Focused - 23: It's Hard To Get on a Different Train

Episode Date: June 13, 2017

When should you form a corporation, and if so, what kind? David has some broad advice, though you should be sure to consult with a local attorney and your accountant before making any final decisions.

David Sparks and Jason Snell spent their careers working for the establishment. Then one day, they'd had enough. Now, they are independent workers, learning what it takes to succeed in the 21st century. They are free agents. Welcome back to Free Agents, a podcast about being an independent worker in a digital age. I'm David Sparks, and I'm joined by my fellow host, Mr. Jason Snell. Hello, David. We're back. Good to talk to you. It is. It is. I always enjoy recording the show. It's my therapy for being an independent worker. It's a good time to kind of talk through our issues.

I'm a big believer in podcasting as therapy in general. It's like, let it out. Just let the words come out in a podcast yeah when we first started this show i told you we have to do it because i have to get it out of my system this is all i think about some days yeah oh yeah i know i was just having this i spent a bunch of time with my wife uh yesterday talking about issues regarding this stuff and the same same same deal um you know you end up getting kind of deep down in it and um what now this episode though i feel like is is is all about um businessy stuff and i'm not super comfortable here but i know you've got a lot of things to say about it and this this is about some nitty-grittyitty things about setting up a business and a business entity. Yes, exactly. This is one that's definitely on my plate. Some listeners may

know, some may not know. I'm a licensed attorney in the state of California. And my job as an attorney is I represent many, many companies. I'm kind of in-house counsel for companies that are too small to have their own in-house counsel. So I do a lot of business formations and breakups and business-y things. So I have a little bit of knowledge about business entities, and I think it's something that anybody getting into free agency should be aware of. With all that said, this is a general background show. I'm not giving you legal advice, so don't rely on stuff I'm telling you. That'd be really dumb to hear it on a podcast and then go do something. A podcast is not a lawyer. Yeah. Especially if you're outside the state of California, because the stuff I'm talking about

is generally based on California law, which is where I work. But even if you were in California, that would still be dumb. One of my big pieces of advice about this, if you're going to go forward with setting up a business entity is to get a lawyer. Um, I know there's legal zoom and other options, but that stuff I can tell you as a lawyer, um, we poke holes in those kinds of companies all the time, which is not what you want. Yeah. The, uh, the key here is, is the general background means we hope this will be applicable to people in the u.s and and perhaps other parts of the world although again what this show is not is jason and david are experts in international laws that's just not that's not going to be it but we think that this could be good for general background in the u.s and uh

and other countries with similar laws but consult consult your local lawyer, local attorney of some form to get advice about exactly what is required in wherever you live. Yeah, I mean, I was a little, the reason why I waited this long to do the show is I, at first I was thinking, well, I probably shouldn't do it because people will get the wrong information and then they'll get mad at me. But what I'm trying to tell you here is there's some very generic advice and ideas about how this stuff works. And I think it gives you a jumping off point to go make smart decisions and hire professionals. So I think that's enough of a disclaimer there. End disclaimer.

Okay. So you start out on your own and you want to get going and somebody is going to inevitably tell you, you need to set up a corporation or you need to set up a limited liability company. And I just wanted to kind of talk about what all that means because it's kind of cryptic when you hear about it. And I've had clients in the past that set up companies without even knowing why and they did it all wrong as a result. So I think just to get some basic knowledge out there. And part of it is I'll just share my experience. When I left the firm and I went out on my own, I did not set up a corporation or limited liability company. The first thing I did

was what is called a sole proprietorship. And you may have heard that term before. Generally, what it means is I'm going to be doing business as whatever the name of my company is, but it's not a company. So it's just me. I'm signing the contracts in my own individual capacity. It's just me doing business. It's just me doing business. That's not a bad way to get started, especially if you are not doing anything that's particularly risky. The alternatives we're going to talk about later are separate legal entities. It's like a separate person under the law, like a corporation has assets and you have assets. So if the corporation gets sued, your own personal stuff does not get subject to liability. With a sole proprietorship, you've got everything in one big swimming pool. I mean, your house, your car, everything you're

