#107 What I Need to Know About Incorporating My Side Business, with Attorney Tanya Bower - ENCORE

Show Notes

Do I need to incorporate my side business? Which type of incorporation, S Corp, C Corp, LLC, is the right choice for me and my business? What are the advantages and disadvantages of each? These are just a few of the many questions Lori Vajda and Nola Boea had for special guest and business attorney Tanya Bower, a director with law firm Tripp Scott. From protecting your assets to establishing credibility, there’s more to know about incorporating your small business than which corporation to choose. This was our most popular episode in 2021, so we’re offering this encore because it’s just that good.  ​

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In This Episode You’ll Learn

• When incorporating your business may not be the right choice. 
• What a prenup is in the world of entrepreneurship and why you need one.
• The main, and maybe even the most important reason, for incorporating your business.
• Why choosing the wrong type of incorporation could cost you personally and financially.

While incorporating your side gig may reduce personal liability, there’s another important reason to do so, as Nola and Lori found out, tax saving. That’s right. Are you a musician on the side? Well, you musical instruments could earn a tax deduction. Photographer, hairstyle or yoga instructor? Yep, your equipment may all be deductible. Of course you should consult with an accountant or business lawyer before filing your taxes. As attorney Tanya Bower explained, knowledge about incorporation is power, and that power is the ability to know the best way to protect yourself and the future of your business.

(4:45.17) The single biggest mistake entrepreneurs make when starting a business.
(6:58.62) These missed opportunities could cost you more than just revenue. 
(7:39.66) This type of corporation allows you to control whether revenue is paid to you in a salary or in dividends. Knowing the difference can save you money.
(11:58.60) The four main pathways for structuring your side hustle or small business.
(24:29.62) Thinking of starting a cause related business? You’ll want to know about this incorporation designation.

Resources 

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Transcript

Nola: [00:00:00] Starting a side hustle is exciting. There's a real opportunity to make money and maybe even one day turn it into a full-time business. Creating a side gig comes with great responsibility. Many aspiring entrepreneurs worry about the legal stuff. Like, how do I go about setting up my business? What's type of business corporation should I choose? While others may wonder, if I'm just selling my crafts on the side, or doing a little computer work in the evenings, or making some extra cash driving for grub hub, am I really a business? Well, don't you worry, side hustlers. We've got you covered. And maybe even help you stay on the right side of the law.

Announcer: [00:00:38] You're listening to the Sticky Brand Lab podcast, where time strapped professionals, like you learn how to create a business you love in as little as three hours a week.

 Lori: [00:00:49] Whether you're an aspiring side hustler working on your passion project or have joined the side gig economy and are bringing in a little money on the side, you may be thinking, since you're not earning steady income it's not really considered a business yet. Think again. Hello and welcome, podcast listeners. Lori and Nola here. And in today's episode we'll be talking to business attorney Tanya Bower about the ins and outs of starting and registering your business. But before we do, help us help you stay in the know. Be sure to subscribe to our podcast on Apple podcasts Google podcasts Spotify, or wherever you listen to podcasts. That way you'll never miss out on any of our weekly helpful, informative and always interesting podcasts. Now let's get this Find-out-what-you-didn't-know-you-needed-to-know-about-registering-your-business episode started!
But before we begin, a little disclaimer. In today's episode we'll be exploring the topic of incorporating your side hustle with attorney Tanya Bower. The ideas and opinions shared are for informational purposes only and do not constitute professional legal advice. Please consult with an independent legal advice expert for information specific to your city, state and circumstances. Now on with the show.

Nola: [00:02:08] Our special guest today is attorney Tanya Bower. Tanya is a director with the law firm Tripp Scott in Fort Lauderdale, Florida. A practicing attorney since 1996, Tanya's practice focuses on corporate and tax matters such as estate planning, asset protection and wealth preservation. She counsels business owners on a wide range of areas including establishing and dissolving corporations, drafting contracts, limited liability companies with partnerships, establishing, amending and terminating pension plans, and representing owners in acquisitions and mergers, analyzing the tax aspects of these transactions, as well as estate planning matters. Wow.

Lori: [00:02:51] Wow For sure.

