev. So, Keef Keeve. Oh, that's a U. Q. Wow, that's not my fault. That looks like a V. Is there

a recommendation for what a trucking logistic company should be? S Corp or C Corp for best tax purposes.

Okay, you're killing me. Q. Q. I'll write it up here so you guys can see. K, I, E, U. Says, he says, I've got a trucking logistics company. Operational, blah. What do you think, people? Is that passive or operational? I already put the word in there, right? It's operational. They're transporting crap. They're coordinating trucking. They're doing a service, blah, blah, blah. So is it on the passive side or is it on the ordinary side? Max, what do you think? Trucking logistical operational company. Is it ordinary income or passive? Ordinary. Max is our law clerk here. He's so freaking smart. He's awesome. He's already helping people out every day. Ordinary income. What's the first tax we're worried about? Self employment tax. Hmm. So Q says, well, Mark, should I do an S corp or should I do a C corp? Oh, my gosh. Don't be offended, Q. At any point in this presentation, have I ever implied that any of you would ever, ever, ever freaking set up a C corp? I'm not going to swear. There might be kids in the room. No, I did not. Because out of a thousand entities we set up, maybe one would be a C corp for a Main street company. That's right. C Corp's not good for the small business owner. Maybe for an isolated, very specific tax deduction reason, maybe. And you may say Q's sitting there going, well, Mark, please, pray tell. Why? Well, let me tell you why. Let's run the numbers. So let's do 100 grand. Let's do 100 grand. Keu has 100 grand in profit. Maybe he brought in $150,000 and he spent 50 grand on expenses. Same here. Apples to apples. 150 in, 50 out. Netted 150. I mean, netted 100. So he's got 100 grand. This is a C corp. This is an S Corp. All right, now we know. It goes without saying, if it was an LLC, right out of the gate, we'd pay 15 grand in self employment tax. So we know we don't want to be an llc. That's easy. Unless it's an LLC taxed as an S corp. Then it's an S corp. But just a plain Old llc. No way. So Q is like, okay, Mark, I get it. I don't need to be an llc. But should I be an S or a C? Now, wherever Q is located in Duluth, Minnesota, he's going to set up a Minnesota corporation. That's it. He's going to go to the Secretary of State, file articles. We do it for clients in Minnesota and all 50 states. We would set up for $400, 450 for a corp like this with our paralegals or 800 with an attorney. We're looking at a corporation. Then we go to the IRS and make an S election if it makes sense. So what would it look like with the C corp? All right, he's got a C corp. The IRS is going to require a salary for Q. We've talked about that. You have to have reasonable compensation for the owner that's working in the business. All right, I'm just. Let's just be. I'm going to do a 40, 60 split. To be honest, that's probably about where we'd be at. So we're going to take 40 grand in salary at W2, and we're going to take this net and turn it into 60. See, we're going to split the net into two parts. 40 grand, W2, 60 grand. K1. Very common. Now we just say FICA. Okay, we're not paying FICA on 60 grand. That's a big deal, right? We just. We. Now we're paying six grand in FICA. We are paying 15 grand with an LLC. So we already know that that could be pretty good. But on the 60 grand, what happens? Do you have another tax qu. You do, don't you? It's called c corp tax. 21% max. What does Joe Biden want to raise it up to?

39 or 37?

