Transcript:

When tax time comes around. Are you being reactive or proactive? Do you find yourself swimming in a sea of questions like, is it better to do my tax return cheaply? How do I know if I’m doing them the right way? Welcome to the Tax Answers Advisor with Marcelino Dodge. Today, we’ll answer these questions and many more. Sharpen your pencils and take some notes. Now here’s your host, Marcelino Dodge.

Marcelino: Welcome to The Tax Answers Advisor show, covering what everyone talks about at the dinner table, your Federal Income Tax. On this show today, we will discuss about starting a business. Are you planning for success, or for disaster? Among the questions that we will answered during the show is the type of entity should I be. Initially though we’re going to touch on just a few updates in the tax industry for the week, that’s of interest to many people is the cost of living, increase for social security coming up in 2021, which is a whopping 1.3%.

Now this week also the IRS announced that if you are a victim of the September wildfires in California, you now have until January 15th to file either your Individual Tax Return, or your Business Tax Return. And that actually includes making the tax payments as well. Also announced this week, the tax relief is also for victims of Hurricane Delta that was on October 6th. Those individuals have a filing and payment deadline, that’s been extended up to February 16th.

So that’s good news for those that are in a horrible situation, and at least they have that extended time. Sadly this week, it looks like so far, no new agreement on any potential stimulus payments that’s still a pending issue to go on. Just not sure if and when those are going to happen. So, we just need to keep moving forward as best we can. Now one quick reminder, I want to put out to everyone is that if you happen to mail a check for your tax payment back on July 15th or a little bit before July 15th for your payment that was due on your tax return.

Well, because of the back log the IRS has, your check may still be sitting in the envelope with the IRS. So certainly I encourage you to not cancel your check, just make this. Give it some time the IRS is still processing this because they’re still social distancing, taking care of their employees. So it could just be just stuck in a stack of mail. And there’s a lot of mail that the IRS still processing so, be patient, is really what the word is on that.

So back to our topic of the day. Now if you’re considering starting a business and you know in these situation that we’re in. It may be questionable to be starting a business, but there are several entrepreneurs out there who have a great idea that even under circumstances that we’re in, you can start a business, and perhaps do very well. Take a look at the markets, see what’s happening. You have an idea, a lot of ideas have come out of that successful businesses have come out of situations, bad situations like this and people turn them into a successful business.

So, you have an idea, you want to start a new business. Well, who do you go to talk to if you want to start a new business? If you want to start a new business, you have an idea. While many people what I have found is they will go and talk to their banker. They’ll possibly go talk to a lawyer. But yet, they often times do not go visit their Accountant or person that does their taxes, which, at least in my opinion, as a professional. If you’re thinking of starting a business. That is the first person you should go speak to, about starting a business.

And there’s a number of reasons why that I feel this way, and the biggest reason I feel is because of the potential tax situation or tax areas that you need to be aware of even in creating a business and that’s vital to know before you go actually talk to the Attorney or you go talk to a Banker. So, the tax professional like me is a good person to start with, because as a tax professional. One who deals with the numbers and businesses all the time. We can have a discovery session.

To really look at your business idea very closely and see, is a good idea? How we can validate this idea? Is this a program that I want to move forward? Am I making the right choice in looking to start this business? That’s some of the areas we can look at with you and helping you to establish goals. Start off with perhaps a model skills. Where do you want to accomplish in the first few months of the business? What do you want to accomplish maybe in six months, in a year and so on?

So to establish those goals helps you to know where your business is going to go or at least give you a direction. And then a success plan would be essential. How am I going to reach this goals now? How to identify the elements of success in the type of business. Now, especially in the type of business whatever type of business you’re looking to start. Hopefully, it’s something that you already know well like, for example, if you been in tree trimming for somebody, and you want to go out and start your own tree trimming business.

Obviously you have the background, you have the training to do that so that’s something you can possibly do and do well. And I know some people who go and do this business well because they had the training. Yet even in knowing how to do the actual tree trimming itself with this essential to the business. But then when you go out to start your business and there’s the back and information that is this vital for you be able to do and that’s why it’s important to talk to myself like a tax professional so that you can have that information ready to go.

