Dec. 29, 2025

Powerful Business Strategies - Legal Structure

Show Notes
Transcript

When you start a business, selecting your legal structure is one of the first, and most important, decisions you have to make. The structure you choose will have a significant impact on the operation and management of your business, as well as your personal liability as the business owner.

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Hi, you have done too sure wow for you your.

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This is the pipe Man here on the Adventures pipe

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Man W four c Y Radio, where weekly we have

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the Positively pipe Man segment and we feature in that

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segment powerful business strategies from Michael Barbarita. So let's welcome

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Michael to the show once again. How are you doing great?

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Well? I want to I want to apologize. Last week

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I didn't wish you merry Christmas.

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Oh yeah, well I'm Jewish, So a couple of weeks

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ago you missed wishing me a happy Honikah.

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They see that. There you go, that's what I missed.

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There you go. But I'm gonna wish you happy new

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yet coming up. So I believe the year is over.

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It's just had to believe how they go quicker every

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single year, like it just amazes me. Wasn't it just January?

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Yeah, I'm confused, It's really amazing. But yes. So today

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I'm going to talk about legal structure and business structure

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because when you start a business, selecting your legal structure

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is you know, a billion It's an important decision because

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the structure you choose will have a significant impact on

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the business operation itself. The management of your business as

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well as taxes and personal liability as the business owner.

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And I'm not a lawyer, as you all know so,

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and I don't pretend to be one here on the radio,

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but I do want to talk about legal structures as

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to my understanding of them and the best way to

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utilize them.

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It is important then most people do not understand them.

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There are a variety of choices, and most a lot

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of people make the wrong choice, right, and so.

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The the the three there's three as I see it,

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there's three basic entities. There's your sole proprietorship, there's a corporation,

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and a partnership. So let's focus just on those three.

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And of course there's different forms of a corporation, there's

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different forms of a partnership, but let's talk about them

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one at a time. So, a sole proprietorship is actually

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a business formation that does not protect you from personal liability. However,

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the use of a sole proprietorship comes in most effectively

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is when you're just starting your business and you're seeing

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if it's going to work out. Because if you're just

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starting a business, you're under the you're under the lawsuit

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radar for the for the most part You know, you're

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just starting out, and so instead of incurring all the

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costs of setting up a corporation or a partnership, you

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just want to test out your business to see if

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it's going to be something you're gonna stay with. Say,

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if it's something, it's you know, that's gonna work for you,

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it's not to make money, and if it is, then

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you's stop. Then you have to get out of that

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structure because that structure affords absolutely no personal liability protection.

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It's you know, if so if somebody, and.

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Higher taxes, higher tax right, and higher taxes as well.

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Because it's all on your personal tax return, there is

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no flexibility as there is with other structures. So, uh,

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you know you're gonna pay self employment tax. You're gonna pay, Uh,

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you're gonna pay the regular income tax. In addition to

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that self employment tax is fifteen point roughly fifteen point

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four percent. Uh you're paying where as an employee, you

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only pay half of that. The other half is paid

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by the employer. And since you're sole proprietorship, you're considered

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an employer and that's why you're paying fifteen point four Yeah,

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but the only way I recommend sole proprietships is if

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you're just starting the business, you don't know if it's

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gonna go north or south, and you're under the legal radar,

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you're not taking a lot of risk, you know, You're

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not like, for example, you're not giving what are they

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called when you they put they imprint the skin? What

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is that called tattoo? You're you're not a tattoo paala

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all right, because if you while, that would probably present

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itself with a liability even for your first customer. So,

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but for the most part you're under the radar, then

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a sole proprietorship is probably your best choice until you

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start saying, you know what I'm gonna. I'm committed to

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this business. Now I'm gonna I can see myself making

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money in it. It's a profitable venture. Now it's time

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to start to look into probably a corporation.

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And I'm also a big believer and you might agree,

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might not, that it should never be a soul prop.

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There are other ways to do it as a sole

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prop without the liability, you know, and you can always

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switch later. For instance, if you do a single member LLC. Right,

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that's basically a sole prop, but without the liability.

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Right, No, that's right. Is exactly that the single member

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LLC is a sole proprietorship without the liability. But you

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are paying that, you know, you are paying that self

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employment tax, so it's not in full. So it's not

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really that that kind of as favorable as structure. But

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but it is a liability protection. So if I was

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a tattoo poll, that's exactly how I would set it up.

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But once again, I'm paying a five hundred dollars annual fee.

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I'm paying, I'm you know, you know, I'm paying for

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an extra schedule in my tax return. Well, actually you're not. No,

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you're gonna be paying You're gonna you're gonna have this

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the extra schedule anyway, but you're gonna be paying that

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that the membership fee, and you're gonna have to hire

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a lawyer to get to develop that and so that

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if you're not really sure if your business is going

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a fly, that's when I that's when I do recommend

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a sole proprietorship. But you're right, you can eliminate the

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personal liability to be a single member LLC.

