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as of 2021 there are 31.7 million business owners in the united states many business owners are setting up llc's one out of every six taxpayers that comes to my office owns an llc i own six llc's and i've set up over 5 000 llcs for my clients l to the l to the c i love saying llc because it reminds me of ll cool j llc's are the most popular business vehicles that business owners set up why is it that most business owners who have llc's aren't sure if they should be in llc's my name is carlton dennis and in today's video we are going to go over what you need to consider before setting up an llc llc owners make a lot of mistakes i'm sorry and in today's video i need to point out some of the mistakes that you need to be conscientious of before establishing your llc let's dive in mistake number one is not knowing the type of income you're receiving prior to setting up your llc this is really important and reason why is because there are three different income types you could be receiving and it could determine whether or not you need an llc versus an s corp or a c corporation the three different income types that you need to be familiar with are number one ordinary income ordinary income is everyday income that you work for and is typically in the form of w2 wages or 1099 compensation the next form of income is passive income passive income is income you technically do not have to work for typically you're familiar with passive income from investment properties or interest that you earn off of the money that you have in your bank account the third type of income is portfolio income portfolio income is typically income that you receive when you decide to sell capital assets or if you have capital gains tax from the sell of a rental property these three types of income are important for us to know because it can help us decide whether or not it makes sense for us to have an llc so let's talk about it number one passive income if we have passive income what we have to understand is that passive income is not subject to social security tax or medicare tax that ordinary income is subject to so when you think about it it may not make sense for you to worry about whether or not you have to eventually transition your llc to an s corporation if you have rental real estate if your income is passive you don't have to worry about self-employment tax so typically a lot of real estate investors will establish llc's for their real estate holdings so if you ever had the question in your head why do people set up llc's as opposed to c corps or s corporations for their real estate a big deciding factor around this is because real estate investors are not subject to the social security and medicare tax that ordinary income earners are subject to this leads me to ordinary income ordinary income is the income you're familiar with when you're working a job where you are putting in labor anytime you're putting in labor you're going to have to pay into social security and you're going to have to pay into medicare taxes and if you decided to become a business owner that means you pay into self-employment tax it's been talked about in all of my youtube videos if you've seen them now one thing that you have to understand about ordinary income is that ordinary income you will pay 15.3 self-employment tax which is your social security and medicare but then you will also pay your federal taxes and your state taxes so knowing that ordinary income is subject to self-employment tax federal tax and state tax we have to define what type of business owners need to know that their business is actually ordinary income instead of passive business let's talk about that i have clients all the time that'll get on the phone with me and tell me carlton i have a passive business i started amazon automation i'm doing amazon fba i'm selling products on etsy i have my online shop any of these clients that i talk to that have these businesses that are very automated had to work to get to a place where their businesses are automated they sat on the computer they figured out how to put up ads build their website hire the contractors and someone else is doing the fulfillment and dropping off the orders to the house that is a business that requires work and if labor is involved we are subject to social security and medicare taxes federal and state taxes so i just wanted to make sure that when we go into setting up a llc that we also understand which type of businesses are ordinary income businesses and truly understanding what would be considered a passive business last but not least is portfolio income i don't really get too much into the portfolio income unless i'm dealing with my real estate investors which i primarily focus on if you happen to have real estate income and you decide to sell an investment property you're dealing with capital gains it could be short or long-term capital gains depending on how long you held on to that asset but if you're aware of capital gain income you might realize that this is actually categorized as portfolio income to your tax account so understanding these three types of income can let us know whether or not you should have an llc that's going to remain as an llc or if you have an llc that will eventually be switched to an s corporation or another desired entity structure mistake number two with llcs is not establishing your llc prior to knowing that you wish to have a real estate acquisition it comes up pretty often that i get on the phone with a client that told me that they just bought an investment property and now they're trying to decide whether or not it makes sense for them to have an llc and i sometimes wish that they would just have a conversation with me prior to them buying the rental property because then i might have advised them to establish the llc prior to buying the rental property so that they can buy the property in the name of the llc that they establish for themselves this is a way that we can completely avoid having your name ever online at the accounting assessor's office saying that you're on title for owning the property but then we get to a place where you want to have that asset protection because you find out that someone could slip and fall and hurt themselves inside of your property so you eventually want to have an llc for liability protection but the property is already in your name so now we have to decide does it make sense to set up an llc and do a quick claim deed and re-title your property in the name of the llc well this is where we can run into some issues at least i've had clients run into issues one of the issues that they run into is this whole do on sale clause where now there's a stipulation in their mortgage agreement that says that anytime a property is being transferred or sold that the mortgage is now due so this is where we have to be extremely careful and mindful prior to establishing llc's into investing in real estate we have to speak with the tax pro we have to speak with our mortgage company we have to determine if we can purchase a rental property in the name of an llc and if you're setting up
Thanks for your comment Hildred Zephyr, have a nice day.
