Foundations Part 1: Entity Types

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And this episode, we're going to talk about all things.

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Business foundations.

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And we're going to deep dive into what even should your business foundations be?

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You know, what, what should you be looking for?

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What type of business should you register as, what do you need to

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do on the legal side of things?

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You know, do you have employees, do you have contractors?

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Do you need to register like payroll, all the things like

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where do you need to be set up?

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So.

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Pause get something to write with.

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I don't care if it's your phone and you're just using your notes.

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If you're a pen and paper kind of person, but get whatever you need.

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Pause this, come back.

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And then we're going to take a whole bunch of notes because this episode

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is jam packed with information.

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Okay.

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Number one, we were talking about business foundations.

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The number one foundation is choosing what type of business

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entity you're going to be.

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Now, what I mean by that, there are, there are different names for all of these, but

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in general, you have a sole proprietor.

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You have an LLC, you have a corporation, and those are kind of your big basis.

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Entity types right here, but there are multiple ones within those.

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So sole proprietors and single member LLCs are what are

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known as disregarded entities.

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Now, disregarded entity is a really fancy way of saying that basically

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your tax returns get filed together.

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Um, the business itself, while it is a business, it doesn't have its own, you

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know, business return that has to be done.

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There's just a couple of extra forms to get processed with your personal routine.

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And with both of those, they're also known as pass through

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entities, all the entity types.

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So those pass through entities mean that the business profits

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or losses pass through.

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So think of like there's a bucket, right.

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And below that bucket, Is your personal bucket.

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So the top one's your business.

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The bottom bucket is your personal, and there's a hole in your business

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bucket, and all of the profit trickles through that hole into your personal

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bucket for when you file taxes.

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So your business doesn't owe income taxes, you owe income taxes on the

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profit that you make in your business.

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Now, the benefits of a disregarded entity, again, generally a sole

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proprietor single member, LLC.

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Your tax costs are really low to do your filing your preparation.

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You know, you can do it yourself through TurboTax or some

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of the free EFL software's.

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If you're going to pay a professional, you're normally looking at something

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that's not a massive investment.

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Um, there's still a lot of information that goes into all of that.

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You want to make sure that your records are accurate.

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Um, but the, the deadline is the exact same as your personal, you

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know, In a normal year, April 15th.

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Uh, if you're filing by the regular deadline, October 15th, if you're

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filing by the extended deadline, because it's part of your personal return.

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Now I really like LLCs because they're what I call a transitional entity.

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So LLCs are great because they are really flexible.

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So you can be a single member, LLC, which is basically a sole proprietor

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with the protections of an LLC.

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Still has all the same simplest.

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You can be a multi-member LLC, which could be a partnership.

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It could be, uh, an S-corp election.

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You could have a C Corp election there, all of these different

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elections that you can do with an LLC.

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And the same thing with the corporation, you can elect to be a C Corp.

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You can elect to be a partnership.

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Um, that's a lot of times when you see like the Inc period, the incorporated.

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Generally I'd say probably 75% or more of our clients that we work with are

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single member LLCs and single wall, single member LLCs, or S-corp elections.

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Um, but LLC for their entity type.

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When you're choosing, cause that's a whole bunch of information and you're probably

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like, kind of losing your mind right now.

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So how do you choose number one, are you planning to continue this business?

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You know, have you dipped your toe in?

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Are you going full time?

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Is this something that you've been doing a little bit on the side and

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you now really want to make it legit?

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Um, I get a lot of questions.

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Like when should I make things legitimate?

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As soon as you decide, it's something you're going to be

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pursuing, like actively pursuing.

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If you're just testing the water for a couple months, that's your call.

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You can be a sole proprietor and operate that way.

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But if you are getting something started that you were planning to

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do for more than the next year, I would absolutely set yourself up.

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Now in a couple of states, being an LLC can be a little bit cost prohibitive.

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Those states being Massachusetts and California, And I think

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Illinois off the top of my head.

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So first you're going to want to type in the state that you live in

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LLC registration, the state that you live in sole-proprietor registration.

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And you're going to want to look at the fees.

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And the reason that I call out those three states in particular,

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Massachusetts, for example, is $500 a year to register, to be an LLC.

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California.

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Once you register to be an LLC, you have to pay dread $800.

