Business Innovators Radio - Interview with Lee Knoll Managing Partner of Knoll & Company -Next Generation CPA Firm Discussing Business Structure

Episode Date: July 12, 2024

An experienced CPA, Lee has worked in the accounting profession for over 30 years advising clients in small businesses, estates, trusts as well as being an Advanced QuickBooks Certified ProAdvisor, QuickBooks Online Certified, and Bill.com guru. He has advanced expertise in working with businesses in the real estate, transportation, legal industry and professional services industry.Learn More: https://www.knollcpa.com/License#16945Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-lee-knoll-managing-partner-of-knoll-company-next-generation-cpa-firm-discussing-business-structure

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Lee Knoll, who's the managing partner of Nolan Company, your next generation CPA firm. Lee, welcome back to the program. Hi, Mike. Hey, I know today we want to talk about a really important topic called business structure.

And I think we could probably talk for nine and a half hour straight on this one thing. So let's hit the highlights of this. But I know this is so important because when a business comes to you and says, let's start a business or let's expand a business or let's look at some of the key points of, am I set up the right way? Business structure really is the first place to look. So first of all, let's define what is business structure? Business structure is any type of entity that you decide to operate with, whether it's a corporation, LLC partnership, or just a sole proprietorship.

Okay. So the structure. So are you just selling your way or? and you're not really set up and you didn't go to the Secretary of State, well, that's not right, but, you know, what do you choose? You know, and let's start at the beginning. I would assume that you start as, you know, if you're a smaller business, you start as a sole proprietorship, right? Not necessarily now. You can actually start as a single member LLC.

Okay. And that's probably the, and again, if you start as a single member, LLC, it's for tax per or it's, it's just, it's like a sole proprietorship. So you don't have to be a sole proprietorship to start an LLC. It's, if you have a name you want to operate on, because if you have a name, you have to register the name with the state anyway. Do you do business as name. So you might as well do an LLC. So then you heard my misunderstanding of the assumption of, oh, you started a sole prop. So when is the time that someone would think of, well, all I need is a sole proprietorship?

If it's really just a really, really, really small business and they're not really doing it for much profit at all and not really trying to make it a business. per se. And then when they start, you know, kind of get that proof of concept and they're starting to, you know, get clients and sell, you know, products and services, and they then go into that LLC. At that point, what are the benefits to the business owner? Because I know that as a sole proprietorship, there's some, maybe some limitations, but then there's some protections as an LLC, right? Yeah. The big, big thing you get with an LLC is, I believe there's some, liability protection is basically the big thing you get with an LLC. And again, with any type of entity, you generally get some sort of liability protection.

With the sole proprietorship, it's like you're one and the same. It's yourself if you're sole proprietors. So there's no liability protection there. It's just you. So what's an example of how that would provide that liability protection? So what does that look like? Well, it just makes it harder for, I guess I'm not real sure on that. The thing I had heard in, and you as a CPA would know this better, but I had heard like if you're in business doing a bad business deal and something comes against your,

you as a sole prop, they can come after your house or your personal accounts. But as an LLC, there's going to provide that protection to go. No, that's as personal. You can only get the stuff that's in the business. Yeah, yeah, that is true. With an LLC, they, in 30, can't come out. Now, I think the slight problem is if you're the only one doing the work, they can still come after you personally. And just like anything, we say, there's never one answer to everything.

And just like you just said, they're like, okay, yeah, there is that protection. But if you're the only one, there's always conditions. So you never can hear one thing and go, oh, well, I'm safe because. So you always have to keep that, those kind of things in mind. So good distinction there between SoulProp and LLC. What then as the company grows or what then should people, be considering regarding the LLC and from a tax perspective because one thing that I have heard of is having your company set up as an LLC but then taxed as a different entity to

give you some benefits that way. Yeah, you can be an LLC when you start when you're small. You can be a one person LLC if it's just yourself and then down the road when you're you start making money generally i i recommend um once you make net profit of around 50 000 plus you can then elect to be taxed as an s corp um or or s corporation for tax purposes not changing the entity you're still in lc for state state um reasons but for tax purposes you're an s corp now And all that, basically the big difference is you don't have to, you don't pay Social Security and Medicare tax on 100% of your earnings. Then you can take smaller, you can take some of your money out in distributions and some out in salary, some of the earnings. So you're not paying Social Security tax on all the earnings of the LLC.

Because the word comes to my mind, and correct me if I'm wrong, but like being double taxed. Is there an aspect of doing it that way that prevents being taxed twice on the same thing or paying taxes twice on the same thing? Yeah. Oh, with an LLC, yeah, either one of those, you don't get taxed twice on either one of the, yeah. Yeah, there's no double tax on that. So then as the business grows, should it be, you know, I've heard of like the C corporation, at what point should you consider changing from LLC to an S corp to a C corp? Are there some things to kind of milestones to keep in mind there?