doing is subject to liability if you do something under that sole proprietorship that were to get you sued. So that, from a lawyer's vantage point, that's a big problem. But I'm not sure that that's not the right way to go when you start. Like I said, it really depends on what you're doing. When I was starting, I was starting out with this law practice where people, I mean, rarely do I do things that are going to make me liable because I'm very careful and doing good work and et cetera, et cetera. But I wanted to also make sure that it was going to work for me. I didn't know when I left whether or not I would be able to make a living off it, or I'd do it for three months or six months and suddenly realize I needed to go get a job somewhere to eat. And I didn't want to set up a bunch of legal entities and go through all that

nonsense just to find out it wasn't going to work. So it was kind of like my safety valve in a little bit by not setting up a company at the beginning. Right, right. I mean, if you're tinkering, if you're just getting started, I could really make a strong argument that the last thing you need to do, it's like doing your steps out of order. The last thing you need to do when you're seeing if this is something that's going to work and last is to spend all your energy on setting up a business instead of actually building your business. Yeah. Another reason some people wait is in a lot of states and countries, these entities are taxed on a calendar year basis. That's the way it is in California. So if you're setting up a new business and it's, you know, it's October

and you're like, well, do I really want to pay the extra year's taxes for a company that's only going to be in existence for three months? So some people will wait until the beginning of the year. That's another reason to do, but the, but the way it works is real simple. Um, you are, you don't have to fill out any paperwork. You are doing business you are doing business and the one thing some folks do is what they call a fictitious business name or a dba you may have heard of called a dba doing business ass i remember always seeing these in published in my local newspaper as a notice and thinking this is such a weird what is this this is john smith is undering operating under the fictitious name of clean carpets inc and be like or clean carpets for you or something i'm like what and i never understood it never understood as a kid so in that case john smith was going to be operating

as a sole proprietor and he did that fictitious business name publication so when you want to get one of those you go down to the recorder's office wherever you live and they have a form you fill out. And usually they've got some requirements. And one of the requirements is often that you need to publish to the world that you're going to be using this name. So it's out there, which is kind of silly because nobody reads the newspapers they publish these notices in, except Jason, apparently. But nobody really knows. But you publish it nonetheless. reads the newspapers they publish these notices in except jason apparently but you know nobody really knows but but you publish it nonetheless i lived in a small town and i think that the idea is it needs to be published somewhere you know that that was it and so this was the only real

recourse was to put it in the local newspaper yeah good for the newspaper business that's you know that's why the newspaper business was so good back then. Yeah, and they still do it largely in newspapers in my experience. And there's online services you can go to do to set up a fictitious business name. And so the idea is once you get done, you get this piece of paper that you can take to the bank. And when John Smith gets a check made out to fancy carpet cleaning or whatever the company is called, the bank can have an account with that name on it and can cast checks in that name. So the role of a fictitious business name is to tell the world that you're doing business under a fictitious name, which is usually the name of the business and to set up your

banking. But underlying it all, there is really no like legal protection. It's still one entity. It's still you. Right. So it's instead of setting up a corporation, all you're doing is registering that you're operating under this name. That sounds like it could be a corporation, but it isn't. It's just you with a different name. Yep. Yep.

So, and it's funny, I had a case years ago where some guy was committing fraud by taking out fictitious business names for somebody else. And then he was collecting the guy's checks and cashing them. And so I was representing the guy who was getting ripped off by this. We found out. We turned him into the police. It was a big deal. Wow. But, I mean, it's just a weird thing that you can do to attach your personal name to a business.

So that's the part of sole proprietorship. You set up your business name. You get your fictitious business name. You start working. And the advantages are it's easy. You've got a cheap form you fill out for the fictitious business name. The accounting in a lot of ways is easier. It's one tax return.