Now, once you get your discovery session, get some ideas going, where gonna go? You’re going to do and then work on setting up a business plan. Find out these are the steps that I need to take for success. A good question then to consider is what type of entity is my business going to be? Well, we’re gonna discuss a little bit each of these a little bit more but one thing I’m going to say here initially is the fact that it’s like the beginning suggestion. Everybody says to go and make is go, be an LLC.

That’s like what many banks say, many Attorneys say, just go for you in LLC and start your business. Well, from a legal standpoint, I’m not giving any legal advice or anything that, that could be a good idea. But without fully understanding the tax consequences or the tax realities just by going and doing that. We don’t know if it’s a good idea or not, from a tax standpoint. So from tax standpoint, it’s important to know what kind of structure you’re going to do because what’s going to give me the most protection, to give you the most benefits, and until you have goals established.

We don’t know what entity is going to be the best. So it can range anywhere of what kind of business is going to be best for you or business system is going to be best for you. Is going to be based on your goals, what’s going to be better for you to start off with? Is being a sole proprietor perhaps good for you or maybe some type of LLC. If there’s more than one person involved, if you have two or more people, should we do it as a Partnerhip? Some type of Corporation?

That’s when you bring everybody together and really sit down and establish some goals that will help you to be able to start your business and make the correct decisions from the beginning, by having those goals established. Now when it comes to establishing a company, there’s entity information which, like if a corporation or an LLC or some type of entity is needed. Like that it’s important to get not just rely on me as perhaps the Accountant or Tax Professional but you may need an Attorney.

To help you in setting up those legal situations with your State because a Secretary of State’s in each state usually has some type of filing that you need to do and there’s articles of incorporation for corporations and there’s other documents required for an LLC. Usually I recommend that you work with an Attorney because they’re though, that is the practice of law. That’s what I recommend. And so that’s why I recommend do that part and so we can now work together with an attorney because in that area.

And as far as there’s tax registrations, we can help ones to obtain depending on your state, through your State Department Revenue. Those matters can be handled and of course the IRS numbers, if you’re starting an entity or an LLC usually you need some type of Federal Employer ID number to go with those.

And certainly we work with helping ones attain that. Then of course once you have the federal license number and you have other information required by whatever is required by your particular state.

Because forming an entity is also basically done at the state level. Then you’re going to open up your bank accounts, and then there’s so many other areas that we go into help ones to do when you start a business. That is important to cover each of these steps very importantly. Then once you get the business going or once you get through the setup process. Then you also have various accounting.

You have payment system that you need to set up which is what we work to help ones to set up, and these are vital to set up good from the start. Because what happens a lot of times with ones, I’ll go and start a business and I’ll go sign up for some software online, or maybe go to a store and buy it right off the shelf and of course most of its online through subscriptions now. Is that I’ll go and buy the software and we’re in the follow the steps through software to set it up.

But yet getting that set up correctly from the beginning is just absolutely vital. So what we need to keep in mind is that just because software says it’s, “Do it yourself and it helps you to run your business”. It’s not as easy as it looks because I’ve seen a lot of reports come in from various software’s that, basically, it wasn’t set up correctly. And the people, that individuals that set up their business you know they do a great job.

People do a good job with what they do and they make their best effort in fixing up the software, but yet it’s really at least I really recommend having a professional of some sort, like myself, help you to set up that software, and then help the user professional, which what I can do is help you to not only set it up, we can help monitor it, so that your profits are monitored on a daily basis. So we can see okay this is what, this is the money coming in, this is money going out.

This is who we owe this week, this is who we need to pay, and so on. On that way you know you have a profit and loss going, and it’s accurate. Oftentimes, you also need in the business, not just the profit and loss statement. You need to balance sheet which is needed for your banks. And because oftentimes ones have difficulty setting up their software initially, there’s various numbers in there that are off. And because most people, they do a great job but they don’t necessarily understand how an accounting program works.

And that’s, this kind of what it is. It’s not good or bad, it’s just what I encountered in the business. And so because of that, it’s good to have someone help you set up these processes and then help to monitor this processes, this is that way. As I mentioned in the title for the show, “Planning for success or disaster?” You avoid the disaster part of that, by having your accounting system set up very, very correctly, from the beginning of your business.

And so what we’re going to do in the next segment here, we’re going to go ahead and discuss more individual entity types, and advantages, disadvantages, tax consequences of each. And why again it’s so important to decide ahead of time, what kind of entity am I going to be when I start my business. That way, you maximize the potential for your success, maximize potential for your profits in putting together a plan, setting some goals.

