Ep. 111 | Should I Be An LLC?

Episode Summary:

Join the Teaching Tax Flow podcast for episode 111 as Chris Picciurro and John Tripolsky explore one of the most commonly asked questions among entrepreneurs and small business owners: "Should I be an LLC?" 

In this episode, Chris breaks down the complexities of LLCs—single-member and multi-member—providing clarifications on tax implications, asset protection, and operating requirements. Whether you are a budding entrepreneur, a real estate investor, or someone looking to optimize your business structure, stay tuned for an insightful discussion.

LLCs, or Limited Liability Companies, offer various benefits and challenges for business owners. This episode delves into the myth that forming an LLC provides automatic tax benefits, explaining that in most cases, single-member LLCs do not offer tax advantages. Chris highlights the importance of choosing the right structure based on your specific business needs and potential liabilities. He also explores advanced considerations like being taxed as a corporation and the implications of multi-member LLCs, revealing the flexibility and administrative responsibilities involved.

Key Takeaways:

• Forming an LLC does not inherently provide tax benefits unless making additional tax elections, particularly for single-member LLCs.
• A key advantage of LLCs is liability protection, which can safeguard personal assets, though compliance must be maintained to avoid piercing the corporate veil.
• Multi-member LLCs provide flexibility in ownership structuring, allowing allocation of income, deductions, and credits beyond proportionate equity.
• Tax returns for multi-member LLCs can be complex and costly, highlighting the importance of weighing structure options.
• Consulting with a tax professional or attorney is vital prior to forming an LLC to ensure you select the most suitable business structure for your goals.

Notable Quotes:

1. "Forming an LLC does not provide additional tax deductions that didn't exist before."
2. "The advantage of a multi-member LLC is the flexibility in ownership and allocation of income."
3. "A single-member LLC is a disregarded entity for federal tax purposes."
4. "The operating agreement of an LLC is like its bylaws—integral and should be well-structured."
5. "Talk to an attorney or tax professional before forming an LLC or electing corporate tax status."

Resources:

• Defeating Taxes Private Facebook Group: DefeatingTaxes.com

Episode Sponsor:
Strategic Associates, LLC
Roger Roundy
www.linkedin.com/in/roger-roundy-86887b23

Unlock the mysteries of business structuring and tax optimization by tuning in to this episode of the Teaching Tax Flow podcast. Chris provides invaluable insights and actionable strategies that can transform the way you view LLCs. Don't miss out on the chance to deepen your understanding and position yourself for success. Subscribe to the podcast and stay updated with our practical tax-saving tips in future episodes!

• (00:02) - Should I Be An LLC
• (05:04) - Understanding LLC Formation and Federal Tax Implications
• (12:01) - Understanding LLCs: Benefits, Myths, and Tax Implications
• (22:58) - LLC Formation and Compliance Tips for Tax Professionals
• (26:24) - Nostalgic Games and Childhood Memories
• (27:25) - Understanding When to Form an LLC for Your Business
• (35:19) - Exploring Tax Strategies and Community Engagement

Creators & Guests

Host

Chris Picciurro

Founder, Teaching Tax Flow

Host

John Tripolsky

VP of Marketing, Teaching Tax Flow

What is Teaching Tax Flow: The Podcast?

Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.

Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.

In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.

Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.

Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com

Intro: 00:02

Hey, everybody, and welcome back to the teaching tax flow podcast, episode 111 today. We are gonna explore and hopefully answer that question of, should I be an LLC? That's right. Has a little rhyme to it, but before we get into the topic, let's take a brief moment and thank our episode sponsor.

Ad Read: 00:22

This podcast is brought to you by Strategic Associates. Are you a high income earner, real estate investor, or successful entrepreneur who is frustrated by having to pay $75,000 or more of annual tax liability? If so, Strategic Associates can help. Your first step to saving 1,000, if not 100 of 1,000, is to contact Roger Roundy at [e-mail] or by calling 801-641-2956, and be sure to tell them TTF sent you.

John Tripolsky: 00:52

Alright, everybody. We are back on the podcast. Hopefully, you enjoyed that little intro there and the title of this one. Right? Like, should I be an LLC?

John Tripolsky: 01:00

That's pretty much the extent of my, hip hop rap music career or the attempt at it. I'm not a poet. I'm really a tax person, in that regard, which is why we bring on this guy, if you could see him, this this handsome gentleman over here. Hey. We're both wearing hoodies today, by the way, Chris.

John Tripolsky: 01:15

Is it cold over there?

Chris Picciurro: 01:17

You know what? It's slightly chilly in Nashville, given given our curve of usually beautiful weather. Slightly chilly, but beautiful weather for a walk, to listen to a book, or to listen to this podcast, actually.