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That is not actually a business registration.

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That's a business tax that California itself charges.

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And once you become an LLC, you pay $800 on.

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Every year is registrations.

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When we file your taxes, you pay $800.

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It is a write-off as is the Massachusetts $500.

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But I recommend generally in California, you become a sole proprietor.

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And then when you get to the point that you're making enough profit to

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be an S-corp, you then register to be an LLC with an S-corp election and

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kind of do that all in one fell swoop.

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Whereas with a lot of my clients, I'll recommend that

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you do a single member, LLC.

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Meaning that you're just literally the only owner single member because it's

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simple and it keeps you protected.

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And I normally recommend that you do that.

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And then you can do an S-corp election at a later date when you're making profit.

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That's great because it means you don't have to change bank accounts.

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You know, everything is set up your business, entity and name, isn't

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changing the way you get taxed as the only thing that changes.

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But like I said, California can be pretty cost prohibitive.

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Um, you might be wondering, well, like when, when should I even be an S-corp?

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What is an S-corp?

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Um, that's something that we dive in really heavily into my, into my course,

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um, Get your shit together, self study course that, you know, we're talking

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about everything that's coming from that course right now, so that you can really

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understand how to own your finances, your business, finances confidently.

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But in that we discuss escorts and S-corp elections.

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And essentially for most business owners that I work with, if you're a sole

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proprietor or a single member, LLC, and you expect to be making 40 or $50,000 in

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a year, And profits now keep in mind when I say profit it's business income minus

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business expenses, but those business expenses don't include what you pay yours.

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So, if you expect your profit to be between 40 or $50,000, an

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S-corp election is most likely something that you should look at.

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Um, it comes with some additional costs, but it also comes with

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some really big tax savings.

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However, those tax savings continue to grow.

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The more money that you're making.

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In profit.

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So definitely something to, you know, go to confident money podcast.com and

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check out the course because we do delve really, really deeply into that.

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Um, it's something that I think probably over 60, 60 or 70% of

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our clients are escorts now.

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Um, I'm an escort.

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It has a ton of tax advantages and I found it to be really beneficial.

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So.

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Continuing on with what type of entity you should have.

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So sole proprietor, single member, LLC, or an LLC with an S-corp election.

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Great.

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Those are all really good options.

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What do you need to consider covered?

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Do you have employees?

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Now we dive into this, like the difference between employees and

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contractors really deeply in the course, but I'm going to give you an overview.

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I have a lot of clients that will come to us and I'll ask,

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you know, do you have employees?

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And they'll say, well, yes, I have contractors.

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And that's an oxymoron.

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And you want to be really careful with that because if you have

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contractors, you have contractors.

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If you have employees, they are different.

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Contractors at the end of the day, contractors are

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business owners themselves.

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They, the biggest difference between employees and contractors is that

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contractors have the ability to choose when they work to choose how they

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work and to refuse work employees don't to nearly the same extent.

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So if you have a contractor,

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let's say that you're a wedding event, industry, vendor, you know, maybe you're

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a photographer and you want to bring on a contractor because it's a flat fee.

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You don't have to set up payroll.

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It's a little bit easier.

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All well and good.

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Generally, you're going to expect to pay a little bit more to the contractor

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and because you're not paying for all the taxes, you're not paying for

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benefits, you know, it's just a flat fee and that contractor can refuse work.

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So what that might look like is, you know, Hey contractor, I have this project coming

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up, I need X, Y, and Z done by this date.

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Is that something you can take?

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Versus if they're an employee, Hey, so-and-so I have this, this and this that

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I need, and I need it done by this date.

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Let me know if there's any issue.

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So the first one, the contractor has the right to refuse that if they don't have

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time, if they don't have capacity and they can also choose how to invoice you,

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like there's a lot of other nuances to it.

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Whereas an employee you are setting when, how, where, you know, and

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what potentially they are doing.

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So there's, there's some more control that can come with that.

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If you need certain things done differently, there's nothing wrong with

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having contractors or employees or.

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We have a mix of both in our company and that's great.

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They serve totally different purposes, but if you do not truly have

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employees, then you do not need to be registering for payroll tax accounts.

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Assuming that you are not also an S-corp yourself.

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So we've chosen our entity.