And as we know this goals that once again will help us to know what type of entity we need to be. So we’re going to discuss we’ll start with sole proprietorships, or single personnel LLCs when we return after this break. This is Marcelino Dodge, The Tax Answers Advisor on the voice America Business Channel.

Become our friend on Facebook, post your thoughts about our shows and network on our timeline, visit facebook.com/voiceamerica.

Today’s tax and financial environment is constantly changing. Tax laws change rapidly, the traditional reactive approach to tax preparation and taxes, no longer works. To deliver the best possible outcomes in today’s world, you need a year-round approach to take advantage of tax law changes, and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year. To limit his clients tax liability.

Plus, with this year-round approach, clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at success@cashtracksfinancial.comm or call 844-394-4287.

Have you become a member yet? Sign up now to become a member of Voice America, it’s always free and easy. Plus, you get to take advantage of some free member benefits, get unlimited access to millions of hours of on demand content across all of our channels, keep track of your favorite episodes, shows and hosts in your own customizable library. Find out what shows you might be interested in, based on your favorites. Plus, you get insider access with our newsletter, membership gives you more. Sign up at voice america.com, and click register at the top right.

Voice America Business Network. The bottom line in business.

This is The Tax Answers Advisor with host Marcelino Dodge. To reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to success@cashtracksfinancial.com. Now, back to The Tax Answers Advisor.

Marcelino: Welcome back to The Tax Answers Advisor, I’m Marcelino Dodge. I appreciate you sticking around for another portion of our program and we’re talking about starting a business today, why it is important to consult a tax professional or an accountant. When you go to start a business, because part of the reason is, first of all as I mentioned in the previous segment, the importance of setting goals, getting an action plan.

Now as a step back now, is from some information you can already considered now that we’ve established the goals and an action plan. We need to discuss the type of entity for your business to be, perhaps, for your business or starting it may be starting out, it may be best to be a sole proprietorship. Now, also if you’re an individual to all just starting a business. And is you can also be a single person LLC which most people just don’t understand or don’t initially know that when you do a single person LLC, by definition, or by default with the IRS that entity is still taxed as a sole proprietorship from the IRS standpoint, which basically means you file an Schedule C. Now, so we’re gonna interchange those here a sole proprietorship and single personnel LLC because they are taxed the same which basically from the IRS standpoint that is the individual or that is the person. Now oftentimes when I deal with people who worked and sole proprietorships, or single person LLCs a business.

Usually happens but, usually on a sole proprietorship, and that is the fact that personal funds and business funds are often co-mingled, which means that people sometimes will use their business checking account to pay personal bills with which on a sole proprietorship essentially because it’s all the same, it’s not really that big of an issue now. But what it does creates though, it creates a little challenge or actually a big challenge in trying to determine how much profit is the business or sole proprietorship making.

Which is why I often tell people, even on a sole proprietorship or single person LLC, it is absolutely essential that, 1. You have a separate bank account for that business. And you treat that account as a business account. Not as your personal savings account, not as personal checking account. Now you can take draws out of that account like an owner’s draw is which is something I do recommend and some, some of my clients do that.

They’ll take like $500 or $1,000 a week transfer that from that account over their business account because that’s like a draw of a sole proprietorship, which essentially that’s okay and that makes that easy for accounting purposes, for tax purposes and everything. That way, you can easily keep that part separated, and then have everything else that’s in that account as a business expense. So that it’s once again easy to track and in a sole proprietorship or single personnel LLC.

The owner or sole proprietor or the member manager of that single personnel LLC. They are not allowed to be an employee. That is one of the biggest mistakes I have seen with these types of businesses, is that somebody set them up and let that owner be a schedule an employee of the business and when you’re the owner of that IRS regulations say in a sole proprietorship, no you’re not an employee of the business. You are the business essentially. So you can have employees and sole proprietorships.

I do several of them, I work with them, and it’s deducted as wages on the tax return for the sole proprietorship, but the owner is not. Now we keep in mind that once the tax return is started or the schedule C which is what it is on the tax return we go through to complete that. We keep accurate books through the year for the business to help them to know their profit and losses as well as to help the owner to appreciate that they may need to pay quarterly taxes.