Nola: [00:02:52] Welcome Tanya. So, what do you enjoy most about the work you do, and specifically working with side hustlers and entrepreneurs?

Tanya: [00:03:01] Entrepreneurs always come at you from a unique perspective. And side hustlers as well. And so it's nice to sit in the room and shift your perspective or understand their perspective.  And that's what I liked the most is the uniqueness that they bring to a situation.

Lori: [00:03:19] Do you think that some of that is just as a group we're we don't know what we don't know? So, we have big dreams as a side hustler, aspiring entrepreneur feel like the world is our oyster?

Tanya: [00:03:33] I think the one thing that goes through his side hustlers and entrepreneurs is their ability to handle taking risks. And I think that's what you know that that that drive to take a risk also allows them to look at things differently. And and see something. you know a few years ago we met with the two guys in Fort Lauderdale who started Delivery Dudes. Now I would have never thought about Delivery Dudes. You know the that’s the local Florida or Fort Lauderdale kind of equivalent to Uber eats before Uber eats started. And you know they're young guys and they just saw a need and went for it. And that's what I like about entrepreneurs and side hustlers: They see the need, they take the risk, and they move forward.

Lori: [00:04:17] That's great. Well since you have worked with many entrepreneurs can you tell us what some of the most common mistakes you see that they make when they're just starting out?

Tanya: [00:04:28] So you forgive me I get a little sarcastic about it but they don't sign their prenup. Um

Lori: [00:04:36] That is a really good point because working now is this if they're in partnership or just in general?

Tanya: [00:04:45] Yeah. Typically, I think the biggest mistake I see with entrepreneurs who go in together with somebody, whether it's a brother or their best friend or their cousin. They don't design their agreement between them and shame on them if they don't have it because not having it can destroy the business especially as they progress in the business.  One person is focused on money. One person is focused on expanding and risk they can't see eye to eye and meet and make a decision because they've just kind of diverted even though they can still be the best of friends. But it is probably the biggest mistake people make going into business.

Nola: [00:05:27] And what if they're not a partnership? What if they're solo?
 
Tanya: [00:05:30] So with solos it's really planning ahead. What is the right structure for me? So Um you know like if you look at somebody who sets up a limited liability company And they're the only member, well, you’re back to basically for tax purposes being a sole proprietorship. So you potentially miss out on some tax benefits that could arise being in a more definitive business entity tax setting.

 If you know you're going to go into business and you're probably there's somebody important who doesn't have any money in the game and you're going to want to award them some type of equity, an LLC might be the better structure just because there are some tax advantages.  So it's really kind of having the big picture and having a conversation where do you see yourself going Um in structuring the business? 

Lori: [00:06:21] When we started, you had mentioned that one of the things that you enjoy about working with entrepreneurs as they were risk-takers and we were talking about we dream big we're willing to take our idea and run with it. And yet part of what I hear you saying is you also have to think a little ways down the road.

Tanya: [00:06:40] Right . You got to think big picture and you've got to go for it but at the same time you need somebody whether it's your attorney, accountant, business coach or something who can guide you and keep you a little more focused on the formalities that will only benefit you in the future.

Nola: [00:06:58] Do some people make the decision to incorporate or think about their tax implications do they make those decisions too late sometimes?

Tanya: [00:07:07] Sometimes. Yes.  Let's just say you're two lawyers and you're going to start a practice together and so you go ahead and you set up an LLC.  That means that every dollar I make is going to be treated on my taxes as employment income. So not only am I going to pay Social Security, I'm going to pay Medicare tax on every dollar that comes in the door. Whereas had I maybe sat with my accountant or an attorney who knew about it, and talk to them about what's the right structure, Maybe I would have gone with a corporation, or I'll get really fancy, an LLC that elects to be taxed as a corporation, where I can control what portion comes to me as salary and what portion comes to me as a dividend, where I don't have to pay the employment taxes on the dividend.

Lori: [00:07:57] I think it's safe to say, especially given what you've just shared here is that we often don't know what we don't know until it's too late. And we may learn some really important lessons about how to structure our hobby or our side gig or even a full-time business, as I said, a little too late. So one of the challenges just in general when you're talking about business regulations is that for most of us the language is so over our heads that legalese is not easy by any means. So is there a difference in how the government sees a part-time business or a side hustle versus when it becomes your primary source of income?