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We've decided if we have employees or not at this point, and that can change.

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If you get employees in the future, you can set up payroll.

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It's not like you don't have to have everything done right now.

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You get to piecemeal.

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Now do you do legal zoom?

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Where do you register?

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Do you have to register at the state?

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Do you were just here locally?

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Do you register with the IRS?

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Do you do it yourself?

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Do you have someone else do it?

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Googling will not help here.

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There is so, so much that comes up with this.

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Our company, the freelance CFO does business registrations all the time.

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You know, the price varies, but we make sure that you have the right entity type.

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We ask questions.

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We make sure you have, you know, any documents that are needed

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set up and you're good to go.

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We register you with the state with the IRS, but if you want to do.

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I absolutely cannot recommend against legal zoom enough.

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They charge pretty high fees and their recurring fees per year are much higher

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than you need to be paying in order for your business filings to be maintained.

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So, no, I absolutely don't recommend legal zoom.

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I recommend a, if you feel comfortable doing it yourself, we go into how

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to do that for quite a few states.

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In my course, I actually have recordings of how to do it and

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of how to register with the.

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So that's something that's in there again, competent money podcast.com.

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It's in there.

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Now with that being said, if you feel comfortable doing it, you

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just need to understand there's going to be a ton of repetition.

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Generally.

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It's going to be you yourself.

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Putting your information in again and again, and again, and again.

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Now there are a few things to consider.

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Do you want your home address being listed or your apartment address?

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Because most of us, our business addresses wherever we're living at the time.

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You know, there's not a lot of, a lot of people that I work with that have

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physical addresses that are separate.

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So there are two things to consider.

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Do you want to set up a virtual mailbox in your state near you?

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I did that.

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I love it.

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All of my mail for the business gets scanned in.

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I'm able to pick it up locally if I need to pick it up.

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If someone sends a package to me.

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Um, but my address is not publicly.

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And then the other thing that you need to have you need, what's called a registered

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agent and it's called something different in certain states, like a registered

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process server or an agent of record.

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What that basically means is you need someone with an address in the state

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that you're registering that has a physical location, not appeal box.

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They can actually, you know, go to the office and that's, if you

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were to be served legal documents, Someone needs to be available.

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Now that can be you, you can absolutely act as your own registered agent.

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I was my own registered agent up until about a year and a half ago.

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But again, that lists your address publicly.

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So if you go look at your state and then registered agent, you will

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normally find for about 25 to $75 a year, registered agent services.

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So you can have a virtual model.

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So that you use that virtual mailbox address for your address?

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Cause you're the owner.

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Um, it'll have a couple of other questions.

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You're like the owner, you're the officer.

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Um, you're the organizer.

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And then when it comes to registered agent, that's where if you choose to

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use a registered agent service, you can put the registered agent information

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in there and you can put their address.

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And that way, your address does not need to be listed anywhere

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in the filing requirements.

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Again, that's something that, you know, we handle if needed, but

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it's something that was a little bit of legwork you can do as well.

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And.

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You need to register with both the IRS and the state.

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And this is one that I see happen occasionally actually, where

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people will do one or the other, you know, maybe you'll register

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in the state, but you won't have registered with the IRS or vice versa.

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A lot of times you'll need to do.

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EIN.

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And again, an EIN registration is just basically a social

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security number for your business.

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It's an employer identification number and you need one.

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If you're an LLC or an S Corp or a C Corp, you can choose to get one.

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If you're a sole proprietor, I had one when I was a sole proprietor,

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because then I didn't have to give my social security number out.

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It can work in place of that.

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If you register your business and you can register a business as a sole proprietor.

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So federal registration, state registration, even if you don't have

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income taxes, like if you're in Florida or Texas, you still need to register

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your business at the state level.

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And then you need to check in your county and city to see

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if you need to register there.

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Do you need to register for a business license, you know, or any other sort of

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business registration and that's normal.

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Just a phone call.

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Um, it could feel a little bit weird in this day and age, but phone

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calls really will get you forward.

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And I would just call your local city, say that you're confirming, you know,

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Hey, I'm starting a new business in this area and I want to make sure

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that there's nothing that I'm missing.

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Then you have everything.

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You get your EIN and a matter of minutes, it's a, an electronic document.

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It's so easy.