No, 28. 28, you're right. 28 wants to take the corporate tax back up to 28. Right now it's 21% flat. So 21% times 60 grand, we're looking at about 12 to $13,000. 12 grand in corporate tax. Ooh. Well, that sucks. Now, I know some of you that are watching that have C Corps. Well, Mark, I can just borrow from my C Corp. Oh, okay. That's retained earnings. Someday you're going to have to pay the tax on that money. That 60 grand you took out on a loan. Well, I'll just close down the C Corp and I'll never have to pay it. No, my friend. Because when you close down the C corp with retained earnings and you don't pay taxes on the retained earnings. The IRS audits you, and then there's penalties and interest, my friend. Oh, okay, well, I'll just take a bigger salary. Oh, that's right. Old school CPA out there says, oh, I don't want profit in my C corp, so I'll just take a bigger salary. Gosh, I'm sounding so cocky today. And incredulous. I'm just in a bad mood. I don't know why. I haven't had a rock star in at least four hours. Usually I'm a lot more lovey. I'm just kind of pissy today. I don't know. I apologize, everybody. Normally, not like this. I'm very lovey. But this C Corp topic brings out the worst of me too. So an accountant says, oh, we'll get out of corporate tax. We'll just take a bigger salary. Okay, so now we take 100 grand in salary. Well, now I'm paying FICA. Well, I don't want to take that. I'll take more dividend. Well, I don't want to do that. It's a mess. You're either going to pay corporate tax or more FICA key. You. You would never, ever, ever get into this mess on my clock, on my dime. If you're a client of mine, hell no. The S Corp. Simple, easy. You're taking a salary of 40 grand. You're going to take a draw of 60. Oh, my gosh, we just saved six grand. Done, done, finished, Kapoot. The end. C Corp suck for small business owners, you know, well, Facebook's a C corp. And Apple and Microsoft. That's because they raised billions of dollars with shareholders and they're publicly traded. That's when you've got to be a C Corp. But for Main Street America, a little hair salon, a landscaper, a dentist, a doctor, an engineer, a lawyer, an accountant, a restaurant owner. You would never do it. Never, ever, ever. Okay, we have DJ Rick Webb in North Carolina.

All right, he says I run an escort business right now, but also have a day job. He's saving up for some real estate. Says if I drop my day job, are there any new tax benefits that I could take advantage of?

And he said he's saving up for rentals. Okay, so DJ Rick says he has a day job. W2. Very good, Rick. He also has an S corp, which I have a feeling that's doing DJ services. I'm just going to go out on a wild limb right there. Maybe I'm crazy. And then he's this Is him. We're going to say DJ Rick is down here and he's got a W2 from the day job. He might be taking a W2 from his s corp. I don't know. It depends on how much profit he's making. Is he driving all the money back into it? What's he doing? I don't know. Could have lots of write offs for all those cool tables and, you know, all those microphones and cool equipment. So I don't know. Profit is going to make a big deal here on what I might recommend. But he said, I'm going to need your help, Max, to clarify what the question is. He says, I'm going to take my money out of my S corp and inject it into an LLC and buy a rental.

He runs an S corp business right now, but he also has the day job

and he's saving up to do real estate. So Rick could take money from his day job W2, he could take money from his S corp, put it into a little personal savings account until the time's right. He could go ahead and form the LLC in North Carolina and get ready to go out and pounce on a. On a foreclosure and buy it with cash. I don't know. So, Rick, you're doing the right thing. I love it. Rick, you're doing right. You're doing what I'm doing. Save your money up. Buy more real estate. Pen drop, easy stuff. Daniel in Duluth, Minnesota.

I have an S corp and have bank accounts set up for all my employees kids. I have two rentals under my name and one under an llc. Can you break down how my rental property money flows from my LLC through my S corp, also from my S corp to pay myself and my kids.