There's nothing too complex about that. We had Andrew on recently, so go back to the accounting show for stuff like that. Banking is, I think, a lot of times easier because it's all under one social security number. Although, if you are going to go out and do a sole proprietorship, I recommend getting a separate EIN. And that's something you want to talk to your accountant about, but the employment identification number, so you don't have to give your clients or the people you work with your personal social security number. The assets are easier to handle because it's just one big pool. Like I said, that's all great, except the flip side of that is there's disadvantages by having everything together. If you ever do something under that business that gets you sued and, um,

and you're liable, then everything you own is subject to liability. They can come after your house or, you know, your, you know, your, um, your Maserati or whatever it is you've got that you value. Um, uh, and intermingling your money is just really complicated in terms of doing your taxes. When you've got one checking account that you're running all this stuff out of, uh, that's a big mess. Andrew did a great job of explaining this in that episode where we talked to him about just, just how hard it is to unwind where the money goes and where the money comes from. If you have, I think that's what he said is like, first thing you do is open a separate

bank account. Like first thing you do is open a separate bank account. Like first thing you do before any of these other things, just make sure the money does not commingle. Yeah. Another reason, and this is the reason I ultimately, one of the reasons I ultimately incorporated my businesses was, um, because of things that are mingled, if you ever get audited, I mean, I'm, I'm super, I'm super conservative with taxes. I I'm sure I probably overpay, but, um, if I ever were to get audited, if I was as a,

just as a sole proprietorship, what I was told by several accountants is the, the, the auditors who audit individual returns aren't as savvy and business smart as people who audit corporations. aren't as savvy and business smart as people who audit corporations. So the auditor you're going to get is going to have a hard time figuring it out. And when I got to the point where I had a legal practice and a media business that I was all doing as sole proprietorship, my accountant said, if you ever get audited, they're going to be so confused by all of this. And that scared me enough to say, okay, I got to just incorporate. So, and we'll, I'll talk about what I did later, but, but so sole proprietorship, a lot of people will tell you that's terrible. Don't do it. I think you just

need to understand it has risks attached to it, but for some people it makes sense. I mean, if you're starting a new business and your job is something super safe and not going to involve a lot of liability of any sort, and you just want to kind of get your feet wet, I don't think it's necessarily a bad idea to start out as a sole proprietor. As long as you understand that you're taking risks by doing that. But, you know, there's other options, and we'll talk about that next. But first, I want to take a minute to talk about our first sponsor today. And that's our pals over at FreshBooks. So you're racing against the clock to wrap up three projects, prepping for a meeting later in the afternoon, all while trying to tackle a mountain of paperwork. Welcome to life as a free agent. This life can be challenging, but our friends at FreshBooks believe the rewards are

worth it. And they build tools that make the challenges easier for all of us. I don't know about you, Jason, but I've got a bunch of clients I work with and managing billing is one of the things that was really intimidating for me as I was getting started. And FreshBooks really solves that. I mean, they have a really nice web interface. And with the growth of the internet, there's a lot of opportunities to be self-employed if you can just take care of, you know, figuring out how to track time, track expenses, and get bills out. And FreshBooks is here to meet this need. They've been working tirelessly on an all-new version of their cloud accounting software,

and the new version looks great. If you haven't checked it out in a while, I recommend you do. The new FreshBooks has been redesigned from the ground up and it's custom built to work exactly the way you do. You'll be able to be more productive and organize while also getting paid quickly. The thing I like about the new version is it's really easy both to capture time and also to create invoices. You can create and send professional-looking invoices in less than 30 seconds, and you build it with their what-you-see-is-what-you-get interface, so you'll see the invoice exactly the way your client will. Some of the really expensive accounting software doesn't do that,

and I hate it when you see the bill go out and it doesn't look the way you want it to look. So FreshBooks will care that for you. You can also set up online payments and that I use online payments for my clients and I can't get over how much faster I get paid with the ones that pay online versus the ones that stick in a drawer and eventually send me a check. FreshBooks did a study on this and said that customers get paid up to four days faster that get these online options. You get the email, you just click a button and you pay them. You'll also be able to see when your client has seen your invoice, which is really great. So you don't have that guessing game where you don't know if they actually saw it or opened it.