John Tripolsky: 01:32

You know, this is not a parental advisory. If it you know, we might have to well, I won't do it. We put a parental advisory tag in this one because I almost sent you a a visual bird being that I'm in Michigan freezing my rear off and, you know, chili for Chris, just so everybody knows, is, like, 82 and, you know, mildly sunny.

Chris Picciurro: 01:49

I think we you know what? I think we've got a I've I you know what? I'm gonna have to look because I don't wanna lie. I think we might have a yeah. Yeah.

Chris Picciurro: 01:58

We got a, you know, we got a 5 on 55 degrees here. High 58. So it's a winner. It's it could get a little chilly, but it's never too cold to play pickleball.

John Tripolsky: 02:09

Oh, of course. Of course. And I

Chris Picciurro: 02:10

got out there today for sure.

John Tripolsky: 02:12

This topic so we're gonna talk about LLCs. And and we can't we can't jump into this just yet because I do wanna reference 2 things really quick. So if you if anybody listening to this or or watching it for that matter wants to really get cringey, I believe, is a is a term that the kids use every once in a while. Go listen to the first one we talked about. It was episode 2, believe it or not, about single member LLCs.

John Tripolsky: 02:34

And I think it was 3038 or 39. We talked about multi member LLCs as well. So there's 2 podcasts. Go check them out. Those ones don't have video.

John Tripolsky: 02:42

We started doing video in episode a 100. So here we are in this card. But also too, I'm gonna try to find a couple points in this podcast to really kinda ruffle Chris up here a bit because I know LLCs, it's sometimes easy. It's not as easy as saying that you're a 10.99 employee, which is completely untrue, but we'll find our we'll find a hole in there somewhere. Well, I'd say one of the

Chris Picciurro: 03:05

yeah. We're gonna one of the top five questions that we get asked in teaching tax flow or CPAs in general or tax professionals enrolled agents is should I be an LLC? That is the I mean, it's weekly. And what's frustrating, it's very frustrating, is that for some reason, I literally yesterday, I had a chat with a potential client, and they have this belief that if they form an LLC, somehow that gives them extra tax deductions that that they didn't have before magically. Don't understand where that's coming from, but we're gonna dive into it.

Chris Picciurro: 03:46

And I agree. Some of the prior podcast, we didn't have the technology we have now. But this this question is, as you like to refer to, situationally dependent. But we're gonna dive into what an LLC is, the difference between a single member and a multi member LLC, what are some of the advanced tax elections the LLC and LLC can make, and then what are the pot what are the benefits, what are the drawbacks, and then we'll wrap it up by saying, who typically does it make sense for to be an LLC and who maybe it doesn't make sense for?

John Tripolsky: 04:20

Perfect. Perfect. And I know we see it a lot. I mean, I'm sure we'll get into it obviously in more detail. I mean, this is coming down to if you wanna open up a, selling cookies at a farmer's market or your real estate investors.

John Tripolsky: 04:33

Sometimes every property they own is in an LLC. So, again, great discussion. Sure. We'll we'll recap. I mean, a little bit of this will be redundant of those other episodes.

John Tripolsky: 04:43

But, again, everything changes. It kinda everything stacks on top of each other. And, Chris, I'll I'll hand the, and the proverbial actually, not the proverbial mic, the actual mic over to you here in a second. It's you know, take take what we're saying, obviously, as it relates to taxes. I don't think we have to get a whole lot into the actual liability with everything else side of things.

John Tripolsky: 05:02

I mean, that's a little bit more on the legal front. But it is fairly easy to form an LLC if it's appropriate. Sometimes it's more work than it's worth. So, Chris, I'll let you far as you kinda walk us through.

Chris Picciurro: 05:13

Yeah. As far as forming an LLC, that that you could do either on your own. You can do, you can use a company that that, we've worked with many times. And, actually, if you're listening to this, you get a discount with Corpnet. John's gonna put that in the show notes, or you can work with an attorney, to form an LLC.

Chris Picciurro: 05:31

We're also here gonna focus on the federal tax implications of an LLC. Some states, or different states handle LLCs differently when it comes to tax. So in my home state of the state in Tennessee, we do have a franchise and excise tax that any LLC is subject to. There are some exceptions. So that's something to consider on a state by state basis, but we're going to stick to the federal side of things, putting that little asterisk saying, if you live in a state with some type of additional franchise or state tax on an entity, make sure you consider that.

Chris Picciurro: 06:08

That's something to, they wanna talk to someone about. But what an LLC is, a lot of times people don't even know what the acronym means. An LLC is a limited liability company. Many people think limited liability corporation. But limited liability company, and it gets formed when you file paperwork with either the state you live in or the state you're going to do business in.