And some do need to do that based on what their profit and loss says that each quarter, which is usually April 15th, June 15th, September 15th and then January 15th of the following year. So they pay those quarterly taxes because the employers as while the sole proprietor pay self-employment tax, which that is both some of what an employee would normally pay and then an employer would normally match, which is one amount that the owner pays.

Now that actual amount they pay, or the net profit because that’s what they pay it on is the net profit of the business after expenses. May or may not close to what they took and draws but the draws don’t necessarily take into account expenses that are often calculated at a later date, such as depreciation for large equipment or other items in the business. Sometimes interest like, they’ve got a business loan isn’t calculated right away it just, it’s just very careful. It’s something that a person may need to do.

I’m doing oftentimes that’s where many businesses started as a sole proprietorship or single personnel LLC and that may be what they say and that could end up working good for the person operating the business. I mean I know several people here and I help several people have been sole proprietor for years and it’s worked for them. They’ve get their taxes paid and they operate and they’re successful. Could be good for each individual.

We can’t say one size fits all, but each individual may be. He’s being a sole proprietorship is the right choice. Now, as we’re going and we talk to individuals wells and establish their goals. Maybe in some cases, a Corporation. That would be either C Corporation or an S Corporation that they may want to estate. Now depending on what they’re going to do what their goals are. How many people are coming together to form this business. Maybe they’ll want to form a C Corporation, or an S Corporation.

Many people in small business and in the areas that I worked with, are maybe one or two owners that start up like a C Corporation for example, which is as we look at C Corporation initially. That’s an entity of course all to itself. The C corporation pays its own tax. But one of the disadvantages of the C Corporation is that it’s also known for double taxation. And see there can be single shareholders or can be multiple shareholders in a C Corporation but nothing flows through to them. It’s all paid at the corporate level.

Now, the profits that are made for the year that the C Corp can pay taxes on are can be distributed to the shareholders in the form of dividends. And then see this is where the double taxation comes in is that the C Corp paid which the flat rate for C Corporations is 21% under current law. And that’s always basis show on is what current Law, lock is at the time that the show is being done. So they could pay the tax on those profits 21% at the corporate level.

Then they distribute out those to as share as dividends to the shareholders. Then, the shareholders pay tax on those dividends. That’s where the double taxation comes in. Oftentimes, we see these are small corporations in their small privately owned corporations which somehow I work with. There’s an owner and oftentimes that owner which can be a single shareholder or maybe two or three shareholders of that C Corporation.

They’re oftentimes employees of the corporation. Which is allowed because you have a separate entity there, that the employer, which the employee which the owner is an employee of the business. And the nice part about being a C Corp is that there’s many tax benefits that the corporation can pay for the owner. Like, it can buy the owner’s, the Corporate to health insurance for the individual shareholder. Of course there’s retirement. You can have retirement plans within the corporation as well.

All of these are subject of other expenses which reduce to Corporation Operation profits. It’s the amount of tax that they pay. And so they’re saying, there’s several other areas that are many benefits that a sequel can have. But they just have that one little deal of a double taxation there, but it allows you to people doing. I have some clients, is you can turn around and do very successfully, do very legitimately and very legally, is you can have a building for example that you own as an individual.

And then you can take that building, and at whatever market value is for the area that you’re in, you can then turn around and lease that building to your Corporation. But it’s vital for that to come across as legitimate as that you have an actual lease agreement that has minutes from a corporate meeting that shows that you’re entering into this agreement between my company ink and me that we’re going to deal with this amount per month basis.

And it needs to be at market value of now as a shareholder, that’s getting that rent that’s running into your business. It’s really nice that you have income coming into you from business that you don’t pay Social Security tax on, Medicare tax on. You do pay income tax on it. But yet, you also still get deductions, you get deductions like property tax, you get deduction sections like depreciation on the building, and other items that you perhaps you’re paying that the corporations is not paying on the building.

That’s one of the many advantages of being a C Corp, that can really be very advantageous for you having a C corporation. Now of course we touched a little bit before on the S Corp, which is the other option that you have and it comes to Corporations, is that S Corp which is actually very, very common. Many people I worked with and some entities. You can make an election to be taxed as a Corporation as an S Corp. See it’s when you go to form a Corporation at the state level.