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You don't save that PDF and then save it in like seven other secure

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places and print a couple copies and like give one to a parent or friend.

Katelyn Magnuson: 00:16:45

If you lose that document, it can take weeks to get a new copy from the IRS.

Katelyn Magnuson: 00:16:51

So just save it because you need it for freaking everything.

Katelyn Magnuson: 00:16:54

It's like having your social security guard.

Katelyn Magnuson: 00:16:56

You get your state registration.

Katelyn Magnuson: 00:16:58

Sometimes that's immediate.

Katelyn Magnuson: 00:16:59

Sometimes that can take a week to two weeks depending on the

Katelyn Magnuson: 00:17:02

state and how they process it.

Katelyn Magnuson: 00:17:04

So you have your federal registration, you have your state registration,

Katelyn Magnuson: 00:17:08

you have your local license or anything else that you need you're

Katelyn Magnuson: 00:17:11

then going to need to open a bank account because all of these things.

Katelyn Magnuson: 00:17:17

Basically they've created a new entity, right?

Katelyn Magnuson: 00:17:20

So in order to have a business bank account, you need these documents, your

Katelyn Magnuson: 00:17:24

federal EIN, your state registration, any local licensing, and then check

Katelyn Magnuson: 00:17:29

with the bank that you choose to work with and see if they need anything else.

Katelyn Magnuson: 00:17:33

Occasionally they will request a certificate of good standing and all that

Katelyn Magnuson: 00:17:38

means it's normally like five to $15.

Katelyn Magnuson: 00:17:41

You get it directly from the state.

Katelyn Magnuson: 00:17:43

You can either get it from their website or call them and ask them where to get it.

Katelyn Magnuson: 00:17:47

And it just means that your business registration is active

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and current, and you're not behind.

Katelyn Magnuson: 00:17:51

And you don't have any liens or anything else, you know, sort of nefarious or bad

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going on, associated with your business.

Katelyn Magnuson: 00:17:59

Make an appointment at your bank, go in, open a business, checking,

Katelyn Magnuson: 00:18:03

preferably a business savings and ideally a business credit card.

Katelyn Magnuson: 00:18:07

All at the same time.

Katelyn Magnuson: 00:18:08

My favorite bank to do all of this is chase.

Katelyn Magnuson: 00:18:12

I would absolutely love in my heart and soul to find a small

Katelyn Magnuson: 00:18:15

bank that did all this really well.

Katelyn Magnuson: 00:18:17

The problem is if you choose to use an accounting software like QuickBooks, zero

Katelyn Magnuson: 00:18:22

wave, countless others, they don't support all of the banks, especially the smaller.

Katelyn Magnuson: 00:18:29

So the bigger the bank that you can go with, the more support and the more

Katelyn Magnuson: 00:18:33

connectivity you're going to have, I find as well that with chase, chase

Katelyn Magnuson: 00:18:39

is one of the few banks that will give you a decent credit card limits.

Katelyn Magnuson: 00:18:43

When you apply as a new business, I have all of my business

Katelyn Magnuson: 00:18:46

banking or almost all of it.

Katelyn Magnuson: 00:18:47

I'm now moving over to.

Katelyn Magnuson: 00:18:49

I had most of mine with Wells Fargo.

Katelyn Magnuson: 00:18:50

When I first got started, despite having excellent personal credit.

Katelyn Magnuson: 00:18:54

When I applied for a business credit card, I got a $600 limit

Katelyn Magnuson: 00:18:59

on my business credit card.

Katelyn Magnuson: 00:19:01

And it was a secured card, which means I had to put a deposit

Katelyn Magnuson: 00:19:05

down that was equal to $600.

Katelyn Magnuson: 00:19:08

They basically let me prove that my business was responsible enough because

Katelyn Magnuson: 00:19:12

my business had no credit at all.

Katelyn Magnuson: 00:19:14

So Wells Fargo was much tighter on their lens.

Katelyn Magnuson: 00:19:17

Chase will really frequently give our, you know, the new clients that we work with

Katelyn Magnuson: 00:19:21

anywhere from like a 5,000 to a $15,000 credit limit as a brand new baby business

Katelyn Magnuson: 00:19:26

owner, which is much more feasible for the business owners that I work with.