Or is a C corp just for, you know, the mega large businesses? A C corp, a C corp really is not necessarily just for the mega businesses, but they're very, there's not very many of those anymore. And the big difference is between the S-Corp and the C-Corp is with the C-Corp, you can, the fringe benefits. You can, for example, the officers can, you can cover 100% of the health insurance on the officer on the C-Corp. And you can have a medical reimbursement plan. you can have basically a lot of the benefits inside the C-Corp that you can't in the S-Corp. That's probably the big difference is the medical stuff.

And the other difference is then the only way to get money out of the C-Corp is to pay yourself salary. And that's where the double taxation comes in because the C-Corp, pays tax and then you pay tax on whatever you take out. So the C-C-corp does pay double tax. You can pay double tax with the C-Corp. And that's really why there's not that many C-Corps anymore once they came out with the S-Corps. So probably this day and age, none of the newer small businesses ever set up a C-Corp, unless they really want to do the medical reimbursement plan.

And again, none of them, if they have employees, they most of times don't want to set that up either. And so, yeah, so most of them are not set up, don't want to do that. Interesting. And I know I say this a lot of times, but it really bears repeating.

There is never one solution to every single person that is set up because it all everything everyone is different and so should you be a LLC taxed as or should you be a plain LLC or C corp all of these things are some something that you need to talk with your CPA about and say here's my needs here's what I want to be doing and then the CPA ask questions and says here is the the right structure what are some of the mistakes that you see people making typically before they come to you and then what are you doing to remedy those Well, the mistakes that I see is they come to us after the fact that they've already done something. They've either set up a LLC and they thought they filed to be taxed as an S-Corp when, in fact, they never sent in the paperwork for the escort, but they come after the end of the year, after the taxes are due, or

they're behind. Instead of, so they don't seek professional help at the start. They should always, whenever you're starting a business, you should, the first thing you should do is go see the professionals and get,

figure it out before you start, not after you start. So you're saying, people should not just plow ahead and think they're right and assume and sprint ahead, they should actually take a pause, think, get some advice, get a multitude of counselors, and then move ahead. That sounds really like wonderful advice, huh? Yeah, that's exactly what they should do.

But yeah, a lot of times they just start plowing ahead and then they've either done it wrong or they don't quite understand. that their friend told them to do it this way, which wasn't quite right or, yeah. That's a big, their friend or Google. Yeah, or the big one that's happening right now is YouTube videos is, there's a bunch of YouTube tax advice and LLC setup advice. Uh-huh. And so basically YouTube has a lot of videos saying everyone's just set up a LLC will save you taxes.

Well, you got to spend money to save on taxes. Yeah. And I would suspect there's something else that people need to recognize. It's not just quote-unquote setting up an LLC. It's setting it up the right way. Correct. And too many times people hear something online or Google or social media and they go, oh, to save money or taxes, I need to set up. And so I'm going to go click, click, click.

And then something in the process or something in the setup could have been done differently, better, more efficiently, or was actually done wrong. And then now they're not doing things the right way. Exactly right. So having someone that you know you can trust is just critical. I think that is really, really powerful to keep in mind. So with business structure, you want to do it upfront and do it the right way with the right advice. Well, Lee, what if someone sets up their structure? Should there be a time where, you know, five years down the road, there could be a change to the structure that would benefit them?

What should they be watching for to ask their CPA, should I make a change? Or is it once you've set it up the right way, then you don't. you can forget about it. How does that work? Yeah, yeah. You can always change the structure down the road if you need to. And in some cases, that does happen if the business is really successful. And you're getting ready to either sell the business or do some sort of merger. whatever the case or bring on partners or there's our there are different reasons that you may want to structure the business different than than it is currently like um like the big one is

generally generally i don't recommend s s corps for um unrelated um individuals um um just because with an escort, you've got to keep everything equal. And people have trouble keeping all the distributions equal. So I don't generally recommend an escort for unrelated individuals. But there's ways to get around that. Like you can have a, for example, you can have an, an S-Corp own the own the LLC so

you may have three S-corp's own a LLC so that's one way to so the main LLC is the business operating unit whereas the S-corp's are the individuals that actually own the LLC, but their S-Corps own it. So there's ways around it.

So, yeah, down the road, yeah, you may want to change the structure a little depending on the circumstances. Yeah. So again, you don't blindly set it and forget it. You get qualified help. You see what you need to accomplish and pick the right structure. and then once in a while, verify and make sure that you're still in the right structure for what you need. Yeah, you always need to verify.

You just don't keep going and plugging along. You need to just make sure everything's going good and double check in, see, on whether it's your business structure or your accounting or whatever it is. You need to be looking at it every year if you're still in the correct spot. 100%. Very good. Well, Lee, this has been really, really helpful for understanding setting up business structure the right way and some tips to consider. If someone is interested in double checking their structure or setting up their business the right way, what's the best way they can learn more and then also reach out and connect with you? Well, they can connect with us.

They can find us on the web at nolcpa.com, or they can reach us by phone [phone] or by email, null-cpa at nolcpa.com. Excellent. Well, Lee, thank you so much for coming on the show again today. It's been a real pleasure talking with you again. Appreciate it, Mike. You've been listening to influential entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes,

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