Chris Picciurro: 06:35

So you could, if you live in, you know, Michigan, John, you could go form a LLC in another state even though you reside in Michigan if if that state's going to if that, activity is going to be doing business in that state. So it's a lit it it's and it also, so that's what an LLC is. It's just you're creating an entity separate from yourself. That's what that's what you're doing. A single member LLC, let's talk about that.

Chris Picciurro: 07:07

A single member LLC LLC is a disregarded entity for federal tax purposes. This is very, very confusing for people. All it means is that from a federal tax perspective, if you form an LLC, it is relevant to your federal tax situation if you're the only owner. So Johnny t over there remember your knitting af cans a while ago? Well, I don't know what other activities we had you doing.

Chris Picciurro: 07:37

But let say

John Tripolsky: 07:38

well, I have to say, we're not Yeah. Knitting afghans and selling those and cookies at farmer's market. Sounds great.

Chris Picciurro: 07:44

You've got a lot going on.

John Tripolsky: 07:46

Yeah.

Chris Picciurro: 07:47

But let's say you, are knitting you're knitting your afghans, and you say, you know what? I'm gonna form an LLC, Johnny's Afghans. And you form it, you file it with the state of Michigan, you get a federal identification number, you set up a bank account, and you start doing business as an LLC. Well, from a federal tax perspective, that activity still is reported on what's called the schedule c. You're still self employed.

Chris Picciurro: 08:18

There's no difference on your tax return if you were self employed or a single member LLC. The only difference would be on your schedule c, which is the form you report self employment income, is you write Johnny's Afghans with your federal ID number. Now let's pretend, John, let's pretend you buy a rental property. Alright? And you buy a rental property in your favorite city in the state of Michigan, which is East Lansing.

Chris Picciurro: 08:46

Oh. So you go buy I'm sorry?

John Tripolsky: 08:49

Said, oh, of course. Just so everybody knows, I live in the, the other side of that spectrum if you're a college football fan. Do the math.

Chris Picciurro: 09:00

Yeah. Unfortunately, he he lives by near Ann Arbor, but your town is very charming, and nice. Anyway, you buy a rental property in East Lansing. You rent it out as John Johnny t. You come to me and you say, I'm gonna form an LLC called Johnny t Rentals, and I'm gonna slap this rental property in the LLC.

Chris Picciurro: 09:20

Side note, there are other considerations that have to be thought of as far as you if you have a loan on the property, is the loan transferable to the LLC, are all your contracts on the LLC, etcetera, etcetera. But let's just assume you can do it. You report that rental property if you're the only owner on schedule e of your personal tax return. John, I'm gonna give you a really difficult quiz. If you bought that rental property in the name of an LLC that you're the only owner of, where do you think you're gonna report that rental property activity?

John Tripolsky: 09:53

Schedule c.

Chris Picciurro: 09:54

It's answer well, schedule e, but it's still on your personal tax return. The same as it would be if you just owned it personally. So that's what I mean by when it's a disregarded entity. A single member LLC, whoever the owner of the LLC reports that activity on its tax return. So if for some reason, John, you owned a corporation, and that corporation owned a single member LLC, all the activity from that LLC would ultimately get reported on the corporation's tax return.

Chris Picciurro: 10:19

So what that means is a single member LLC is a disregard of NC for federal tax purposes. There are no tax advantages to being a single member LLC just on

John Tripolsky: 10:31

its own. And one thing I you know, I'm sure some people have this question are being like, oh, what are you talking about? There's no tax advantages. Again, looking at it from the federal level. Right?

John Tripolsky: 10:40

We're not getting into, I'm trying to think of the term, tax like, tax haven states. Right? Your Delaware, Wyoming, etcetera. Like, that that's a whole other thing, and that's obviously just on state level.

Chris Picciurro: 10:53

Well, here's the situation, and that goes beyond the the scope of this podcast. Sometimes people form LLCs in different states so that their jurisdiction is in that state. And some states offer more anonymity as far as the owner of an LLC than others. So in the if you formed your LLC in the state of Michigan, all I would have to do is go to the, Michigan, I think it's LAURA, but or secretary of state. LAURA is, like, licensing and hey.

Chris Picciurro: 11:23

Whatever whatever the state website is that where you register your LLC. And put the name of the LLC in and guess what I'm gonna see, who formed it and what their address is. So that's why at times people use something called a registered agent, a third party to form their LLC to get that anonymity, or some states don't make that information public. So that's why you'll see some taxpayers. And, again, you're gonna wanna consult with an attorney, but form LLCs in Wyoming or Delaware.

