R. Shawn McBride recently spoke to Holly Signorelli about building a foundation for your business.
R. Shawn McBride: Hey everybody, R. Shawn McBride here with you live, I’ve got my friend Holly Signorelli joining me here, and we’re going to be talking about building a foundation for your business. So, both of us work in different areas. Holly’s a CPA that actually practices as a CPA, I’m a CPA that doesn’t practice as a CPA, but I do legal work, and both of us help people really build big stuff. And a lot of our clients have done big stuff over the years, we’ve helped them lay the foundation. We really want to start helping spread that message and get more people doing it. So, Holly, maybe you want to take a second or two and give a little background about you and what you have done to help other people build their enterprises and businesses over the years?
Holly: Yes, I’m a wealth strategist and a CPA, obviously. I’ve worked with thousands of entrepreneurs from startups to multi-millionaires, and like you said, it’s all about setting the strong foundation because things keep changing and there are legal things to think about. But also, if you want to sell your company one day, even if you aren’t planning to sell your company, you may want to one day and so there’s a lot of things you need to do in the beginning to make that happen.
R. Shawn McBride: Right, and it all starts with a foundation, right? You need to know kind of what your vision is, where you might end up at, what you’re going to do so that you can start tailoring things to get to that solution.
Holly: That’s right. And I find I’ve been doing a lot of speaking engagements right now with lots of different entrepreneurs and I still find that everywhere I go, most people don’t really understand the power of the S corp. You know, it’s that they know that there’s an LLC, and they always ask if they should be an LLC. But so many people that I deal with, even people that aren’t looking for an LLC, don’t realize that you have to decide what kind of LLC that you want to be. Because if you don’t, then you’re really getting taxed like a sole proprietor. Then you’re paying federal tax, and you’re paying social security tax. And that’s where, when people finally have their first good year and maybe they’ve netted out $100,000, they end up owing about 30 grand in tax, which is a lot of tax for $100,000 nowadays.
R. Shawn McBride: Right, and part of this is just smart planning. And you’re also looking towards an exit at some point, right? At some point, this business is no longer, at some point you want to exit or transition out of it. You’ve got to have a strong foundation there, you can have some tax surprises there. We’ve talked about that, some of the real estate holding side.
Holly: Oh yeah, yeah. There’s a lot of things that real estate investors don’t think about in terms of how long they need to hold a property and how much they’re going to have to pay for that. And I was actually on a radio show last week. We were talking about flips, and basically, when you flip a property, for example in real estate, it depends on if it’s a short-term transaction or a long-term, in how much tax you’re going to pay. But if you flip enough properties, then the IRS can actually come in and say this is not real estate anymore, this is your active job. Like, you’re going to get paid with normal taxes, and a lot of people don’t know that too. So it’s the things that you don’t know that you don’t know. That’s the problem.
R. Shawn McBride: Right, and it all starts with a plan and a vision and knowing where you want to go. And then, you and I, I think we both, we’ve worked with a lot of different people over the years. We’ve got a lot of coaching and counseling in building our businesses. And we’ve obviously read a lot and learned a lot from of other people. But the quickest way to learn is to bring somebody in who has that applied expertise. Which is what I do a lot in my business. When I have a particular need, I’ll bring somebody that knows how to do a particular area. And this accounting stuff and this legal stuff’s a little bit complicated. You don’t know what to expect.
Holly: It’s not a little bit complicated, it’s complicated. And again, it’s the things that people don’t know that get them in trouble. And a lot of times they just don’t, they don’t even know to ask the questions. So I tell somebody that if they’re newer in their business and they have a little bit of a budget, then still just have that consultant. Just, you know, find out what they need to know from the beginning, to make sure that they set up the right company and that they don’t end up, I mean you’re going to pay way more in taxes then you’ll pay for a consultant, that’s for sure.
R. Shawn McBride: Yeah and a lot of times like that quick advice, in the beginning, to get you pointed in the right direction can save so much money on the back end, that the two aren’t even comparable. I mean, a little bit of money in the planning stage, you change your structure and then change how everything works about our company, can lead to completely different outcomes.
Holly: Yeah, and I’d had that same problem myself even years ago when I had a bad real estate deal because I thought, you know, that I knew everything, right? But I didn’t, and so there was a few mistakes there that did cost me a lot of money. And that’s why I really started doing most of what I do now, is for people to be educated about the things that they just don’t know, so they don’t get into that kind of trouble. Or so that they can be proactive about the whole thing.