- Margaret Lebel, Staff Member
hey gang jim hart back at you here from hawthorne law are you operating your business as an llc did you form an llc recently and are you wondering whether or not you're handling everything properly now that you've started your llc today's video i'm going to share with you all the things that you need to do once you start your llc to make sure you don't mess everything up with your business moving forward hey my name is jim hart i'm the founding attorney here at hawthorne law we help online businesses and entrepreneurs to get their legal house in order so that they can focus on doing what they do best and that's helping other people and building their business and building something that is truly magical and wonderful in the world that is going to really change lives and today i'm here to talk with you about the things that you need to do after you have started your llc to make sure that your business is protected moving forward now most online entrepreneurs will start out as a sole proprietorship and if you're not making any money and you don't have any clients that's probably the best way to go because god forbid i don't want you going out there and spending you know any money forming an llc if you don't have any money coming in yet and that's a big question that people ask me about when i get on calls with people is how to when to form that llc should they do it and i've talked to a number of people who are just not at that point in their business yet where they're ready to start an llc and and that's fine and and not everyone is at that point but what we want to talk about today is if you've just formed that llc and you're wondering okay now what do i need to do this video is going to be for you all right so there's a number of things that you need to do when you are starting out with a brand new business with a brand new llc probably the first thing you need to do is make sure that you have an operating agreement drafted and that's something that that you can do for yourself you can find something online for free we offer an operating agreement you can check it out here or if you use my services to sign up for your own llc or if you did use my services to sign up for your own llc then you'll get an operating agreement through that service as well but having an operating agreement in place is vital to making sure that if anything would ever happen with your business if you were to get sued and i've talked to a lot of people who are in very high risk businesses where it's very possible that they could get sued in their business and you need to have a good operating agreement because that is going to show that you're following the proper procedures the following the proper legalities to make sure that your business can be protected so that that plaintiff's attorney that's trying to sue you can't come in and say judge you know what they don't even have an operating agreement so clearly this is just a big you know this is just them and they formed an llc they formed some articles of incorporation or excuse me articles of organization that's what they're called for llcs and they form that and they really haven't done anything they're not operating as an llc so disregard the llc and let's get at those personal assets shall we anyway an operating agreement is going to help protect you from that so you definitely want to make sure you get an operating agreement in place number two and again this is something we do for you if you sign up through our service but you need to apply for your ein to apply for an ein you need a tax id number or social security number all in existence right now and there are services that will obtain an ein number for you if you're a foreign or if you're from out of the country and you do not have a social security number there's ways to go about that it takes a little bit more time that's not something we offer right now but i've thought about it in the future and but you need to get your ein number for your business this is vitally important because you need it before you can go to step number three and step number three is you need to go and open up a bank account for the llc so maybe you've been operating as a sole proprietorship up until now and you're switching to an llc and so you need to make sure you transfer all the funds and all the money from the bank accounts you've been using for your sole proprietorship which hopefully is segregated against your personal bank account that's very important to maintain that distinction between the two hopefully you've done that and but you transfer all the funds from your personal business account into the account for the llc but to do that you need the social security number which i just talked about so open another bank account that's very important and you might want to open more than one check out my video on profit first for entrepreneurs and you might want to open two or three or four in my case i've if i had to count on one i probably got like six or seven once i'm not sure i i've got a lot because they all have a purpose right so do that number fourth thing you need to do is you need to apply or reapply if you've already got them as a sole proprietorship for your personal business license and permits now in some states in some municipalities you're going to apply for those on a personal level anyway like for me for instance i've talked about this before as an attorney i have to get what's called a privileged license in north carolina well specifically in in wake county or or cary north carolina where i practice as an attorney we need to have a privileged license and that's something that i apply for it's for me personally as a lawyer so if i were to leave my firm and go join another firm then i would take that privileged license with me to the new firm it has nothing to do with my llc so but in other cases you need to have an actual license for the llc so make sure you apply for the proper things as again as part of the business formation package that we offer we have an upgrade that you can get which will basically we will do a search in your local area for all the different business licenses and permits you need and prepare a report for you so you can go and apply for all those and make sure you've got everything you need for your business all right number five you need to make sure that you've got your contracts in place for your vendors and your clients or whoever you work with and so if you had contracts in place previously for them with you personally you need to just that's pretty simple you just change them all and substitute for your name the llc name and then making sure that when you sign those contracts you sign it the proper way you want to sign it as the llc by your name as member of the of of the or owner of the llc something like that so that you make sure that every contract you enter into with either clients or vendors or service providers whatever that it's between that entity or person and your llc as opposed to you personally now you may need to go back with old clients and all vendors and say hey i just formed an llc we need to redo our
Thanks Len your participation is very much appreciated
- Margaret Lebel
About the author
I've studied natural product chemistry at University of Wisconsin-Stevens Point in Stevens Point and I am an expert in evolutionary sociology. I usually feel bouncy. My previous job was family practitioner (md) I held this position for 2 years, I love talking about meditation and zorbing. Huge fan of Lauren Conrad I practice cycling and collect film posters.
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