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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 Michale Sendejo, have a nice day.
- Vicki Schuering, Staff Member
and again Jim Hart back out you're here from Hawthorne law and today I want to share with you how to start an LLC [Laughter] this information is gonna be pretty much the similar regardless of what state you're in as an attorney I practice in North Carolina I'm also licensed in Florida so by the end of the day I'm going to tell you about the different steps you need to know if you're gonna start your own LLC and this is really important actually a client in yesterday he was wondering who was trying to going through a divorce situation and they have a business a rental property business that he needs to separate with his wife and they both want to keep the rental properties and we talked about one of the things they can do is start an LLC so how do you do that well it's actually pretty easy to do depending on the state you're on and before I get into that I want to remind you hit the subscribe button below make sure you comment like this video and share it with your following in social media we'd really appreciate it also hit the little bell thingy there should be a bail thing you down there as well I like to say bail thingy I don't know why so that you get notified when I post new videos so anyway here's the deal when you're starting an LLC the first thing you need to do is you need to do a search for your name you need to make sure your name is not taken and this doesn't need to necessarily be your brand name this can be a special name for your LLC your business name but you need to go to the way you're gonna do that is you're gonna go to your Secretary of State's website in the state where you're starting the LLC by the way I need to mention something right off the bat you do not need to go to Delaware you do not need to go to Nevada you do not need to go to why aunt Wyoming to start your LLC you can start your LLC in your own state if you're starting in another state then you're gonna have to register in your own state anyway as a foreign entity big mistake costs a lot of money it's more effort it's more pain than it's worth don't do it there's there's people out there they say you can do that because you can avoid taxes you can't avoid the taxes okay rant over start the LLC in the state where you're doing business that's gonna be the best state for you to do it in that's number one number two so I already mentioned go to your Secretary of State's website do a search for your name make sure the name is not taken if it's not you can go ahead and file what are called or are articles of organization and I think it's named the same thing in all 50 states I'm not sure about that but that's that's what you're gonna file you're gonna fill out this form your articles of organization it's going to give information like the name of the LLC the business address who the agent is make sure you see up here my video on registered agent that needs to be an actual physical address where somebody can accept mail on behalf of your business if you get sued that's where the registered agent does basically there's corporate entities that do that but it means to be a physical address in the state where your LLC is located they're gonna want information such as who the initial members are of the LLC owners of an LLC are called members not shareholders and other information like that and you're gonna take those articles of organization you're going to take them down your Secretary of State's office or potentially you can file this electronically through through the interwebs and you're gonna pay a filing fee it varies in different states and then once they file those your LLC is going to be formed they're gonna send you a little a document back that's gonna tell you that your LLC has been formed then you can the LLC but here's the thing that's not enough people if that's all you're doing to start your LLC there you might as well do nothing because it provides no liability protection to you there's no tax advantages to doing that that you you've basically done nothing to protect yourself which is the whole point of forming LLC hold on a second my wife thinks wanted me when I drink coffee that way anyway if you're getting what I'm saying so far make sure you leave a comment down below and just type something cool you can type something cool that's fine and let me know you get what I'm saying so far so that's number one you got to file those articles of organization but there's another step you need to create and what's called an operating agreement an operating agreement is a document it's a contract between you and you as a member of the LLC and the LLC the basically spells out exactly how the LLC is going to operate what you're gonna pay yourself in terms of a salary or distributions or how those are going to be distributed all those different things where the businesses can be located what you're gonna do if you decide to add new members what you're gonna do if you decide to break up with your the other members how often you're gonna have meetings what's going to be the subs those meetings all these things there's all these things that need to go into this operating agreement and you need to have that done and then you need to follow the next step is you need to actually follow the terms of the operating so that if somebody decides to see you at some point they can't do what's called piercing the corporate veil and by piercing the corporate veil that's how they can do that if you basically don't operate yourself as the LLC according to the terms of your operating agreement so that's important all right the next step is to make sure oh and let me go back if you're in some some states ask you to publish a notification I know I think New York asks you to do this so there might be other requirements in your particular state you want to check those requirements and make sure that you follow the law and the legal requirements in your particular state the next thing you want to make sure you do is remember to to file all the necessary updated paperwork every year and and that may be annual minutes that may be an annual report different things there's usually going to be filing fees associated with with this so you want to make sure you do that on an annual basis to make sure your LLC stays active I've had situations where people have failed to do that and then the LLC becomes inactive and then anything the LLC has done up to that point while it's inactive basically is is void I had a big issue with the client who there it involved a transfer of real estate through the LLC and a deed was passed and money was paid and things like that but the LLC does not shoot we're talking about Oh making sure you do all the annual reporting requirements you need to make sure you do that if you don't do that then you can run into problems and your LLC can be disbanded and as I mentioned I had a client that had a real estate deed and the real estate deed was basically void and that was a big problem because my client had spent several hundred thousand dollars I'm acquiring that piece of property but his deed was no good and then there was a death and that's that's what we do tha
Thanks Irene your participation is very much appreciated
- Vicki Schuering
About the author
I've studied strategy at Alfred University in Alfred and I am an expert in sociology of finance. I usually feel enthralled. My previous job was cardiologist (md) I held this position for 20 years, I love talking about magnet fishing and soapmaking. Huge fan of Josh Groban I practice parachuting and collect vintage guitars.
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