Chris Picciurro: 11:52

Some of these states that maybe have better case law for that are more pro business or more anonymity or more liability protection for its owners. So Perfect. Single member LLC, there's it it's a disregarded entity. There's absolutely no, there's no tax benefit. But let's look at some of the positives of the single member LLC.

Chris Picciurro: 12:13

One is easy to file. We just said, you could just go on to the state website and file, create an LLC. It does provide, in theory, it does provide limited liability protection for your personal assets. So, John, if you yeah. You've you're knitting up those Afghans and you've got a you know, obviously, you've got 1,000,000 and 1,000,000 of dollars stacked all over your house, if for some reason you made a you make a defective Afghan and a child chokes on it, then you wanna make sure those other assets are protected.

Chris Picciurro: 12:44

So the main reason people form an LLC is for asset protection or or limiting the lie limiting their liability and keeping their personal assets free from potential litigation against the entity. It's very flexible, you know, when you're doing business or in real estate. In another positive that that dovetails on the flexibility is you could you could actually elect to be taxed as a c corp or an s corp, if that makes sense. We're gonna go back to that later in the in the show. So those are the main positives of the single member LLC.

Chris Picciurro: 13:19

The negatives? Well, 1, the expense of it. Right? So is the there's an expense to it. Every state's a little different.

Chris Picciurro: 13:29

In the state of Tennessee, it's about it's $300 a year per LLC that you have to pay the state, and then you're also subject to the franchise and excise tax. Every but every state's different. 2, it doesn't reduce your tax burden. There's no like I said before, I know I sound like a broken record here, but I can't say this enough. There are no tax advantages to forming the l l's the single member LLC.

Chris Picciurro: 13:52

Doesn't make it a bad idea. And but and 3rd, that liability protection, it could be pierced, if you're not managing your LLC properly. So let's say, John, you formed this LLC, you put your Johnny's Afghans LLC, you create a Venmo account in your personal name, and everyone pays you from your personal name Venmo account even though you had this LLC. You've ultimately you you have, you've pierced that that what what people used to call corporate veil, but you've pierce that asset protection that you might have. Again, those are more legal questions, but those are the negatives of the single member LLC.

John Tripolsky: 14:30

It's probably one of the things that stuck with me from college, you know, eons ago was that term piercing the corporate veil. Mhmm. I remember that pretty pretty vividly, but so and, Chris, I'd I'm gonna make the assumption here that probably the number one, I say, most misunderstood, which really is the definition of a myth, with LLCs is frankly just that that we've now, I think, mentioned a couple times that there there is no tax benefit to owning an LLC. It's pretty much exactly what's in the name. It's a limited liability.

John Tripolsky: 15:04

Like Well,

Chris Picciurro: 15:04

there's Yeah. There's no tax benefit to being a single member LLC.

John Tripolsky: 15:07

For a single member.

Chris Picciurro: 15:08

Let's put that. There could be some tax benefits to being a multimember LLC or electing to be a CRS corporates we're gonna talk about. But just simply forming the LLC doesn't provide you any tax benefits. It's like saying, hey. I created a living trust.

Chris Picciurro: 15:22

Great. Did you put any assets in it? No. I didn't. Okay.

Chris Picciurro: 15:25

Well, you knucklehead, you're still gonna go through probate. Right?

John Tripolsky: 15:28

That's a great comparison, though. Very good. Mhmm.

Chris Picciurro: 15:31

So yeah. It's like it's like buying a car without an engine. You know, it's not gonna it's not gonna go anywhere. It's just gonna sit in your driveway. So let's look at the multi member LLC.

Chris Picciurro: 15:40

What is a multi member LLC? I know this might sound really elementary. It's an LLC with more than one member. Why am I saying the term member? Well, when you're talking about a an LLC, the owners of the LLC are called members, not partners, not shareholders.

Chris Picciurro: 15:55

They're actually members. So when you have a multi member LLC, it's more than one owner. It could be 2 spouses. It could be siblings. It could be any parties.

Chris Picciurro: 16:04

It could be a someone in another entity. It's just it's it's a multi member LLC. Now the positives of it are similar that the, the membership if if designed properly, we'll have asset protection, which is important. Right? So let's say you and I, you know, your Afghan business is going well.

Chris Picciurro: 16:28

You're, you know, you go in and and now I'm I'm with you. I'm a member. You at Intermedia member and and, you know that I'm a bit of a loose cannon, and and I go do something really dumb. I get in a fight with a Michigan Wolverine fan somewhere. Well, they can't sue you or the Afghan, you know, because just because one member did something silly, you're protected from the other one.