You'll know if they opened it. And that way, when you send them a reminder email, you can phrase it accordingly. And they have an only notification system. That's kind of like your personal assistant. It tells you when you get paid, tells you when there's a problem. I like it all. Anyway, all of these features are coupled with this beautiful redesign, focusing on simplicity and clarity and gives you a bird's eye view of your business at all times. So FreshBooks is focused on the age old question of how my business is doing. If you're a free agent, that's really important to answer that question. Get yourself FreshBooks.

They're offering a 30 day, uh, unrestricted free trials to listeners of this show. So just go to freshbooks.com slash free agents and enter free agents with the space. And how did you hear about a section? So they know you came to them from the free agents and start getting paid. Thank you so much, FreshBooks, for supporting this show and all of RelayFM. Excellent. Now, there are two different kinds of corporation type

that I think that we're supposed to talk about in this episode, sort of a straightforward corporation and an LLC. Is that right? Yeah, those are the two big ones. There's other forms of entities. And once you get a fancy lawyer, they can talk to you about some of the other ones. But the two people most often use and hear about are corporations and LLCs. And it's funny to me

talking to people, you know, what their understanding of that is as they form them, because they, you know, it's like, it's mystery to people. And they just like, well, somebody told me I should do this one or that one, but I'm not really sure why. I think your job, if you're going to be a free agent is to get to the bottom of this. I'm not saying you form it yourself, but at least having a basic understanding of what the advantages of these entities, because once you form it, it's really hard to get off the train and get on a different train and quite a bit, expensive. So make a good decision going into this. So let's start with corporations. The corporations are the age-old business entity. They go back a

long way. In most states and countries, corporations or something like corporations have existed for a very long time and the laws are very well established. And for lawyers, and for you, if you're running one of these companies, having well-established laws is really important. So how does a corporation work? In general, it's a business entity that is like a separate legal entity. If you've got a corporation, it starts out with who owns the corporation. It's the shareholders. Let's use Apple, right? If you buy a share of stock, you're a shareholder in Apple. That doesn't mean you're in charge of it, but it means that you own a little piece of it.

Make sense? Yep. charge of it, but it means that you own a little piece of it. Makes sense? And then the next level of a corporation is the board of directors. So you've got the shareholders and their one job, really their only job, is to elect the board of directors. If you think of any publicly traded company that you own stock in, you'll get the notice once in a while there's going to be a shareholder meeting. And what really happens at the shareholder meeting is you elect the board of directors. And so the board of directors job is to kind of oversee the company. They're, they're kind of like the men up on or men and women up on the Hill, looking down at what's

going on with the company. And the other thing they do is they appoint the officers. And that's the third leg of a corporation is the officers. Those are the people that have rolled up their sleeves and they're there every day doing the work. So using Apple, because Jason and I like Apple, we know a lot about it. You can have a share of stock in Apple. You can be appointed to the board of directors if you have enough shares or if they love you enough to put you on their board of directors. And then from there, you can appoint people like Tim Cook to run the company. With a small company, you get to wear all three hats. Yep.

Yeah. And even though you're wearing all three hats, it doesn't mean that you can just do whatever you want. That's the reason why you need to have fancy lawyers and accountants involved. Because what you do while you wear the different hats is very important to the proper operations of the company. Now, you've got a corporation, right? I do. Yeah.