Then you go, as at the state level it’s corporations, it’s all the state is a Corporation. Now when you make these elections to be an S Corp, that’s actually with the IRS because you go and you get your EIN number or your employer or your ID number with the IR address. Basically, you tell the IRS, I’m going to have employees, and I’m going to be a Corporation. Well by default, you’re going to be classified as a C corporation with the IRS.

Unless you file, it’s a form two, five, five, three, signed by all of the shareholders of the Corporation. Then, you can elect with that. Would you like to be an S Corporation? Now usually I recommend if you’re going to be an S Corporation, you do it from like when you initially become a Corporation, from the very beginning. If you have been a C Corporation for several years, and then you want to change to be in taxed as an S Corporation, you can make the election and do it. And that’s certainly possible.

I’ve had C Corps go ahead and do that. There could be some tax ramifications down the road if they’re certain profits that you still have and so on. Or perhaps depreciation, that could be depreciation issues or a capital gains issues down the road of certain property is sold. But all that’s just stuff that needs to be disclosed if you decide to make it go from C Corp to an S Corp. That’s why it is recommended starting and being a new business, we got to make a good shot from the beginning.

What type of corporation are we going to be? Are we going to be a C Corp, or are we going to be an S Corp? And so with that thought in mind, we’re going to go a little bit more into the S Corps when we come back in just a few moments here. This is Marcelino Dodge from The Tax Answers Advisor on the Voice America Business Channel.

Voice America is on your favorite smart speaker, if you have Alexa, or Google Home, go ahead and give us a try.

Hey, Alexa play finding your frequency podcast on Tune in.

Today’s tax and financial environment is constantly changing. Tax laws change rapidly, the traditional reactive approach to tax preparation and taxes, no longer works. To deliver the best possible outcomes in today’s world, you need a year-round approach to take advantage of tax law changes, and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability.

Plus, with this year-round approach, clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at success@cashtrackfinancial.com or call 844-394-4287.

Have you had a chance to check out Voice America’s online magazine and blog? If you love our hosts and shows. Check out articles that give an even deeper perspective. Plus, topics about health and fitness, movie reviews, philosophy, business tips and tactics, spirituality, positive thought, current events, and even more about your favorite host. It’s just a click away at blog.voiceamerica.com. That’s blog.voice america.com. The Voice America Press Blog. All access, all the time.

When it comes to business, you’ll find the experts here. Voice America Business Network.

This is The Tax Answers Advisor with host Marcelino Dodge. To reach our program today, please call in. The number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to success@cashtracksfinancial.com. Now, back to The Tax Answers Advisor.

Marcelino: Welcome back to The Tax Answers Advisor, I’m Marcelino Dodge. I appreciate you coming back for another portion of the show as we’re discussing about starting a business. And what type of entity that you may want to be when you start a business. In the last segment, I was discussing about Sole Proprietorships and started on C Corporation and touched a little bit on S Corporations.

A couple of points that I wanted to mention here which is really a wonderful, one of the wonderful basis of the Tax Cuts and Jobs Act passed near the end of 2017, is that you have a Corporate operation or business that is making under $26 million an average sales in a year. You can use the cash method of accounting. That is a true, wonderful revision of that law for a businesses to be able to use the cash method of accounting.

To do that, that’s basically, at least I think it’s a much easier method that a curl, so it’s my opinion. I think most businesses take advantage of that. Well you can make an automatic recommendation for. Now, one of the disadvantages of a C Corp that I want to touch on that I had that much experience variance with, is that you have many C Corp especially ones that are smaller ones that may have just a few million dollar sales a year. They may make a lot of contributions and donations to charities, and those are great.

That’s wonderful that they do that to nonprofits and so on, that would be deductible. However, because of limitations within the law, all C Corps can actually deduct about 10% of whatever their profits are. So it’s usually pretty limited on what a C Corp can actually take and for most average Americans, people who are running a business. That’s one of the advantages that an S Corp has over a C Corp, is that if you make significant donations as a corporation, because the S Corp is a flow entity which means a majority of the time, there’s no tax paid at the corporation level.

It’s paid at the owner’s level, is that those donations to the nonprofits charitable donations actually go down to the shareholders. And the shareholders can use those and with the higher limits on exempt on. To be able to itemize as a shareholder. Those could possibly put you over, depending on what the S Corp is actually doing. Now back on the S Corp a little bit more, the single shareholder or multiple shareholders on S Corps. As I mentioned it’s the floor through entity.