Chris Picciurro: 16:50

That's a terrible that's probably one of the worst worst examples in the history of this podcast. But I

John Tripolsky: 16:54

was waiting here to say, I tried to strangle somebody with an Afghan while wearing a branded T shirt and dropped my business card at the scene of the crime. I was like, well, still, you're poor.

Chris Picciurro: 17:04

Ask the protection for the for all the members. Mhmm. A multimember LLC by default is taxed as a as a partnership. They file a form 1065. So the good thing is is that the l if a multimember LLC itself as an entity, so me and you still form Johnny and Chris' Afghans.

Chris Picciurro: 17:22

Right? The entity itself is not taxed. You and I are taxed personally on our portion of the the income, and that is reported on a k one. We have another episode just on k ones. But the advantage is the multi member LLC as an entity is not taxed on a federal tax perspective.

Chris Picciurro: 17:41

We have the ability to include and add members and investors. So we could have malt and other advantages, flexibility. Ultimately, flexibility and ownership is the biggest advantage. We could have some members that are limited members, some members that are, are active members. So let's say you and I wanna expand our Afghan portfolio and we bring in daddy Warbucks.

Chris Picciurro: 18:02

We want daddy Warbucks to put in a $100,000 for us to expand our operations. Danny Warbucks could be a limited partner. He's just investing his money. He's not a general partner out there out there running the business. And though depending if you're a general partner or limited partner, the tax on that income or deductions is handled differently.

Chris Picciurro: 18:22

So ultimately, flexibility is is the key in in the big positive, for a multi member LLC. And again, the ability to add members and investors and the ability and the flexibility to allocate income deductions and credits in not proportionate to your equity. You might be saying, oh, boy. You're starting to use some scrabble words. Right?

Chris Picciurro: 18:45

What I mean by that is let's say you and I have the LLC and it's a 5050. You're the one schlepping around and and doing all the Afghans. Even though we both own 50%, we agree that, John, you get the you get 75% of the profit. I only get 25% even though we own 5050 because you're doing all the work. So flexibility on on allocation of income, deduction, credits, all of these type of things that that go along with the business.

Chris Picciurro: 19:14

So those are the big positives of a multi member LLC. Now let's talk about the negatives. The negative is, ultimately, if we're both operating in this LLC and and if we're if we're general partners, there's no tax advantages. There the tax filings are rather complex. The LLC has to file a partnership tax return and issue k ones to each member.

Chris Picciurro: 19:39

That means that there there's it's it gets more expensive. The average multi member LLC tax return cost in my experience I mean, average because you've got some that are ridiculously priced and some that aren't, is, you know, probably about 6 to $7,000. Now you have some that are could be done for a couple grand, you have some that are and we've in our private practice, we have some LLCs that have 250 members. That's a lot of those and each each member has an equity account that has to get reconciled on their k one. So the point is, it's it's a it's a it could be a negative as it could be because it's a significant burden financially for tax compliance.

John Tripolsky: 20:21

And, Chris, you mentioned, you know, multi members could have a ton of them. Just pulling one out of the the Rolodex here. I feel like Chrysler. You know, the auto manufacturer actually is an LLC, if I remember. 1 of the

Chris Picciurro: 20:35

Yeah. They were an LLC, but they they elected to be taxed as a c corp. So any publicly traded company has to be a c corporation.

John Tripolsky: 20:43

Gotcha.

Chris Picciurro: 20:43

So but you could be an LLC and elect to be You're jumping the gun on on some of this advanced stuff. You must have been doing your homework.

John Tripolsky: 20:49

Hey. It's I just remember seeing that, and this was a while ago. I feel like I remember seeing it on one of the signs for them. I'm like, oh, look at that. Like, that's interesting.

John Tripolsky: 20:57

But

Chris Picciurro: 20:58

Mhmm.

John Tripolsky: 20:59

Yeah. Yeah. Me do homework.

Chris Picciurro: 21:00

No. I'm with you.

John Tripolsky: 21:02

I don't know what homework is. My dog ate it.

Chris Picciurro: 21:05

The other thing is with the multi member LLCs is that, it they're just like a single member LLC, but all I should have mentioned this in the beginning. LLCs are are run based on their operating agreement. An operating agreement is the document that says, here's how the allocations work for this entity. Here are the people that have power to make certain decisions. It's basically the corporate bylaws, but since it's an, LLC an LLC, that document is called an operating agreement, and that operating agreement can change at any time.

Chris Picciurro: 21:37

You know, many times you'll have restated and amended or amended and restated operating agreements because because the LLC might change an allocation or it might bring in a new member or might lee have a buy out a member. So multi member LLCs, some advantages. They avoid double taxation. You've got some flexibility. However, the tax compliance is a little more more money.