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I'm just a believer that I'll spend the money to

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begin with to protect my liability because it only takes

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one one lawsuit, and that's right. You know, it was

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worth paying whatever you had to pay to believe.

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That's right, And that's very true. And so a corporation, though,

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is that next step that gives you the liability protection,

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plus it can give you some tax what I'm gonna

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call tax flexibility. So first of all, there are three

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There are two types of corporations, and then there's the LLC,

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and I'll explain. You have an S corporation, a sub

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chapter S corporation, which in my opinion, is the most

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favorable structure from a tax standpoint and gives you the

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liability protection.

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At the same time, especially if you're a small business.

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Right, that's right, And a C corporation is really, I

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believe to be unfavorable because there's double taxation. It's very

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difficult to sell a C corporation and it's it's it's

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only utilized in rare cases for a small business. And

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I can tell you I made the mistake back in

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nineteen eighty four to be a C corporation, and I

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had to do a lot of work to get out

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of it and turn myself into an S which ended

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up being favorable. But it's it's it's a lot of

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work time, energy efforts expense. You might as well be

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an S corporation right off the bat. Now, an S

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corporation is called a pass through entity, which means the

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profit gets passed through to the business owner's personal tax

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return and gets taxed at the business owners uh uh

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individual tax rate.

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So that you know that.

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So, but the beautiful thing about that is is that

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that profit of the S corporation is not subject to

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unemployment tax or self employment tax. I should say it's not.

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It's not seven to self employment tax. And as a result,

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you can actually by managing it properly, it's going to

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be managed. This flexibility, the flexibility has to be managed,

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and by managing it properly, you can reduce your tax

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liability with that subjec SUBS corporation. Now you have to

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remember that a subcurp anes coop you have to have

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a reasonable salary. You have to make a reasonable salary

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and be on the payroll. Otherwise you're abusing uh the

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U S corporation's advantages.

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And that and that's where you that's where you appeerce

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to corporate vail and you are personally liable if you

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don't do that, that's.

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Right, because what happens is is you have to make

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sure that when you're a corporation, whether it's an S

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corporate or C corp, that you have to be fiduciarily

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responsible in every way so that the courts can clearly

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see that there's two entities, the corporation and the person.

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If you don't separate that, if you commingle funds and

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do all that nonsense, that a good lawyer is going

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to break the corporate veil.

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Yeah, and you're going to get in no trouble totally.

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So you've got to be really diligent about the management

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of a SUBS corporation or ESC corporation.

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By the way, and a perfect example of that is

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which people wouldn't even think of. If you pay one

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of your vendors with personal credit card, you have just

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pierced the corporate veil.

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That's right. The an opposing attorney will have a field

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day with that one. Yeah, yeah, because you're being the

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same person. The key is to make the corporation separate

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from the individual.

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Yes.

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And so then there's this thing called an LLC, which

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is a limited liability company, which we've already touched upon.

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You could be a single member LLC. You could be

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a partnership and and have it and have and be

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an LLC, but you're going to be taxed as a partnership.

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See the LLC. You can be taxed in a variety

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of ways. You could be an S corporation in an LLC,

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which I don't recommend, and that way your tax is

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an S corporation. You could be an LLC and a

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sole proprietor and that is when that's protecting you from

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the personal liability side. But you're being taxed on your

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individual tax return, and then you'd be you could be

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a partnership taxes. Uh, I'm sorry. An LLC tax is

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a partnership. So an LLC gives you the flexibility of

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being taxed in different ways. Yeah, all right, So that

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that's the advantage of it of an LLC. My favorite,

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my favorite structure is still an S corporation because it

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gives you the most flexibility from a tax standpoint, and

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I call it flexibility. It doesn't eliminate tax, but it

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gives you flexibility because of the profit from the S

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corporation is not subject to self employment tax. So give

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it all these structures my favorite, and of course that's

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what my company is, is an S corporation. But like

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Dean said, you have to be very diligent when you're

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a corporation. Otherwise, if you're commingling funds, you're using personal

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credit cards, all of that nonsense that you're gonna look

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like a you're gonna look like the corporation and the

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individual is one of the same, and you're gonna lose

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every lawsuit with with a reason with a reasonable competent

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attorney on the other side.

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And a lot of people do, okay, because they don't

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understand this. They set up an S corp and then

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they pay all their personal bills through the S corps

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so they can quote unquote, you know, bring down their income.

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But again, your deductions are not your personal bills. That

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improper taxation that is deemed income. So if you have

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your personal home rent, let's say, without using home home deductions,

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which I never recommend anyway, but uh, you know you

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are going to you have just pierced to corporate veil,

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and it looks like you're just trying to take advantage

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using the S corp to avoid paying taxes by getting deductions.

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You would never get yeah, okay, and so yeah, this

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was sometow I was taught very early, like eighteen years old, like,

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no matter what, do not commingle and what commingling means.

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Some people think commingling just means commingling the money. That's

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why I brought up the concept of the personal credit cards.

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It's not just commingling the money. It's actually using the

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corporation to fund your personal lifestyle.