Now, each shareholder owns a percentage. So if you have two individuals operating as S Corp. It and they would through a 50% of the profits or the losses directly to them. Which is one of the big advantages which can be an advantage or measure disadvantages depends on your situation with an S Corp, but also with the S Corp again just as the C Corp, your shareholders can also be employees of the S Corporation.

Which is a big advantage because unlike the sole proprietor where you’re paying self-employment tax, and having to pay a Social Security, Medicare tax benefit that is not deductible in any way. By having an S Corp or a C Corp, you’re getting those deductions fully. You’re paying that Social Security, Medicare tax payers what the Corporation pays to you and that’s withheld. And then submitted and also whatever the matching amount is on the S Corp is also fully deductible to the S Corp.

Now you also with the S Corp, as far as the employers, as far as benefits, you still get some advantages and benefits. It’s just some of the differences you got to have some clear outlines on the plan whatever type of benefits you’re going to do. You can still do items like, simple IRAs, you can do those with matching 401 case with matching and so on. Now, the challenge comes in as like with, health insurance, though, is that you can have your entity pay for a health insurance.

But due to the way the rules are written is that whatever the corporation, or the S Corp in this case pays in health insurance has to be added to the income of the shareholder. But within the shareholder, gets to take that off as a self-employed, health insurance deduction. Basically it’s a wash, as far as from a standpoint but still it’s this kind of interesting how that rule works. Plus, you can have what’s called a section 1-0-5 plan.

And also within your S Corp have medical or dental refurbishment in there, that you can for the employees as well as a shareholder. And you can do it in the C Corp as well. It just I once again on the S Corps, those amounts come back as income for the shareholder level. So there’s a few differences between S Corp and C Corp that you got to keep in mind and be just aware of. But one could be more advantageous or the other depending on your particular situation and your goals.

Now the other area we want to touch on if you’re dealing especially with two or more individuals, because an S Corp can be just an individual and have one individual shareholder in each for both the S Corp and C Corp. Now, if you’re talking about multiple person then you got two or more people wanting to go into business together. Well, and maybe if they decide well I don’t want to do all the paperwork that a corporation requires which there’s minutes, there’s articles of incorporation, and other documents that are required by the state, which is why I recommend if you’re going to do Corporation.

You have some type of Legal Counsel help you do with that. In addition, that we can worked together with as the tax person as the account and helping you to form the business. The same would be true if you’re doing a LLC or a partnership, still needs to be legal agreements in there. Whether you are forming an LLC, multiple personnel LLC and all or a partnership. Now then, what kind of partnership, am I going to form?

Am I going to be general partnership, a limited partnership, which that’s all looking at liabilities, and certainly some people need to look at those things very carefully. And once again to decide what type of partnership if that’s just throughout they want to go. We keep in mind that, on a partnership type of business. All the profits and losses once again, it’s a flow through entity, it’s not paid at the business level, it’s paid on the partners level.

Now, with this though we keep in mind that partners get fairs profit that comes through because of the strict tax structure of a multi person LLC or partnership. The partners will then pay, self-employment tax on whatever those profits are. Also, when it comes to multi member LLC, and the partnership. If you’re one of the members of the LLC, or one of the partners, you’re not allowed by current law to be an employee of the business.

You don’t get compensated via W-2 form, you can work for the business and it’s usually written into the partnership agreement that, that person A is going to get X amount of dollars for their work to the part for their work that they do for the partnership and those are in turn during considered guaranteed payments that you receive. Now depending on also what a person like contributes to the business.

Now you can contribute money, you can contribute may be property, or equipment, whatever those amounts are. That gives you what’s known as a basis in your partnership or your LLC, and these basis. You also have basis in your Corporations as well. I neglected to mention those earlier but you do make contributions of cash to a Corporation, and that helps to establish your basis whether you’re in C Corp or in S Corp.

Back on the partnerships, and then as you have the basis a person or a general partner may take a distribution of cash that reduces what their basis, or how much they have invested into the business that reduces that for them. So, that’s where you got to be very careful with that. And once again, profits that come up of that business as a partnership, or multi-personnel LLC. The partners or the LLC members pay self-employment tax on those profits.