Tanya: [00:08:42] Yes and no. So what used to be you know we did they weren't called side hustles. They were called hobbies, right. And so there were rules about hobbies. You could only take a loss for a hobby, and I can't remember the rule but for a certain number of years, and if you never made a profit you had to stop taking the loss for the hobby. The world's kind of shifted more to a side hustle And what you have to be careful for it's still that that hobby rule still exists. And that is you know you need to show a profit or maybe If you continue to show a loss year after year that the IRS comes in and says it was a hobby and you're not allowed to take any losses.

 Lori: [00:09:22] So as a freelancer who might have a full-time job but they're doing their side hustle as a freelancer or contractor, does it fall under the same explanation or are they slightly different?

Tanya: [00:09:35] I think they're slightly different I don't think the freelancer really falls under hobby because it's a little bit more of a dedicated time. But you also don't necessarily expect a freelancer to end up in a loss situation.  One of the reasons why somebody incorporates is to limit the liability that would potentially rest on their shoulders.  Let's take somebody who builds a widget, something that's mechanical that they've created. And why would you incorporate? Well, you would incorporate because the mechanical equipment could cause damage to somebody. And if they're going to sue you want them to sue the entity and not sue you personally. So what you benefit from when you move to that entity structure is you get to build a wall around yourself and try to leave the liability within the entity, the entity that sold the product.

Nola: [00:10:34] The entity being your company that has been incorporated.
Tanya: [00:10:38] Exactly.

Nola: [00:10:38] Your company Inc or your company LLC or whatever. Right? That's the entity that can get sued and not you.

Lori: [00:10:49] Well I guess this explains why we needed you on here as a guest uh to help us understand the business aspects of incorporating. And when we come back Tanya is going to help us understand what options for incorporating a business are available, the pros and cons of doing so.

Nola: [00:11:06] Are you an aspiring entrepreneur, who's ready to share your vision with the world, but you're not sure exactly what that would look like? Or do you just want a safe soundboard to help you evaluate your top business ideas? Then a Be You-Nique session is just what you're looking for. This two-part clarity session is customized and based on your individual goals and experience. Together, we will help you determine your ideal business niche, target audience, and strategy. You'll leave the session with a realistic timeline and a set of small-step, big-win goals that make sense for you and your lifestyle. Sign up today for a free 20-minute consultation at stickybrandlab.com/shop.

Welcome back to Sticky Brand Lab the podcast that reduces excuses so you can gain traction and take action on starting your side hustle. So, Tanya, can you tell us what the options are to structure a side hustle?

Tanya: [00:11:58] Sure, I think there are basically four, whether it's a side hustle or a business, there's four pathways. One's a sole proprietorship One's some form of partnership. A one's a corporation. And the last one is a limited liability company. Those are your four basic pathways.

Nola: [00:12:16] And so, tell us about um what are the pros and cons of each and you know legal, financial implications?

Lori: [00:12:23] And what do they mean?

Tanya: [00:12:25] Sure. So so let's start with this sole proprietorship which probably is the most basic and one you probably slip into really not intentionally plan on being a sole proprietor. So think of the person maybe in the neighborhood who's your seamstress who you go to her house and she fixes your clothes for you but she doesn't work for anybody. That's a sole proprietorship it's something she's doing to earn money and she's working for herself. She doesn't have to give them money to an employer. It's all hers. And so that's your basic sole proprietorship.  But the downfall with the sole proprietorship is one, you're stuck on a schedule C on your tax return. That potentially limits some deductions that you might otherwise be able to take against income, than when you have a corporate or an entity created. And then the other issue with a sole proprietorship is, whoever you are, Joe Smith, you're the guy who's responsible for any liability in any debt of that sole proprietorship. So there's no buffer between you and the creditor of the business. You are the business. You're responsible, you're personally liable. So if you fail to pay a vendor, the vendor can come after you individually. Whereas, when you have an entity, generally that's not the case.

Nola: [00:13:47] Interesting.