Katelyn Magnuson: 00:19:32

And it's just.

Katelyn Magnuson: 00:19:33

You can have your checking, your savings, your credit card,

Katelyn Magnuson: 00:19:35

all there at the same bank.

Katelyn Magnuson: 00:19:37

And it makes it easier if you don't want to use chase.

Katelyn Magnuson: 00:19:39

I just recommend looking at whatever accounting software you're planning

Katelyn Magnuson: 00:19:43

to use, or even planning to use in the future and seeing if they connect with

Katelyn Magnuson: 00:19:46

the bank that you're going to be at.

Katelyn Magnuson: 00:19:48

The other thing that I really like about chase.

Katelyn Magnuson: 00:19:51

Again, this is not sponsored.

Katelyn Magnuson: 00:19:53

Um, the other thing I really like about chase is that they

Katelyn Magnuson: 00:19:56

give you the option to add users.

Katelyn Magnuson: 00:20:00

So I'm able to be added, are know, other team members are able to be

Katelyn Magnuson: 00:20:03

added to clients, chase accounts, with truncated permissions,

Katelyn Magnuson: 00:20:08

meaning we can see their activity.

Katelyn Magnuson: 00:20:11

We can download, we can connect to different apps that we need

Katelyn Magnuson: 00:20:14

to connect to, to get the data that we need, but we can't move.

Katelyn Magnuson: 00:20:18

Or we can't approve bill pays.

Katelyn Magnuson: 00:20:20

And so it keeps it much more secure while still giving us access to be able to do as

Katelyn Magnuson: 00:20:25

much of the job that we can without having to bug our clients or get additional

Katelyn Magnuson: 00:20:29

information from them, us bank, bank of America and Wells Fargo have something

Katelyn Magnuson: 00:20:34

similar, but they are significantly clunkier and much more difficult.

Katelyn Magnuson: 00:20:39

So again, I recommend chase just ease of use credit line and the ability to

Katelyn Magnuson: 00:20:44

grow with the bank as you get bigger.

Katelyn Magnuson: 00:20:46

So.

Katelyn Magnuson: 00:20:48

You've opened your bank account.

Katelyn Magnuson: 00:20:50

You have your registration.

Katelyn Magnuson: 00:20:52

You're good to go.

Katelyn Magnuson: 00:20:53

Now let's talk about anything legal again.

Katelyn Magnuson: 00:20:56

I am not a lawyer.

Katelyn Magnuson: 00:20:58

I'm also not your accountant or finance professional.

Katelyn Magnuson: 00:21:01

This is general information not to be taken as financial advice.

Katelyn Magnuson: 00:21:06

So please do your own research.

Katelyn Magnuson: 00:21:07

You know, reach out to us, go through the course, you name it.

Katelyn Magnuson: 00:21:10

However, the biggest things that I think are really important when

Katelyn Magnuson: 00:21:14

you're laying the foundation.

Katelyn Magnuson: 00:21:16

Getting a contract in place for you for any contractors you work with

Katelyn Magnuson: 00:21:24

making sure that you're protected.

Katelyn Magnuson: 00:21:25

I have a contract for all of our employees.

Katelyn Magnuson: 00:21:28

I have a contractor agreements for any of our subcontractors that we work

Katelyn Magnuson: 00:21:32

with, you know, that can be social media managers that can be graphic designers

Katelyn Magnuson: 00:21:37

that can be virtual assistants, online business managers, photographers you.

Katelyn Magnuson: 00:21:43

The contracts are in place to protect both of you.

Katelyn Magnuson: 00:21:45

And to describe how the relationship should go.

Katelyn Magnuson: 00:21:48

Especially if things end up not turning out the way that you anticipated, you

Katelyn Magnuson: 00:21:52

know, if there's a late payment, if someone refuses service, if you need

Katelyn Magnuson: 00:21:55

to cancel those contracts, detail that out, they also will detail out

Katelyn Magnuson: 00:22:00

who owns the intellectual property that's created during that time.

Katelyn Magnuson: 00:22:04

You know, if you have a graphic designer creating things for you, you want to

Katelyn Magnuson: 00:22:06

make sure that you as the business.