That’s one of the main disadvantages of a partnership as well as various legal ramifications that can come in there but from a tax standpoint, there’s a lot of risk. You can end up paying self-employment tax once again that’s where if that’s a route someone decides to go and that’s when could be what we established, once you go through the goals. Put together a plan and we figure entity. We discuss the advantages, disadvantages of this particular entity type. We come to the conclusion, okay well in partnership is the way.

It’s the way we’re gonna go understanding these matters about, okay, you’re not gonna be an employee business. Youre gonna be paying self-employment tax on the profits and that. But we’re going to have employees, you’re going to be there, just going through those areas. Trying to figure that out. Now one of the areas that many people just don’t fully understand once again is just the fact because it’s like the in thing to go inform LLC.

Which if person wasn’t going to form a Corporation or didn’t want to go through the headaches of having a corporation because there’s many, there’s a lot of paperwork with the corporation. A multi-personnel LLC is a good option but the drawback to the multiple personnel LLC is based on current IRS rules. The multi person LLC is taxed as a partnership. So which basically leads you back to the partnership rules and regulations for the LLC members of what they need to be doing or how they’re going to be conducting business.

Usually when I come to see what I’m dealing with an LLC and I don’t know why more don’t recommend this, but when I worked with multi-personnel LLCs usually for simplicity purposes and makes it easier on the LLC members which is a beautiful election in the tax code. A multi-personnel can elect, the stay as an LLC at state level but for federal purposes they can make an election to be taxed as an S Corporation and what is the significance of them being taxed as an S Corporation. A tax standpoint that makes it easy for them to really get by with not having to pay a self-employment tax from the profits from the business. It allows them to be employees of the business so that their amounts that they would normally pay in self-employment tax, once again their Social Security Medicare. It allows them to get a W-2 form as an LLC member because they’re being taxed not as a partnership which is what a multi-person LLCs are taxed by default.

You get some license, be taxed as an S Corp so that the LLC members are allowed to be employees of the business which I have found when I have this discussion with my employers. They find it to be a very appealing deal especially if they’ve been in the sole proprietorship and accounting together to form this LLC business or LLC and they come to find we can do that? You know that’s great, we’d rather be like an employee and that’s because we’ve been paying this self-employment tax for all those years, having this big tax bill at the end of the year.

We don’t want that anymore and so this solution I offer to them and with this multi-person LLCs be intact as an S Corporation. It works out great for them

into some of the benefits and talking about having an escort, where they can have like retirement plan and so on. Having things more back and forth that you can get into with big partnership. So whenever I can in setting up their books and they have because they keep their money separate and they’re able to have benefits of being an employee of their business.

Which once again goes into some of the benefits I talked having an S Corp where they can have retirement plan and so on with and without having the things going back and forth that you can run into with being a partnership. So whenever I can, I usually don’t recommend partnerships to people we can avoid it. Usually a multi person LLC could be a better option but this depends on circumstances.

But if we’re gonna do multi-personnel LLC, I usually recommend, let’s be taxed as an S Corp so you can take advantage of the benefits under S Corp Law into the having to pay self-employment tax and have all of the other issues that arise with being taxed as partnership. We’ll be right back for our last segment here. This is Marcelino Dodge on The Tax Answers Advisor on The Voice America Business Channel.

Follow us on Twitter at Voice America TRN. Get the lowdown on guests, your shows, your favorites. That’s Voice America TRN.

Today’s tax and financial environment is constantly changing. Tax laws change rapidly, the traditional reactive approach to tax preparation and taxes, no longer works. To deliver the best possible outcomes in today’s world, you need a year-round approach to take advantage of tax law changes, and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability.

Plus, with this year-round approach clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at success@cashtracksfinancial.com or call 844-394-4287.

The latest business information is made simple with the Voice America Business Network. Professionals in the business world bring you live talk radio shows featuring an array of business topics, strategies for sales and marketing stock trading, investing and business technology. Voice America Business hosts are professionals in their fields and bring to the airwaves weekly business discussions that offer up-to-date information, advice, and education. The Voice America Business Network. The bottom line in business talk.

When it comes to business, you’ll find the experts here, Voice America Business Network.

This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today, please call in. The number is 1-866-472-790. That’s 1-866-472-5790. You may also send an email to success@cashtracksfinancial.com. Now, back to The Tax Answers Advisor.