Tanya: [00:13:48] Um and so what an LLC is is basically a mashup of a corporation and a partnership. It allows you to get the liability protection that a corporation provides. But it gives you the flexibility to have different kinds of ownership, different kinds of um of rights, and you can elect to have it treated as a pass through. And a pass through means the tax doesn't get paid at the entity level, it passes through to the owners and the owners pay the tax.  And so you don't have two levels of tax like you do with a corporation that it doesn't all elect to be an S corp.  And it really works specially where you’ve got capital invested, you've got sweat equity, you've got capital but you've got this employee who really is a buckling down has been giving you time and energy and you want to reward him somehow. But if you just give him ownership, he's going to have a huge tax burden. So an LLC has some flexibility where you can give what we call like profits interests. Where they have the right to the profits of the business, they don't necessarily have the rights to look at the corporate records. They don't necessarily have any voting rights, but it's a way where they are kind of like an owner without a huge tax cost of being that owner. And they don't really have a say in the management of the company.  So an LLC gives you a lot of flexibility on how you can manage the workings from a accounting and a tax perspective and even rights amongst owners.

Nola: [00:15:34] I knew about the tax pass through, so you're not getting taxed twice, but what I did not realize was the benefits of the flexibility. So let me give you an example of how I might have applied it. So there was a time that I was looking at creating an app.  I went through some preliminary steps to map out a software and I really wanted to get somebody on board who would be part of the team and start coding.  So I I had that dilemma. Do I you know bring somebody on board and make them part owners in this idea and give them that much power or do I give them a salary and know that this person doesn't really have a stake in it.  And it sounds like uh LLC could have been legally set up so that they have a financial stake and they're financially rewarded.

Tanya: [00:16:28] Absolutely. So so I have an entrepreneur who is kind of on his third round of business He loves cars And so he bought a company that  takes certain classes of cars and refreshes them. And like we're talking like old Broncos and stuff Jeeps and stuff like that. And what he realized was it was more work than he wanted. And so what we did was we incentivize the two key employees by giving them what we call it profits interests in the entity. So that one, it tied them to continue to work there right? Because if they didn't work there, we made the profits interest go away. So we made it a re acquirement that they had to continue to be employed. Two, you know, they had some skin in the game so they weren't just wasting like buying parts. They didn't need or negotiating better prices on parts because at the end of the day, if there's a hundred dollars profit, they're getting some portion of it. Instead of just being an employee who maybe I get a bonus maybe I don't what incentive do I really have?

Nola: [00:17:26] Right. So that's that's really interesting.

Tanya: [00:17:29] So, parallel with the LLC, like I tend to create one corporation to every nine LLCs, is the corporation which is our traditional been around I don't know two or 300 years, And there are two types of corporations from a tax perspective. One's a C corporation which typically you think of any publicly held entity - IBM, Uber, Gap, all of those entities, they're C corporations.  There's double tax. The corporation pays a tax and the shareholders pay a tax when they get a dividend.

And then there's what we call an S corporation. So it falls under the legal parameters of a corporation under state law, but for tax purposes it is elected to be a pass through, and the entity doesn't pay tax, the shareholders do. But for the privilege of that pass through, the IRS says this type of corporation has limitations on it. It can only have a hundred shareholders. You can't have non-residents own it. You can't have really another entity own it unless it owns a hundred percent of it and it's another S-corp. So there are limitations of what kind of owners can own an S Corp. And then on top of that what the IRS says, aside from voting rights, every share in the S-corp is treated the same way. So the only difference you can have is voting rights. You can have voting and non-voting but outside of that, every share is treated the same way. And so that becomes a problem when you're trying to raise capital going forward. Which is what to Lori's, I think it was Lori's question on that first before was, you know where are the mistakes rise. Well so everybody comes in and they do the S-corp because they think about it and that's the easiest way to go but then they want to bring this investor in and it's an entity, so it can't be an S Corp. So we have to restructure the entity all over again, and potentially, potentially have a tax consequence converting it to a now an LLC or going back to a C Corp to allow this investor to come in. So that's where I talk about that big picture of where you see self going or I'm going to need capital in two years and it's going to be this amount of money, is worth having that conversation.