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And big no, big no no, You're gonna get nailed

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and and all the value that the corporation has to

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protect you is gone. The other the other misnomer people

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have is that when they sign a personal guarantee for

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a loan, even if it's a sebass corporation, it's still

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personally liable on that when you the corporation protects you

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from personal liability from the outside. But if you're signing away,

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you're right and and and becoming personally liable for a

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bank loan or a lease or even a vendor. Uh

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that makes you sign personal guarantees, which I'd be very

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cautious about, by the way. Uh, that just you you

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are personally liable regardless of what kind of structure you have.

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When you sign a personal guarantee.

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I was taught that too a young age. Don't ever

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sign a personal guarantee. What's the what's the point of

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getting a business loan if you're going to sign personal guarantee.

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Theoretically, there's no point. The problem is is that banks

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are just being real difficult these days and requiring it

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on everything. And when business owners need a line of credit.

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You know that that's the unfortunate part because they are

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requiring more now than ever because ever, yeah, it was

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never a case back in and back in the day,

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and now like it defeats the whole purpose of having

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a corporation. It's personal guarantee.

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That it does. It does, but at least it limits

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you know, the outside suit lawsuits.

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But that's true.

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But but you know, but but but on the other hand,

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you're right, uh, you know, people sign away. I you

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know that I have clients that have personal guarantees with

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vendors that are thirty years old, and I'm telling them

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to go back and get that personal guarantee and rip

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it up because you know, if something happens, you know,

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imagine being loyal to a vendor for thirty years and

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then they go after you personally because they got this

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personal guarantee and you're happen to hit a ruck patch.

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I mean, it's just scary. So you know, you're never

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signed personal guarantees really now applies with exclamation points to

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suppliers try to get them when especially when you're just starting.

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Out, well, like you're talking about the banks and credit

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and stuff. To me, you know, it's like, if you're

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going to sign personal guarantee, you just might as well

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get the credit personally. Because here's the problem people don't

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think about. If you're getting a business loan based on

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your done in Bradstreet score and you do a personal guarantee,

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you have all the negatives and none of the positives.

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But because you're not you're building your business cred but

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you're not building your personal credit. But your personal credit

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could get affected negatively. So if you're going to have

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where you might get affected negatively on your personal credit,

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you might as well get the positive part of it

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and have it being a personal credit so you're getting

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that on your credit report. That's my opinion at least,

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Like you know, it's a yeah, you don't want to

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personal credit for your business, But in the same token,

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if you're personally guaranteeing. That means you pray, basically are

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without any of the benefits. In my opinion, yeah, it's

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very true.

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It's a dangerous it's a dangerous part of being a

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business owner of these personal guarantees. That's for Don Shure. Yeah,

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you know, you should make sure you have homesteads on

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your house and and and all, you know, and maybe

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put the put your house into trust. All those types

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of things can protect and you should go to a

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state attorney or or an attorney to you know, protect

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yourself because because if you run into trouble and then

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you start to acting yourself, it's it's these are fraudulent

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conveyances that occur and you're just going to get into

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more trouble. So be proactive and trying to protect your assets,

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no doubt.

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So.

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One of the things I like to offer your audience, Dean,

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is a workbook called Legal Structures, and it's an actual

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implementation workbook to help help the business owner understand what

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the best legal structure is and how to go about

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it and why and so in order to get that,

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you go to NeXTSTEP CFO dot net. You hit the

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contact button, you fill out the contact form and in

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the message box simply put legal structure workbook and I'll

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send that to you free change.

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Nice. I love it, and yes, this is a very

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important subject. I'm glad we covered it because I can't

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tell you how many people I know go into business

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and they have no idea about any of this stuff.

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I don't even know what makes them think they should

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go into business without doing some research and knowing your

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legalities and your life abilities and all that. But they do.

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But they do, and they they they think certain things,

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you know, but that's not reality because they took It's

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like everything nowadays. They talk to their their buddy, or

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like when somebody posts something on social media and I

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know it's not true. I'm like, it's that pure reviewed

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And the answer I get is, oh, yeah, all my

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friends agree with me. No, no, and all your friends

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should agree with you and your business decisions either because

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they're not going to pay the price. You will. But

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thankfully because of people like you, Michael, people can seek

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out your expertise, your assistance so that they don't have

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to pay the price.

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And it's a sision is ultimately the decision is ultimately

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as what's structured.

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It yeah, and how much how much they want to yeah,

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and how many to take exactly. Well, again it's been

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this is great information, especially heading into New Year, because

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taxes are coming, okay, and you'd better be in the

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right legal structure for that. And so reach out to Michael,

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get the free workbook and you know, see what Michael

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can do for you. And once again, Michael, thanks for

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being on the Adventures of.

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Pipelin and I wish you happy to you.

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Yeah, it's a matter of fact. I was just gonna say,

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and I'll.

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See you next year, all right, excellent, thank you, bye

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bye bye.

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Thank you for listening to the Adventures of Pipelin.

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I'm w for CUI Radio.

Powerful Business Strategies - Legal Structure

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