Okay, so Daniel was being funny saying his employees, which are his kids, are involved in his business. This takes us to another level. This is a chapter in my book on paying family members, by the way. Eight steps to start or grow your business. It's on Amazon. You can go get it right now. You can go to my website and get it. 60 plus videos and webinars, a business plan and eight workshops live and recorded that you get access to immediately the minute you buy this book. If you want, I'm going to give it away randomly to a person that shares this video today. So we'll talk about that. Do I have last week's winner somewhere? Okay, good. We'll announce that winner too. So Daniel's structure is a little more complicated. And he brings. I'm going to get to it. He's got what we call the trifecta. He has his trust down here. Then he has a little called family management company, a little sole prop. And this is where he pays his kids. At least I hope. Daniel, this is what you're doing. You're paying the kids down here. No W2. Your kids can make up to $12,400 this year and pay no tax and you get a write off. No fica, no suta, no futa and no workers comp boom. Paying kids in your business is fantastic. Now those are your kids under age 18. Then he said he has an LLC with two rental properties. Who should own his LLC? Should Rick own it? I'm sorry, Rick's in North Carolina. Rick would love to own it. Should Daniel own his llc? No, Daniel, Daniel should not own his llc. His trust should own it. So his trust is going to own the LLC 100%. The LLC is going to own the rentals. They'll be on title in the name of the llc. And then he says I've got an S corp. Now he didn't ask about paying his kids but just for everybody else out there, he's going to pay a management fee over here. Management fee is going to go in here. Let's say it's 10 grand. Then he's going to pay his kids 10 grand. He's going to zero this out, pay no tax there. The kids pay no tax and he got a write off for ten grand. P Ching, good stuff. We've been helping our clients do that for 20 years. And then he's going to take a W2 for himself and he's going to take a K1 or a draw anytime he wants. Now the interesting to own who owns his S corp. Not Daniel, his trust. So Daniel's Trust owns the LLC and the S Corp 100%. Now the part that kind of bothers me about Daniel's question, everything he's doing sounds great. Is he said how do I get money from the LLC to the S corp to the llc? He's kind of confused in there, right?

LLC through my S corp and also for my S corp to pay myself and my kids.

Okay. So he says, and this is the problem. You're going to love this, Daniel. I'm going to save you thousands of dollars of headache impossible audits with the irs. He said, how does my rental income from my LLC flow into my S corp and then pay myself? Well, here's the easy answer. It doesn't. It doesn't. Hell no. I do not want Your S Corp does not own your llc. Your rental income does not go through the S Corp. You're like, well, I got to pay myself. I'm coming to that. Don't stress. But this is separated. You've got ops over here, you've got assets over here. And I want a firewall between them, a big old thick wall. Berlin Wall right here, baby. Rentals over there, operations over here. The money never goes into the S Corp this way. Well, Daniel said, how do I pay myself? Just take a draw. That's the beauty of rental property. You probably have a loss on this LLC anyway due to depreciation, mortgage interest, property taxes, HOA fees, home office, kids, repairs, maintenance, cars, Home Depot, Apple Store. Need I continue? So Daniel's going to run this llc, and if he has any positive cash flow, he can take it anytime he wants. The cash flow or the draw is not taxable. What's taxable is rent minus expenses. So your book is income might show profit, but your taxable income might show a loss. Again, go read Forbes. Go read Wall Street Journal. Wasn't this it, Max? Joe Biden was all over this. He is on a rampage. He says this isn't fair. Companies that have book income but taxable losses, that's not fair to regular Americans, they need to pay tax. Great. Thank you, Joe Biden. I own rental property. I don't want to pay tax on that cash flow. And I don't have to, by the way. Let's get rid of 1031s. Let's get rid of free lunches. Happiness is gone from now on. Thanks, Joe. Okay, now again, I may vote Democrat, but I'm not going to vote for that plan anyway. So, Daniel, you take money anytime you want. It's called a draw. Take a draw. Now, if you need money in the S Corp, come around and go put it in as a contribution. And if you're like, oh, I need money in my llc, take a draw out of your S corp. See, Draw to your S corp and come over here and put it in your llc. Either way. But you're not going to have the money run through his income here. Heck no. And they're separated. Their brother, sister. Not parent, subsidiary. And then you're going to pay your kids over here. And we discussed that. So, Daniel, good question. You're over complicating it. Never put your rentals above your S Corp and let that money flow down here. No, no, no. Not good. Okay, this is Tico Blaine, and it's the last question. Now I'm going to do a giveaway here. So hang tight everybody. You got to hear Tico's last question.