Chris Picciurro: 22:03

Now both multi member and I'd be remiss if if, if we said, should I be an LLC and at least not mention this. We do have other podcasts on both of these topics. But what I want to say is one of the advantages of both a single member and a multi member LLC is the opportunity to elect an to be taxed as an s corporation or a c corporation. Now, John, you know, many of us are tax professionals and, you know, I'm gonna go behind the curtain a little bit here. So John and I, lead a peer to peer mastermind group for tax professionals.

Chris Picciurro: 22:39

And it's kinda cool that you're in there because you see some of the, you know, because you see some of the same headaches and head shaking things that happen, that you hear about. And I think that most tax professionals agree that that s corporations are often used too much or too quickly. They could be an amazing tool. So I probably say

John Tripolsky: 23:02

hear that a lot, but then I would say, actually, maybe even more frequent than that, and this is for all the taxpayers out there. The biggest pain in the you know what? For your tax professional is getting the information they need. So if you if you wanna make them happy, there's a tip. I digress.

Chris Picciurro: 23:21

Well, good segue, John, as we good segue to the fact that we're gonna have some really awesome webinars. So definitely, you know, that this sounds like we're pitching ourselves here, but subscribe to our the teaching tax flow YouTube channel. Even if you're listening in this podcast, just the audio, because we're gonna have some tax preparation readiness and some really awesome webinars coming up, to help people get the best result possible with their tax professional. And that's we're very passionate about that. So one of the one of the advantages of the LLC is it does allow you and and it was a good segue with with I think when when it was Daimler, Chrysler, Benz, or some l I remember seeing that too.

Chris Picciurro: 24:01

But you can elect to be taxed as an s corp or a c corporation, which gives you a lot of flexibility. So if you grow out of your current structure without having to start from scratch, you could just make that election. Again, it goes beyond the scope of this particular episode, but there are some distinct advantages on electing to be a c corp or an s corp. And, ultimately, that's where you wanna bring a tax professional in and really work through your situation, your numbers, what type of assets you hold, and determine what structure is best. But point is, I'll I typically, when someone starts a new business, I would say the LLC, 95% of the time is a great option to start because you have that flexibility.

Chris Picciurro: 24:40

The other thing, I should have mentioned this in the beginning because this is new, LLCs now have a requirement as, like, if you're a sole proprietor, you don't to, report to the federal government their BOI, beneficial ownership interest information, and that's due to the corporate transparency act. That's new. So is it a huge deal? No. But it can be if you don't if you don't, comply.

Chris Picciurro: 25:07

So it's just another layer of compliance that you have to consider before you file an LLC.

John Tripolsky: 25:13

Yep. And and, Chris, early on, like, if somebody's thinking about forming an LLC, obviously, you're gonna get a bank account after that. And those are the things that they're gonna ask for right out of the gate is the articles of organization, right, which is provided to you when you form it. Yes. But then, also, I haven't experienced it personally, but I I've heard on a previous podcast we did, maybe, about a month ago or so that they're actually requiring you to show proof that you have filed your BOI now before you can open up a bank account.

John Tripolsky: 25:43

So it's

Chris Picciurro: 25:43

Absolutely.

John Tripolsky: 25:44

Something to consider.

Chris Picciurro: 25:45

Absolutely. So that's something to consider. Johnny t, look at that. You even mentioned articles of organization. This guy did do his homework today.

John Tripolsky: 25:53

Hey. It's just that I, for a while there, I was opening and closing LLCs like I was trading Pokemon cards or something. So it's, you get you get used to it.

Chris Picciurro: 26:03

Johnny t with his Pikachu card. I can't remember what Pikachu transforms. My kids, though, my oldest had a had about a month of his life where he got into Pokemon cards. So we went we built a deck together, and he went we went to the store, and they would play. And I learned it was really cool because there's a lot of math involved.

Chris Picciurro: 26:19

It's kinda like I used to play Magic the Gathering. Yes. Nerd alert is on full,

John Tripolsky: 26:25

full run by actually got into the Pokemon thing. You know, being an an ice hockey goalie, I was a I was a scrappy individual for about a decade and a half or so. I I got big into, like, pogs when I was way younger. Remember those things? You're just like No.

Chris Picciurro: 26:40

That was before my time, but thank you for reminding me.

John Tripolsky: 26:42

Throw those things in. I've thought. It was, like, the most aggressive, ridiculous game on the play. Like, let's just give kids these basically paperweights and throw them at the ground. So yeah.

John Tripolsky: 26:55

Oh. I don't know.

Chris Picciurro: 26:56

Little physical action. Yeah. No. I was into the, I I like magic the gathering. I think it was it was a lot of fun.