R. Shawn McBride: Right, and a lot of this is specific. But you really, part of this is just running some new wave scenarios, right? So you have a company, you want to build a company. What’s your what-if scenario? What if this goes to this size? What if it goes to that size? Then you would probably help people with tax deductions and understand what the taxes situation would look like depending on which way they go.
Holly: Yeah, another thing like that though, with partnerships, is when getting along with people, is a lot of times there are people that are working with somebody that they’re not actually technically a partner. They haven’t set up the partnership, they’re not actual real partners. But maybe one person owns the entity and they’re working, or maybe I should say collaborating with somebody and they’re saying, “Okay, when I sell this property then I’m going to give you “a piece of that income.” Well, you don’t want to do that in real estate because you want to make them a partner. And when you have a partnership, you know even more about this than me, you can make all kinds of things inside of the partnership, where somebody could maybe have more control or somebody’s putting money in. But if you tell somebody that you’re going to give them a piece of the income, that’s going to be really expensive for them on their tax return, versus a short-term or long-term capital gain.
R. Shawn McBride: Yeah, you know, this is another area where you see a lack of planning is in partnership. Let me tell you, I don’t care if you come hire me or who you talk to, to think of partnership, you want to talk to somebody – there are liability implications. And a lot of times what you end up with is the worst of all worlds. You’re going to get slammed on your ass. And if something goes bad, that partnership’s going to come back and haunt you. So you want to really work with the right advisor to make sure you have a liability protection for assets so that you’re going to be safe and that you also want to then make sure you have that right accounting set up and the taxes set up so that you don’t get a tax surprise either. You want to understand how everything’s going to work.
R. Shawn McBride: I tell you, based on the court cases, you know, if you don’t do the planning you’re going to end up kind of with the worst of all worlds. You’re going to have additional liability exposure and you’re probably going to have some bad tax consequences.
Holly: Yeah, and this happens a lot with family members, too, because a lot of people do seem to understand an arms-length transaction, you know, like if you’re selling to a family member you can’t do that thing anymore where you sell it for $10, you know, you have to transfer it with what the value is now. But that doesn’t apply to if you sell something and give part of the gains to a family member. It’s, you know, you don’t get to transfer that long-term capital gain over there, they have to be a partner. So that’s something I think those people . . . I really want them to know and understand, because that’s something that can really, really cause a huge amount of tax and then there’s nothing, you can’t fix it once it’s happened. But even if you didn’t already create a partnership the way you were supposed to, or you want to bring a family member or a friend or somebody that you’re collaborating with, you can still change that. You can still add them to the partnership, depending on when you are going to sell either the business itself or the real estate.
R. Shawn McBride: Right, so there are a lot of pieces there to pool that all together. It’s just, the key is to build your plan, get that vision and that dream, and then start pooling the team together. And it doesn’t have to be me for your lawyer. But if you want to work with us, you know, we can see whether there’s a fit there, I think Holly feels the same way. But the important thing is you got to get a team together. You got to figure out who you want to work with, how to build your team, get the right team put together. Do not just jump into this stuff later. I have a client right now who signed a partnership agreement a while ago, now they want to exit. And they’ve got a lot of liability exposure because this was not carefully drafted. And I’m sure you’ve seen some gotchas with your clients.
Holly: Yeah, definitely with either partnerships or S corps, where there are partners because I think, you know, S corps are really really simple. If you have a small business and your business could be ten million dollars and be called a small business. An S corp is just the way to go. It is very easy to set up. You just have to do one extra form to do the S corp election, and then you have the limited liability and you can save a lot on taxes because you don’t have to pay social security on all of your income, just part of it. And it’s really just one of the best things that the IRS has for small business to help them out on the taxes.
R. Shawn McBride: Right, and with modern-day planning, you can actually be an LLC for state law purposes but then be an S corp for tax purposes. So you’re simplifying.
R. Shawn McBride: You’re blending a lot of good things together. So a lot of planning there. Holly—
Holly: When people have LLCs now, they don’t have to do the minutes like back in the day, right? Or is there something they have to do?
R. Shawn McBride: Well, if you build it correctly, this is one of the things you want to be careful about. I do see some LLC agreements where people are getting forms off the internet. They’re, you know, and then they don’t have maybe a careful lawyer there and some people have brought over kind of this minute requirements into their LLC agreement. But for most LLCs, there’s no real reason to want to have that, so I’m not sure why lawyers or forms are crafting in there. But you have to be careful because I do see them come up there. People are not careful about these inclusions in their documents. So, typically no. There’s no requirement that you have these meetings with your LLC, if you have a well-drafted LLC you get away from all those minutes and resolutions, and things that people forget to do in preparation, which cause liability later. So, you get the best of all worlds if you do it right from the beginning.