He says, I have an LLC that I don't. That I do both wholesale real estate deals and have two rentals in that same llc.

Oh, Tico, he's killing me. His first sentence, he says, I'm going to stop you, Max, just for a sec. Tico says in his first sentence, I have one LLC that's doing wholesaling which is subject to ordinary income tax and self employment tax. And he says, and I have rentals in it too. Well, he's got an LLC sitting on the fence. I don't know what it is. Is it an operational LLC or is it a holding company? We don't know. We all are in the dark. So Max, continue. We are excited to hear what Tico's got going on.

Separate. Separate LLC for my rentals.

He says, ooh, this is good, everybody. Tico says, do I need a separate LLC for his rentals? It's interesting the way he said that. I'm going to put you on the spot, Max, would you say yes or no? Damn it, Max, no. Now why? Here's why. Now listen to the way he phrased it. Do I need a separate LLC for my rentals? I would suspect he's already got title to his rentals in this llc. See what I'm saying? So he. The way to phrase it would be no, keep this llc. It's cheaper, it's easier. You've already got lease agreements, you've already got it on title. You got property taxes, you've got all of your utilities are in the name of that llc. You do not want a separate LLC for your rentals. Keep this LLC and migrate it over here. Keep your rentals in it. Don't jack it up. What you want is a separate LLC for your short term real estate. So I would go out and set up new co. Again, I don't know all the facts, but if you're going to set up a separate llc, it would be over here for your short term wholesale deals. You see why I phrased it that way makes sense. So the way you said it, Tico Teco may say, well, that's what I meant. Well, sometimes people go out and set up a new LLC for the rentals and now the rentals are stuck in the title on title in the old llc. So make it easy on yourself. So I would take this LLC that's on the fence again and move it, but not set up a new one. Just keep it and Keep the title of all these rentals on that llc. Also, I'd like to see that he has a trust in his revocable living. Trust with privacy and all sorts of structuring holds it that way. Anyway, okay, who's our winner from last week? We gotta announce that first. And I'm sorry, everybody, if I was a little ornery today. Last book winner was Carlos Alvarez. He got eight steps. This is expensive to give away. Well, because today is about starting a business, turning your hobby into a business. This is the perfect book for it. So I'm going to give one more away of this. This one's yours, isn't it? I'm sorry. We are on backorder right now at my office. If you want to buy this, go to Amazon because we're on back order at my office. We're selling out of these very hot, hot item. So we're going to give this away. Janae is going to go into social media tomorrow morning, and she's going to look at all the people that shared this video on Facebook or YouTube, if you shared it. She's going to randomly choose a name after she looks for anybody that may have sent her a gift certificate for chocolate, and then see who may win. So if you're tall, dark and handsome and Zen Chocolate, you might be a winner. You might. You just don't know. So, anyway, she will announce that winner. She will contact you via social media, and she will give that, and I'm going to sign it right now, and I'm going to say, you are a winner. Doesn't it feel good when someone says you're a winner? There you go. And is today the 29th or 30th? It is 30th. I got to fix that on my watch. So I'm going to date it today, too. 7:30. 20. Is tomorrow August 1st or two more days? Do we have a 31st this month? There is a 31st. Okay, two days away. Can you believe it's almost August? Crazy. Okay, we're gonna give this away tomorrow. We will ship it out to you free of charge. Everybody keep living the dream. It's hard. I was up last night late. I'll be up late tonight. Still love what I do. I have some flexibility here and there, and it's all good. But I like having a small business and even my own employees. I've been bugging Janae to buy a rental property. I want all my employees. Having a small business on the side, having a small business on the side for extra income and write offs is wonderful. Having a day job for stability and benefits and cash flow, it's wonderful. Do both. It's not one or the other. Turn your hobby into a business and make money doing what you love to do. As long as it's legal. Everybody have a good time. See you next week.