Lori: [00:19:51] So so many individuals then have the S-corps, and you're saying if you think like if you were going to develop the app say that Nola was talking about, and and you envision that someday taking off then an S-corp would not be right for your business.

Tanya: [00:20:10] Most likely, Yes. That's That's correct.

Lori: [00:20:13] But if you were a freelancer and you thought you might eventually go from part-time business to a full-time business, the S Corp, well actually that brings up a question. Would that make more sense if you were the freelancer?

Tanya: [00:20:31] Yeah. Being an S-corp makes more sense as a freelancer.  Mostly for tax reasons. And that is, you typically as a freelancer you're not bringing in capital, right? You're not bringing in investors. So you don't really worry about having different flexibility of share ownership. But what it does do is it allows you to basically pay yourself a salary, that the salary is subject to employment taxes, and then take a dividend of anything else. And generally, when I first started practicing the rule was kind of 60 40. So if you made a hundred thousand dollars you paid yourself 60,000 of salary 40,000 of dividend and the dividend is taxed at a different tax rate. Right now, it's qualified dividend It's probably at 25% instead of whatever your normal tax bracket is and you don't pay the employment tax which is basically treated a self-employment tax another 13.6%. So when you're a freelancer and so th those service providers where it's your services or earning the money and S-corp kind of is the way to go from a tax standpoint.

Lori: [00:21:39] If you were uh employees or you were to hire out any does it make a difference in any of these uh  designations?

Tanya: [00:21:47] That's probably one where you really want especially if you're a sole proprietorship you want to flip into an entity because the sole proprietorship reports everything under your social security number. So you know absent the sole proprietorship hiring employees does not really matter in any of the entities.

Nola: [00:22:04] So I have a question about S Corp and C Corp. And that is, let's say you decide to incorporate. That is literally a C Corp. But the S-corp is actually something you do through the IRS. So is it true that you need to take that extra step?

Tanya: [00:22:24] Yes

Nola: [00:22:25] apply or register?

Tanya: [00:22:26] You're a hundred percent correct. So what happens is you create this the corporation and by default if it has the word Inc at the end or the word corporation your choice is to be a corporation for tax purposes. And in order to fall into the S-corp and be a pass through you have to file what we call a form 2553 and actually make an election to be treated as an S corporation. You typically have 65 days.  We generally try to get it in 65 days from incorporation but the technical rule is as 65 days from starting business. So if you fall if you file it timely then from inception you'll be treated as an S-corp. If you file it late outside of that 65 days then generally you become an S Corp in the next tax year. So that first tax year, you're you're as a C Corp. So it's really important that you do follow through either do it yourself, It's it's the form is not so hard but you know it can be it can scare a lot of people. So, you know, your accountant can file it for you but it's not so burdensome that you can't file it yourself.

Nola: [00:23:40] And you know what and I think that's so important. The whole point is to don't let this stuff intimidate you. And and it can be so intimidating. That's why we have you here because you know people sometimes don't know how to start or they'll you know you start doing you know internet searches and can be overwhelmed with the information. So it's this is this is so helpful.

Lori: [00:24:01] Very helpful.

Nola: [00:24:01] And frankly I've done the registration of an S-corp and It's very very simple. And The IRS their website now they've been making it a point to be user-friendly.

Tanya: [00:24:11] And you know they give good explanations on their forms. And so yeah and there's a lot of information instructions but for small businesses and um non-profits the IRS really does a good job with explanations on their web portal.

Nola: [00:24:29] People want their business to be that change that they want to make in the world.  They want to be able to earn money but they also don't want to have to live by the old adage that profit is the only reason that there is a business. So there are other ways to structure your company that makes it, from the get go, a cause-related company.  I see you nodding. And so you tell me what I'm trying to talk about.