So you probably have meetings for your small company, and you probably have to. Yeah, we're supposed to. But that's, yeah, we're, we're supposed to, I think that's one of the things where, where we have fallen down on the job is we're supposed to have like an official, an official meeting to us. And we, I think we need to do that. We need to have one of those and, and have some minutes and say we met, but it's, you know, there's two officers in the company, so it's very small. It's a short, we have those meetings frequently and we just need to detail one of them as an official meeting of the corporation. I will help you with that. Just remind me. All right. But, but that's, that's the thing that we have a corporation, like all this stuff, you didn't have to deal with sole proprietorship, but with the corporation, uh, when you set it up, you know, you've got to

file documents with the, whatever state you're incorporating in. Uh, you've got to, usually you, you buy what they call a corporate book and it's got a fancy seal in it and stock certificates. Yep. it and stock certificates and you have to put the minutes in there and you have to, there's a whole bunch of stuff you do. And there there's filings you have to do with whatever state you're registered in. Uh, so there's all this stuff going on with, with a corporation that, that is background work that you don't get paid for. It's stuff that not only does it take your time to deal with it, quite often you spend some money on a lawyer to help you make sure it's managed properly. And you have to spend money on your accountant to make sure that, you know, all the money is tracked properly between the corporation and your individual stuff. As we talked about on the show

with Andrew, there's also, you know, you've got to pay yourself out of the corporation. It's a separate entity. You can't just stick your hand in the pocket of the corporation and take money out for stuff. So, so all of that is going on with the corporation and it does add to, you know, it's weary to you. It takes extra work. But, you know, the, the big advantage of that is that you've got a separate legal entity. So if you've got a, you know, company that's job is hauling plutonium from one state to the next and something goes wrong with that, you really will be happy that you have a corporation. I can't tell you the number of times over the years I had clients that had issues go poorly and the fact that they were a corporation really saved their bacon. I mean, you always have insurance and things, but you just never know when things are going to go poorly. And the fact that they were a corporation really saved their bacon. I mean, you always have insurance and things, but you just never know when things are going to go wrong. I remember a few years ago, around 2008, when the economy had that big problem,

had a client that was heavily involved in providing services to auto dealerships. And a bunch of the auto dealerships, especially the American ones, uh, kind of just went under overnight and, and he was owed millions of dollars by these various auto dealerships throughout Southern California. And as a result, his, his business went from very profitable to a big hole in the ground in like two months. I felt so bad for the guy. And he owed people money too. And because he wasn't getting paid, he couldn't pay his creditors. And the fact that we had set up this corporation and he had done everything properly,

he was able to basically walk away from the smoking wreckage of his company. And his home, his personal assets weren't ever at risk. And that's, from a lawyer's perspective, the big reason why you want to set up a corporation. Yeah, you're compartmentalizing, right? This is a box in which you're placing all of your business's material and you've already got a box for your stuff, your personal stuff. And if something happens to the box, it just happens to the box. And if he had been a sole proprietor, he would have lost everything. Yeah. Yeah. So that's the big advantage. Now,

flipping on that is the limited liability company. I want to compare and contrast those in a minute. All right. A limited liability company is a relatively new entity. I remember when I first started practicing 23 odd years ago, it was new enough in California that a lot of company gives you a little bit more flexibility. It allows you to declare as a corporation or as a partnership. Like if you're forming a new company with another person, a limited liability company is something to consider. In some states, but not all, the way limited liability companies protect your assets is interesting. One of the things with limited liability companies is in some places, it's a lot harder to take your membership interest in a limited liability company than it is to take your stock in a corporation. So let's imagine that you're going to a soccer game and you have a car crash and

suddenly you're super liable for millions of dollars. And for whatever reason, your insurance didn't cover you. So you've got a liability and this is a personal liability. This has nothing to do with your corporation. That's because you were going to a soccer game. So if somebody gets a judgment against you, one of the things they do is they call you into court and they say, show me all your stuff. And one of the things you have is a share of stock in your corporation. Well, if you owe money to somebody, they can take your assets, which is your stock in the corporation. And suddenly it's not your corporation anymore. With a limited liability company, and this is super qualified. You need to talk to a pro about this because it depends on where you are and a whole bunch of other things.