Chris Picciurro: 27:02

So, well, anyway, let's get back to LLCs. Who should be the l l who's a great candidate for an LLC, and who's not the best candidate for an LLC? Alright. Let's start with the what I think are the ideal candidates. Business owners that are looking for limited liability protection for their personal assets.

Chris Picciurro: 27:22

That's a a good candidate. Potentially, real estate investors that hold rental properties, rental properties that have a similar concern about protecting their personal assets. Asterisk, talk to an attorney because you need to make sure that just putting your rental property in an LLC, if you have a mortgage in your personal name or other things going on, might not get you that asset protection that you want. Entrepreneurs, I want flexibility on tax treatment. If you want us as I said before, 95% of the time, I'm gonna recommend an LLC to start if it makes sense.

Chris Picciurro: 27:59

And then partnerships or joint ventures that need kind of a more formal structure. So let's say, you know, you've probably experienced this before where I I I think about my kids. Right? And and they're always having these entrepreneurial ideas and, you know, one of I mean, I've got I've got a, hot dog make I've got a hot dog make machine downstairs that my oldest son bought and then and then traded to my younger son. My younger son decided to make these create a hot dog stand by the swimming pool in the neighborhood, and, but then he kinda got loose lipped and started talking to a friend.

Chris Picciurro: 28:36

Next thing I know there's, like, 4 kids out there, and then, like, you realize you're splitting your profits by 4 now, but it's a life lesson. But let's say let's say little Luke's hot dog stand took off. You can't, or, you know, a better example, John, is a band. A garage band that's doing well. Hey.

Chris Picciurro: 28:52

You know, just put if we actually start making money, put the 10.99 in the in the one guy's name, and he'll just pay the other guys. But then it grows and grows, and you need actually some type of formal structure. That's a great because a band is ultimately a joint venture until they really formalize something.

John Tripolsky: 29:09

That's a great example too. And and I know we had a had a a musical guest on an earlier podcast too. If, anybody's a moon taxi fan, check that one out. But, Chris, that's a really good example because that's how you know, sometimes people won't even realize that they're in business until they're like, it's almost a little I wouldn't say a little too late, but, technically, I mean, it could be. You know?

John Tripolsky: 29:34

It's like

Chris Picciurro: 29:35

Oh, over my years, I've run into situations where I've had a musician come in, you know, and obviously I'm I'm really focused on the tax planning and strategy now, but I've had a musician come in with a 10.99 for $80,000. Wow. We did these gigs and the band took off and okay. Great. Well, I only, you know, there's 4 people in the band, so the only 20,000 of this is my income, and I've got some instruments I had to purchase and materials for the gigs.

Chris Picciurro: 30:00

Okay. Great. But there's an $80,000 10.99 in your name. You know, they should form some type of entity. Uh-oh.

Chris Picciurro: 30:09

So in that case, you you that person needs to 1099 the other people for the but of course, do you think those the other people in the band probably already prepared their tax return, you know. It's just a big domino effect. So if you like you said, if it's something you might be in business and you don't even realize it. So that some some formality could really help, because especially a band's a great example as far as, you know, if they're writing songs, trading songs, or who owns that? Who who owns that material?

Chris Picciurro: 30:38

Who owns the songs and the production? So

John Tripolsky: 30:40

And almost looking at I mean, episode 96, I had to just look up the number. You know, we did it on hobby versus business where, you know, that's that's kinda just the tip of the iceberg. But, yeah, with the with the LLCs, it's it it changes things a little bit. You know, it formalizes stuff. It it gets you moving in the right direction.

John Tripolsky: 30:58

So, yeah, as we kinda near the end of this conversation just a little bit, I know we had some some other areas that we wanted to touch on.

Chris Picciurro: 31:05

Absolutely. So who should not form an LLC, in my opinion? Sole proprietors or freelancers that have very minimal liability exposure. Now an LLC could provide you some anonymity. Right?

Chris Picciurro: 31:18

Because, but if you're if you're a if your code software in in in a home office by yourself for a couple people, you probably don't need an LLC. You're just getting paid as a freelancer. You know? So that's that's something that, to consider. You know, high growth startups looking for venture capital, an LLC doesn't might not make sense permanently.

Chris Picciurro: 31:44

However, maybe it it's an LLC makes sense in the beginning and then you you like to be a c corp, you know, or passive investors that just want simple tax reporting. So, John, I'll give you an example. Let's say I wanna invest in an apart in an apartment syndication. I just wanna put my money in and get mailbox money. I'm a limited partner.