Marcelino: Welcome back. For this final segment for today at The Tax Answers Advisor, I’m Marcelino Dodge. I certainly appreciate you listening to this podcast today. Today we’ve been talking about starting a business. Are you to be planning for success or disaster? In starting a business just to touch real quick here, it’s important to speak to your accounting or tax professional. I recommend actually speaking to them first.

Because we can help you to establish goals, help you put together a plan, and the most importantly, help you to understand whether initially, you should be a sole proprietor or single person LLC. And understand the tax ramifications of being this is understanding you may need to pay self-employment tax on your profits. Also, the fact as a sole proprietor, you can co-mingle funds even though we don’t recommend it. I don’t recommend it. I still recommend you treat your sole proprietorship business as like an entity like a corporation that way you can track your profits and losses much better and have a separate bank account.

We talked about the advantages of a being a corporation, such as an S Corp or C Corporation. Now, with these type of entities, it’s vitally important, absolutely essential that if you go through this route that the checking account with these Corporation, whatever you choose to be is truly a separate account of course and it’s in the tax ID number of the business. And it’s treated. Everything is treated as business related money for the business.

That way if you’ve done all your other legal protections and had all the consultations with the Attorney regarding set up of these that you don’t break that Corporate veil, as well as for IRS Audit purposes if for reason that happened. You can show distinctly to me this has not been my personal checking account, look at this, I got all my business expenses right here. This is business income coming in, business income going out. My paychecks, look this, I have a separate account, this is where I’ve been getting my money from my account so it’s all here.

So it’s all good and nice and clean, which is what we really like to see. And so, with good plan as well as come to see the importance if you decide to be a multi-personnel LLC or a partnership, a little bit of difference is there with one of those being could be because you’re one of those how if you’re one of the entities, the multi-personnel LLC or partnership that you do pay self-employment tax on those.

And so it’s important to consider very carefully what you’re going to do in those matters as well so that you make a good choice and so planning is essential from the very beginning. What I do see happen oftentimes, businesses because they’re often starting out small, is that they often start off because it’s easiest to do it makes sense. They may start off as a sole proprietor, because they don’t have big, big plans but maybe not a lot of money but you want to get going.

So we started the sole proprietors, we helped to build the business up. And then at some point down the road they got a good business going, you know maybe we need to turn into, especially if it’s a single owner, maybe be a single or single shareholder in a corporation and then decide, I want to be a C Corp. Or all the taxes are paid at the corporate level or do I want to be an S Corp where some losses flow through to me any individually, and I pay tax on the profits after they flow through to me.

Certainly, those can be very advantageous now of course, going from the Sole Proprietorship, to a Corporation, which is what many people can do. The advantage of course then you can be an employee of the business, which to me that is just absolutely essential, because if you’re having good profits in your business, you want to reduce your self-employment tax and start taking advantage of having items such as your salary.

Also, such as your contributions to retirement plans, business matching to retirement plans all of that becomes deductible to the business. And I stress also here the importance. Also if you want to be an LLC, a multi-personnel LLC in particular. I really strongly recommend with your consultations that if it’s practical and it’s in with your goals being a multi-personnel LLC that’s taxed as an S Corporation can be a big advantage for you and could work very well for us you.

After we established some goals that may be the best way to go. But once again, no matter what entity we talked about here. None of these entities is a one size fits all, each individual’s circumstances, each individual goals, each individual’s business. We have to consider all those items. We have to consider the plan. What do you want to accomplish with your business? And then and only then can a recommendation be made as to what type of business entity, you are going to be?

Don’t let anyone just tell you, all you need to run out set up an LLC. Talk to your Accountant or Tax Person first. They’re the one’s I can best advice you from a tax standpoint, which entity would be best for you. That is what I certainly suggest for you to be doing. Now, I’m going to mention that if you decide or if you’d like me to cover on The Tax Answers Advisor from a tax standpoint, tax planning stand point, you can email me at success@cashtracksfinancial.com.

I certainly do appreciate all you listening today, next week we’re going to consider, “How safe is my tax information?”. A vital topic when you consider how many different tax preparers are out there and if you’re using what’s known as “ghost preparer”. Again, I thank you so much for listening to The Tax Answers Advisor. I am Marcelino Dodge, on the Voice America Radio Network.

Thank you for listening to The Tax Answers Advisor with host Marcelino Dodge. We’ll be back again next Wednesday at 6pm Eastern Time and 3pm Pacific time, on The Voice America Business Channel, we’ll have more to share next week.