But generally with a limited liability company, it can be more difficult to take your interest in a limited liability company than it can be to take your stock, which is an advantage. There's sometimes they're taxed differently. Um, a lot of times, uh, for instance, in California, uh, there's a sliding scale for taxes on a limited liability company that doesn't exist with the corporation. So you end up paying more taxes. So, I mean, there's just, there, there's a bunch of stuff going on when you look at the two entities, but there's definite advantages of one versus the other, depending on where you are and your particular circumstances. So making the decision, once you decide to form a legal entity, based on anything more or anything less than talking to a professional, I think is a mistake. This isn't something you can Google search and just go with it. Right, because it's going to be determined on where you are and what kind of business you've got and what your needs are. It's something that you actually need to walk through with somebody who knows all the ins and outs of this. Yeah, exactly. And the, um, and then you'll hear people say, well, it's an S corporation or a C corporation. Uh, that's another one that's often asked about, uh, S

corporations are, it's an election you make with the IRS, which allows you to simplify tax reporting for the corporation. And you get to basically report the company on your individual return. Yeah, because this is one of those things that I think people, when they think about setting up a corporation, they start to think about, and this is going to have all these kind of crazy tax implications because I'm going to have a corporate tax and then i'm going to have my tax and that's actually why the concept of the s corporation exists is that the s corporation doesn't pay taxes instead the owners of the s corporation all the profits flow into their personal income and are taxed as part of their personal income so in that way the isolate you can you can have that be permeable in this corporation being isolated one thing that can be permeable is the tax implications,

which is what I do. So in the end, that affects how I run the business because I want the business to, you know, basically I want to pay myself and have the business break even and then I pay income tax on that. But if the business has a profit of a couple thousand dollars or $10,000 or a million dollars, whatever it is, you just add that to my personal income and pay it. So the C corporation files its own taxes and,

and it, they're, they're completely separate as tax entities. And it's a, it's a lot more expensive to run a C corporation, but there's some advantages with a C corporation. Like depending on where you are, sometimes you can have non-voting stock. So if you have like silent partners, sometimes that makes sense. If you have people who are not us citizens,

sometimes your ability to do an S election are limited. So there's a whole bunch of stuff that goes into this. And, you know, I keep saying it, so I'll stop, but this will be the last time. and you know i keep saying it so i'll stop but this will be the last time okay yeah you need an accountant and an attorney to kind of put their heads together i mean when i do this stuff my first question to my client is who's your accountant because i haven't seen your personal returns and i don't want to make a decision that's going to cost you a bunch of money on your taxes so you need you need two people that know their stuff working together to get you the best concoction of all this stuff. And then the next piece of it that, that we haven't talked about it yet is where do you form it? Right. You know, people like, well, do I go to

Delaware? I mean, that's a very common one. A lot of people form their companies in Delaware. There's some advantages to forming in Delaware. A lot of them are, a lot of those advantages are, are much more applicable to big companies than they are to, you know, mom and pop companies. So it's not always worth it, but that's something that you have to figure out. A lot of times people don't realize, even though they formed the company in Delaware, they still have to pay taxes and still have to register or at least declare the company and the state that they're working in. So that's a surprise for a lot of people. They think they've registered in Delaware thinking, well, now I don't have to register in California

or wherever else. And quite often you do. And, and so you, you end up paying to two different states on that. So, so that's another thing you need to do. I don't think, you know, the, the age old wisdom of, you know, make an LLC in Delaware or do whatever somebody told you to do is good advice. I think you just need to take a very close look at what it is you're doing, how you're doing it, and talk to some smart people to help you get on the right foot. And this is, like I said earlier, if you do it right to begin with, it's a problem solved and you don't have to think about it anymore. If you do it wrong, it's going to cost you a bunch more money down the road. So should we take a break? Yeah.