Tanya: [00:25:00] Sure You know I'll tell you these are new to me And so I've learned, And the easiest one for me to point to because it's the one I wear is Athleta, which has a public benefit or a special purpose. And for them it's I think empowering women and using sustainable products. And so this the concept of a benefit corporation or a 3LC is that you create one of those corporations or those limited liability companies with the idea of while yes you can still make a profit, your purpose is to benefit the public good.  Um so the easiest one for me to talk about is like Florida because I now know Florida. And it has three requirements. And one is the statutory purpose is to engage in some kind of public benefit activity. Uh the second mandate is that the directors and officers have to consider when they're making decisions for the corporation of that public benefit goal. So they have to think about are they meeting the goals for which it's established. And then the last one is they actually have an obligation to provide a report to the shareholders of how that public benefit is actually being met. So the idea is, both the benefit corporation and the 3LC ,is to really  bringing in social benefit to what you're doing. It doesn't mean you're not making a profit It doesn't mean you don't have to pay taxes. Potentially maybe that means you are donating a portion of profits to charity. It's not required under the statute, but that could be what you've decided to do.

Now then the other thing is you really technically can't call yourself a B Corp unless you've been approved by this not-for-profit called B Lab. And they're the ones who actually give you the B Corp label. Otherwise, you're just a benefit

Nola: [00:26:55] A B Corp is like a seal of approval for any company whether it's a benefit corporation or not. So there I know there's a little bit of a little bit of confusion there but a benefit corporation really is the legal structure while the B Corp is that seal of approval, that like an accreditation stamp.

Lori: [00:27:12] So basically you are being mindful enough to set up your business as doing good social good right from the from the start.

Tanya: [00:27:21] Correct. Correct.

Lori: [00:27:23] This has been really so helpful. And it clearly Tanya you know your stuff and you've made it so easy for our listeners, and to us, to follow along and understand what we didn't know we needed to know.  On a personal side, though, we have a couple of questions for you so that we get to know you on a different level. To date what would you say is the most courageous thing you've done in your life or your career so far?

Tanya: [00:27:52] In 2019 I went all by myself and joined a yoga retreat. In all honestly, I know that the woman who puts the retreats on it was not my first retreat with her but I met her in Morocco. And if you look at my Facebook page my screenshot is myself doing um triangle on in the Sahara Desert on top of a dune. Which is probably the most courageous thing Cause I'm a fear of Heights that I never used to have.

Nola: [00:28:20] Wow how cool! Next question: What What is your guilty pleasure?

Tanya: [00:28:28] Um probably, cause it does bring a lot of guilt, sitting in my pajamas at three o'clock on a Sunday afternoon TV.

Lori: [00:28:42] Just she's speaking your language..

Tanya: [00:28:44] And it let me just tell you when I did I did a strength finders test about seven or eight years ago and pin it pinpointed me exactly my top five strengths. And it said yes you you're the one who sits there and you feel tremendously guilty. And you feel useless when you're sitting on the couch on a Sunday doing nothing. I'm like who is in my house with the video camera!

Lori: [00:29:10] That is awesome And I can relate to that as well. Well, we believe in inspiring quotes. And as a matter of fact, we developed a PDF of inspirational quotes for aspiring side hustlers and entrepreneurs. We thought it'd be interesting to see what your personal favorite quote or motto is for being a successful attorney.

Tanya: [00:29:33] So there's a difference between my favorite quote and kind and my motto

Lori: [00:29:37] Either.

Tanya: [00:29:39] It's really my motto which is to bring integrity and understanding to everything I do.

Lori: [00:29:46] And you did that today. I haven't got goosebumps whe you said that cause you did that today. So you're living your motto. And your inspirational quote?

Tanya: [00:29:56] Uh it's my favorite by Madeline Albright and yes I kick out half of the population but um, "there's a special place in hell for women who don't help other women. "

Nola: [00:30:06] You

Lori: [00:30:07] You won't be visiting that place soon because we appreciate you helping us out and helping others on our side hustlers out.

Tanya: [00:30:15] My pleasure.

 Nola: [00:30:16] If you'd like to learn more about Tanya, her services, or get her free download of things you need to know in setting up your business, visit our website, stickybrandlab.com /resources.
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That brings us to the end of today's episode. We'd like to thank attorney Tanya Bower for being our guest and providing valuable information on incorporating a business. Be sure to come back next Tuesday and every Tuesday for another informative episode. And remember. Action creates results. So tap into your desire by taking 1% action every day. Small steps lead to big effects.
 
Out-Take: A practicing attorney for 25 years Tanya focuses Tanya's focuses or let me start over.