Holly: Well that reminds me, too, of a question that someone asked me yesterday, that people do ask me a lot. And that is, when you have a company and basically just a sole-proprietor, and you decide that you want to have the limited liability, when you take those assets, whatever those assets are, and you take them from yourself to your new LLC, don’t you have to draft up some kind of document for that? I mean, you can’t just put it in the LLC. Don’t they need to have some kind of document for that?
R. Shawn McBride: Absolutely, you’re going to want documentation — you are transferring legal assets from one entity to another. I mean, it would be no different than me selling you a car. I would have to execute the title, you would have to record the title in your name. Other things other than cars don’t have titles, but we have ownership, typically when we do those in written contracts, you know? A buys and B buys. It’d be A sells it, B buys it, you have a bill of sale or other transfer documents, and if you ever have an audit with the IRS in the future, a legal liability issue, et cetera, people are going to say, “Well where’s those written transfer documents “showing the LLC owns these assets?” You could be setting yourself up for a huge problem because if you didn’t have the written document where you transferred from your personal name to your LLC name, somebody could argue that you still own that asset in your personal name and then they could try to attack you with personal liability. So these are little blocking and tackling things that, you know, we want to get ahead of with our clients and these are just little gotchas that, hey, you know, most businesses are it’s their job is to run their business. They know how to deliver a product or a service, and a great value-added way to a customer and they’re fantastic at it. But these little gotchas can be buried in the background.
Holly: Oh yeah, definitely. I think it’s so important with something like that, I know there’s a lot of things too, that you can get online and maybe if it’s something as simple as a contract for a contractor or an employee, maybe those are kind of cookie cutter, but when it comes to transferring assets, I think that’s really critical. Because like you said, even if it’s your own entity, it’s still a separate entity. And now you have limited liability and it changes a lot of things, so it needs to be very formal.
R. Shawn McBride: One of the things, of course, we’ll look at when a liability case is, did you treat it as a separate entity or did you treat it like an alter-ego, another version of yourself? Or if you didn’t transfer the assets and you weren’t careful about who had ownership of the assets and have the good books and records, then the courts are going to look at it and say this wasn’t fair to creditors, it wasn’t fair to the people who are suing you, and therefore we’re going to expose your personal assets. It’s a huge time bomb when it can be done easily in the beginning.
Holly: Yeah, and definitely you can’t, you can’t do that when somebody is already in a lawsuit, right?
R. Shawn McBride: Right, too late, too late.
Holly: Yeah, it’s too late.
R. Shawn McBride: The lawyers are basically going to say, “Where are things at now?” They’re going to want a snapshot at how things look at that moment. And they’re going to assess from that moment, you know? They’re going to say, “Here you are and this is the situation.” You know, “Let me see where the records are now?” And if there’s not a record there showing the transfer of the assets and the assets were properly titled, et cetera, at that point you’re, you know, you’ve already lost.
Holly: Right. Yeah, it’s so important.
R. Shawn McBride: Yeah, so very important information. Holly, how do people get ahold of you?
Holly: I’m Holly at www.themoneytherapist.com, and I have all kinds of good coaching programs on there and some inexpensive programs that will help you set up your LLC, especially if you want to sell it. So I’ve made those intentionally affordable because I feel like the people that need that information the most really can’t pay a lot of money. But it’s really really great content. Or you can just have a one-on-one with me at www.themoneytherapist.com.
R. Shawn McBride: That’s fantastic stuff. I’m Shawn McBride, my mission is to help people build companies and moving forward from there, whether it’s strategy or getting more partnerships together, or really kind of lay that foundation and update it from time-to-time. And that’s my goal, is to follow all of our visions and our dreams and we’re getting where we want to go. So, feel free to reach out to me at McBride for Business. Holly and I’ll do another one of these here in the near future for you and bring you some more great information. Let us know what you need. If you have topics you want to talk about, let us know. We’ll get them in the future sessions. So just reach out to us. Alright.
R. Shawn McBride: We’ll talk to you all soon!
Holly: Alright, bye!
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer dlritter.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment (www.rshawnmcbridelive.com/3laws), gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at firstname.lastname@example.org or (214) 418-0258.
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