All right. Let me tell you about our other sponsor this week. But I want to set the stage first. Think about a family gathering. Think about those family gatherings. You're all around a table, maybe backyard in the kitchen, glass in hand, story start. Maybe an older person in your family is going to tell this story that you've heard a million times before or maybe just for the first time. And think about the value of those amazing, funny, poignant kind of stories that are locked in the minds of the people around you, of your loved ones. StoryWorth is the easiest way to share your family stories. StoryWorth is a product that makes it easy and enjoyable for your loved ones to share their life stories.

It has weekly emailed story prompts and questions you might not think to ask. And the end result of all of that is that you get a beautiful hardcover book with all the stories in it at the end of the year, black and white interior color cover up to 480 pages so that you and your loved ones can preserve memories and pass on the book to future generations. Here's how it works. You buy a subscription for someone important to you. And then every week StoryWorth sends them an email. It's a really nice email. I've gotten these myself because I've tried out this service. And it's often very personalized. And it says, hey, I've got a question for you. What do you

think about this? And it is a prompt. And you can just reply. This person that you buy this for can reply and tell their story. There's even an option for them to record it over the phone if they're not comfortable typing it out. Now, those are collected over the course of the year. And at the end of the year, they get bound together into that book for them to keep. And of course, for those memories to live on and be passed down to generations to come or to be shared with other members of your family. It's a great way to learn more about someone. The questions are designed to evoke entertaining, surprising, and moving responses. I really found a lot of them to be quite thought-provoking

and not necessarily questions that you would think about asking directly. It's a great way of staying in touch with family members who may live a little bit further away than you'd like. You can write stories and upload photos by email. You can use the website. You can use a StoryWorth app. You can share them with as many people as you want. You just invite them via email and then everybody can see the stories. You can save and edit all the stories on the website. All your data is secure. Everything is private by default. Everybody gets

to control who sees their stories. So like I said, I've tried this out. I think it's a really interesting idea. I think it's a really interesting idea i think it's very friendly and and easy to use it's as simple as replying to a prompt in email so if you've got a loved one who is comfortable with email responses then story worth will work for them and if you're looking for a last minute gift story worth is perfect for someone you care about now is the time to place your order though listeners to free agents can get 20 off a subscription by going to story worth.com free agents it's 20 off when you visit story worth.com free agents story worth a new way to bring the family together i think you just sold me on it jace i'm gonna go subscribe it's

an interesting idea if you've got somebody um if you've got somebody you want to kind of hear stories from it is, or, or if you're somebody who wants to share your stories, it's a really clever idea. And I like, I like how the emails work. It really does feel like there are, um, regular people talking to you and asking you questions and a lot less like you're getting this week's form email. So it's very, it's a cool idea. But we've got some older relatives and I was thinking, how do we start collecting what they, their wisdom and knowledge of the family without saying, Hey, you're getting old and you may die someday. We want to get this from you.

Yeah. Here you go. Yeah. That'll be good. Anyway. So, so the question you're going to ask at the end of all this is, do I need to form a business entity or do I go sole proprietor? And I think it's, as I've said, it's something you have to look at a variety of things.

I think if you have a business that doesn't have a lot of liability and is in early stages, it may be fine to stay with a sole proprietorship for a little while just to see how it goes. But I think as soon as you start making significant income off something, or as soon as you start getting yourself into businesses that involve a significant liability, that's when you should be looking seriously at pulling the trigger on setting up a corporation. And one of my clients is a sole proprietor, IT professional, and he goes and does IT for big companies. And I said, you have to incorporate.

It's just too risky. I mean, if some company's computer system goes down and they claim it's your fault and sue you, I don't want you to be personally liable for all this stuff. And so that's just an example. But that's the kind of questions you need to be asking yourself. Is this thing getting to a point where I need to form a company? And then there's all the other tax stuff I was talking about earlier, which I think is another reason. I don't think you should be intimidated by it, though. It's not that scary. You can get it set up.