Chris Picciurro: 32:05

I don't have any personal liability over the operations. I'm not running an apartment. I probably don't need to file form an LLC, just invest into another LLC where I already have asset protection, if that makes sense. So those are the common, identity or situations where an LLC does not make sense.

John Tripolsky: 32:24

Mhmm. And they and and, Chris, with this one too. So this topic, right, of should I form an LLC? You know how I said a little bit earlier, and I'm like, oh, I try to find a way to kinda poke the bear a little bit with you. I really don't have one.

John Tripolsky: 32:35

I couldn't find I couldn't find a hole. Although, I will say this for anybody who's listening, we planned on doing a, LLC 2.0, episode, And I think I think Chris got a little scared. I might find the hole and kinda send him off the deep end. So he suggested this one for this topic, for this one, you know, from a conversation he likely had. So kudos to you, sir, for avoiding.

John Tripolsky: 32:59

Well You know? You you found a content haven, which you have taken advantage of. So

Chris Picciurro: 33:04

Well, let's leave you people with with the final three practical tips. I love things in threes. Final things. 1, make sure you have a good operating agreement even if you're a single member LLC, a formal written operating agreement if you form an LLC. 2, make sure you have the separation of church and state.

Chris Picciurro: 33:25

What what I mean by that is if you form an LLC, make sure you separate your business finances with your personal. Have very, very limited commingling, to protect that what we call corporate bail veil. And 3, before you do move forward, make sure you talk to an attorney or a tax professional before forming an LLC or electing to be taxed as an s or c corp. Follow those three guidelines, and you'll be set up for success.

John Tripolsky: 33:51

Amazing. And, Chris, here's one question for you before I let you off the hook here. Say it is July, August of a year. Somebody file their returns for the previous year by the April 15th ish deadline. They did not have an LLC at the time.

John Tripolsky: 34:08

They've been they've been they recognize that they're in business, and they say, you know what? I really need to form an LLC, singular or multi. Right? And say this is midyear. What should they do?

John Tripolsky: 34:18

Should they wait until the following year to do that, or should they go and just get it set and there's amended returns. I know there's a lot of complexity with some stuff.

Chris Picciurro: 34:29

Right.

John Tripolsky: 34:29

But what would be your recommendation if you had that question?

Chris Picciurro: 34:32

I would say talk to your tax professional, talk through your business entity, and there's nothing wrong with forming an LLC midyear. It could make a lot of not every LLC should be January 1st. There could be many, many reasons. Some that someone might wanna form 1. And then in you know, and if it's if you're a single member LLC, remember that one of the first things we've talked about.

Chris Picciurro: 34:51

Let's say you're a free, You have your own business and you form the LLC. It's still all on the same schedule c, if that's the case. So, yeah, don't don't wait till the beginning of the year to do that. Just talk to someone and figure out, because we know different there are different tax rules for different types of entity structuring. Ultimately, legally and ethically reducing the tax you pay in your lifetime, that's our that's teaching tax flow's mission, the voice of tax planning, and one of the strategies is making sure you're structured in the best way possible.

John Tripolsky: 35:25

Beautiful. Beautiful. It's a great way to close it out, and I'll actually put the challenge out there. So anybody that is part of that defeating taxes at private Facebook group of ours, Let's actually start a discussion on this, and maybe maybe I'll kick it off for us here on on the day that this launches on on Tuesday. And just kinda get everybody's opinion on that because I I would love to hear I mean, very self serving.

John Tripolsky: 35:47

Just the experience that different people have had in different states, in different businesses, just etcetera. So we can have a full on LLC thread conversation that will get fired off and, yeah, chime in that. You would be very surprised somebody, you know, who maybe hasn't posted in that group. This sounds like a a car ad right now, but, you're definitely invited. Defeating taxes.com.

John Tripolsky: 36:09

Go to that. Send you directly to the group. Join it, and just chime in. There's so many tax pros in there. Our goal, at least in 2025, is to have more people chiming in there than Chris because I have to listen to him all day.

John Tripolsky: 36:22

He's a wise, wise, young chap, but, you know, we don't want him to feel that he has to answer every one of these. So we we do have a lot of input from other tax pros. And, again, it's it's a state by state situation, majority of it. And, yeah, ask those questions. You'll get some fantastic answers, some ideas.

John Tripolsky: 36:38

It literally is, a forum for the Teaching Textile community. So check that out. And as always, kind of the boilerplate closeout outro that we like to flow with here on the podcast is We will see you back here next week, roughly same time. And, Chris, do you remember that last line that I throw in there?

Chris Picciurro: 36:59

There's your Same place. I hope so.

John Tripolsky: 37:02

Bingo. Alright, everybody. Have a great week. We'll see you back here very soon.

Disclaimer: 37:08

The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer. The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.