Katelyn Magnuson: 00:22:08

On those once payment has been rendered because therefore you, so making sure

Katelyn Magnuson: 00:22:13

you have those nailed down, making sure you have client agreements,

Katelyn Magnuson: 00:22:17

simply being an LLC is not the have all be all to protect everything.

Katelyn Magnuson: 00:22:21

You need agreements in place.

Katelyn Magnuson: 00:22:24

And.

Katelyn Magnuson: 00:22:26

That takes us to our last item of operating agreements.

Katelyn Magnuson: 00:22:29

So if you're a single member, LLC, if you're a sole proprietor, operating

Katelyn Magnuson: 00:22:33

agreements are not required, um, an operating agreement is just that.

Katelyn Magnuson: 00:22:37

How is your business going to operate?

Katelyn Magnuson: 00:22:39

I see these required really frequently with partnerships or multi-member LLC.

Katelyn Magnuson: 00:22:45

Essentially an operating agreement can be as simple as

Katelyn Magnuson: 00:22:48

some information scribbled down.

Katelyn Magnuson: 00:22:50

You know, I, Caitlyn Magnuson owned 50% of this business and you know, you,

Katelyn Magnuson: 00:22:55

Sarah Smith owned 50% of this business.

Katelyn Magnuson: 00:22:57

We've both put XYZ up in capital.

Katelyn Magnuson: 00:23:00

Like it can be really, really simple or it can be very detailed.

Katelyn Magnuson: 00:23:05

You know, I have one that I use.

Katelyn Magnuson: 00:23:06

That's a really great template that I've modified, that covers all the bases.

Katelyn Magnuson: 00:23:10

You know, if someone wants out, if someone, if there's a disagreement,

Katelyn Magnuson: 00:23:14

if a vote needs to be held, if a new member needs to be added, you know, how

Katelyn Magnuson: 00:23:18

taxes are handled and that operating agreement is there for when you need

Katelyn Magnuson: 00:23:22

to be able to make business decisions.

Katelyn Magnuson: 00:23:24

And a lot of times when you're needing to reference your operating agreement, Things

Katelyn Magnuson: 00:23:29

might be a little bit heated or things might be a little bit more difficult.

Katelyn Magnuson: 00:23:32

And so having all of this laid out when you've done it in a clearer

Katelyn Magnuson: 00:23:36

fair Headspace gives you guidelines for how to operate your business.

Katelyn Magnuson: 00:23:41

It also makes it cleaner.

Katelyn Magnuson: 00:23:42

Like if one of you wants to sell, if one of you doesn't want to sell, if one

Katelyn Magnuson: 00:23:46

of you wants, like how do you buy out?

Katelyn Magnuson: 00:23:48

You know, what all goes into this?

Katelyn Magnuson: 00:23:49

So those are all things that you need to be considering,

Katelyn Magnuson: 00:23:52

and you should absolutely use.

Katelyn Magnuson: 00:23:54

You know, go to the legal page.

Katelyn Magnuson: 00:23:56

There are tons of other lawyers out there that work with

Katelyn Magnuson: 00:23:58

creatives and business owners.

Katelyn Magnuson: 00:24:01

You don't have to work with someone in your state unless you have

Katelyn Magnuson: 00:24:03

something really particular, but you do need to work with someone

Katelyn Magnuson: 00:24:06

that is familiar with your industry.

Katelyn Magnuson: 00:24:08

Same thing I really recommend when you work with a finance professional,

Katelyn Magnuson: 00:24:11

finding someone that is familiar with your industry, even if they're

Katelyn Magnuson: 00:24:15

not located in your state, we work with clients all over the U S so.

Katelyn Magnuson: 00:24:21

Let me know what you thought of this episode.

Katelyn Magnuson: 00:24:22

If you loved it, please leave a five-star review.

Katelyn Magnuson: 00:24:25

Again, anyone that leaves a five star review gets entered into a

Katelyn Magnuson: 00:24:29

drawing at the end of each month for a free strategy session with yours.

Katelyn Magnuson: 00:24:34

Truly Caitlin Magnuson.

Katelyn Magnuson: 00:24:37

Next episode, we're going to talk all about paying yourself, which is something

Katelyn Magnuson: 00:24:42

it's probably the most common question that we field in this business is

Katelyn Magnuson: 00:24:47

making sure that you're paying yourself the right way and how to do that.