It doesn't cost that much money to get one of these things going. And that's where you spend the most money is just getting it off the ground afterwards. Maintenance isn't that bad. Do you regret it forming a business entity or has it been a problem for you? For me, it was actually kind of the training wheels for, for leaving entirely the, um, once there was money changing hands on a regular basis for my podcast it was podcast advertising basically that was that was starting to happen for the incomparable i started to feel a little uncomfortable about continuing as that money just being paid paid right to me but i was also thinking of a longer term like i'm going to go out on my own i'm going going to do other things. I kind of want to get this up and running now when I've got the chance. So for me, it was almost like I wanted to be positioned for

leaving and it was an opportunity to do it when things weren't complicated. And so I was actually very happy to have done that because it was a small side project that prompted it. But it meant that when I left my job, I already had a business entity up and running and ready to go to do everything else that I was doing. Yeah. Makes sense. It's not that bad. I don't think you should be afraid of doing it. If it makes sense for you, just talk to somebody and get it going. A couple other things, care and feeding of your business entity. You know, once you formed it, you should have a lawyer and accountant on board to help you out, even if it's just once a year to help you do your minutes. Just because you formed it doesn't mean you're protected.

You still have to do all the things right to run the company. You need to do whatever registrations are required by your state and file the necessary forms and have your minutes. required by your state and file the necessary forms and have your minutes. And people get under the mistaken impression that just because you send 500 bucks off to LegalZoom that you're protected and you're just not. And I guess I should finish up with the idea of piercing the veil. That's the fancy lawyer term for making someone personally liable for the debts of the company. So even though you have a corporation, how could making someone personally liable for the debts of the company. So even though you have a corporation, how could you be personally liable? Well, there's a lot of different ways. There's a lot of different laws, but I can tell you generally, uh, there's three

ways you get in trouble. The first is you don't follow the corporate formalities. You know, you don't issue stock. You don't do your registrations. You don't do your minutes. If, if, if a lawyer can go into court and show a judge that you didn't take the company seriously, then the judge isn't going to protect, use it as a method to protect you. And then they, in essence, pierce the veil. The next way you get in trouble is with the money. If you start using corporate money to pay pay your pool guy or make your car payment or your house payment and you're not properly accounting for the money, that's an issue. Another way you get in trouble is if you fail to adequately capitalize the company.

If you keep the bank account for the company empty and just put money in when you absolutely have to, to pay a check or a bill or something. Again, the judge is going to look at that and say, well, this wasn't actually a separate legal entity. This was really just you having a fake company. So that's why if you do this stuff, make sure you've got someone in your life that can kind of help you keep an eye on things and make sure there's no problems. Make sense. Yeah. It's not that hard. And as you grow, it's probably something you're going to need to do. So ask a lot of questions. Make smart answers. Make smart decisions.

And don't be afraid of this stuff. It's not that hard. Yeah. And get help. Yeah. Get help. Please. Well, what haven't we talked about?

Is there anything else left to say on this one? I think we've done a good overview. There's not a whole lot more to say. There's either not a whole lot more to say or there's 20 hours more to say one or the other right i think that that to get back to the disclaimer this is the this is the uh this is the overview from this point where do you go and the answer is you talk to somebody if you are thinking of setting this up you talk to a lawyer you talk to your accountant and get advice about the right move for you. Because this is not the kind of thing that is a matter of your personal preference as

a whatever you are for your profession. It really is a legal and tax-related decision that you should use your legal and tax-related people to help you choose or tell you what to choose. There's no gut feeling here. It's, you know, advice from experts. You can do it yourself, but you could also do your own root canal and neither one of them usually turn out very good. I don't recommend either of those. I used to joke when I did a lot of litigation that one of the best things in the world, I loved LegalZoom because almost every time I sued a company that was formed by LegalZoom,

I was able to pierce the veil because they just inevitably didn't do it right. All right. Well, if you would like to reach us and give us your feedback about this episode or any other episode, go to relay.fm slash freeagents. There's a contact link on that page. You can tweet at us at freeagentsfm. You can visit our Facebook page at facebook.com slash groups slash free agents group. And until the next fortnight, when we talk to you again, thanks for listening.

Bye, David. Bye, Jason.