Welcome to the Unshackled Owner Podcast. Your host is Aaron Young, a business owner, an entrepreneur of the last 34 years. How are you going to structure your business? If you’re trying to be an unshackled owner and you want to build a business that’s bigger than you, that works harder for you than you have to work for it, you must be built on a solid and a strong foundation.
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A Strong Foundation With Aaron Young
Hello. Welcome to The Unshackled Owner. My name’s Aaron Young and I’m your host today. I’m really looking forward to our conversation we’re going to have today. You see, a lot of these episodes are going to talk about philosophical ideas, things like focus, clarity, culture and so on. We’re also going to talk about very pragmatic things.
I thought we don’t want to get very far into these episodes without talking about one of the most critical pragmatic issues that you need to be aware of. That is, how are you going to structure your business? If you’re trying to be an unshackled owner and you want to build a business that’s bigger than you, that works harder for you than you have to work for it, you must be built on a strong foundation.
A Strong Foundation: You want to be in the very best possible structure to get you from where you are to where you want to go with this business.
What I mean by that is you want to be in the very best possible structure that’s going to get you from where you are to where you want to go with this business. You want to be considering, how are you going to be organized, how are you going to infuse money into the business, who are the shareholders going to be, how is the board of directors going to operate, how do you present yourself to the world and what laws, both laws and tax codes, are going to be the ones that best benefit your particular enterprise?
Because everybody’s different and there is no one size fits all. What I want to do is just give you a quick overview of the four primary ways that people organize their business, give you a quick little understanding of what each one of them is and then lay out for you my perspective on those.
Now, I need to clarify by saying I’m not a lawyer and I’m not a CPA. When I’m giving you my counsel, it’s really as a business owner like you, a guy who’s been down the road for many, many years, over three decades of working with lots of different business entities for lots of different purposes. These are my musings, my opinions and I strongly encourage you that if you have any deeper questions that you want to get verification on, you go find a lawyer or a CPA.
Now I’ve done my ‘don’t sue Aaron’ speech, now let’s talk about the four primary mechanisms or three structures and one other way that people are setup and the one that’s not a structure but that’s a way to be organized is as a sole proprietor. Sole proprietor’s really easy because it’s just you. There is no business structure. It’s just you saying, “I’m open for business. My name’s Aaron and I fix drinking fountains. If your drinking fountain is broken, I can come over and help you and you can pay me. That’s great.”
As a sole proprietor, there are number of things you can deduct on your taxes. There’s no real asset protection because you are the business and the business is you. Consequently, if there’s a liability some place, if somebody decides that you didn’t fulfill on your side of the contract, you let them down, the thing you did actually caused them harm. If they decide to sue you, then the only entity there is to sue is you. You have no liability protection but it is simple, simple, simple.
There is no corporate formalities to follow, there’s just your tax return, there’s no concern about co-mingling funds between you and the business because you and the business are one and the same. There you go. That’s a sole proprietor. In my opinion, certainly the simplest and certainly the least safe and the least tax advantaged.
There’s corporations. Corporations start out as a C corporation. A C corporation is a completely separate entity from you. It has its own birthday, it doesn’t have to be on a calendar year so you could say our fiscal year begins April 1st and ends March 31st or whatever. You set the fiscal year, it does its own tax return, it has a board of directors, it’s utterly separate from you. You may be a shareholder but other than that, the business is utterly separate.
A Strong Foundation: Virtually all publicly traded companies are C corporations. Because you can sell shares of a C corporation to anybody.
Those are great. Virtually all publicly traded companies are C corporations. Why? Because you can sell shares of a C corporation to anybody. It could be a human being, it could be another company, it could be a fund, like a hedge fund or some investment fund, it could be a domestic individual or a foreign individual or a foreign company. Basically, anybody can buy shares of a C corporation, which make them great for being publicly traded.
Virtually, any public business, publicly traded business is going to be a C corporation. A lot of other companies that are going to have multiple shareholders end up being a C corporation. Or if the company’s going to be owned by, even if it’s only got one shareholder, if it’s going to be owned by a company or owned by a foreign individual, non US individual, it’s going to probably be a C corporation.
Now, some people say, “I don’t need all that separation and I’d like to simplify my life, simplify may tax reporting, make everything just easy and flow together and I’m just going to own this company by myself or me and my spouse are going to own the company.” We’re going to set it up, not as a C corporation but we’re going to file a C corporation and then we’re going to file a form with the IRS requesting being treated S corporation, a simplified corporation.
An S corporation can only be owned by a human being and can only be owned by US citizens. A company or a foreign individual, doesn’t matter if your uncle Charlie from British Columbia wants to put money into your company, uncle Charlie can’t be a shareholder because Uncle Charlie is not a US citizen human being. It doesn’t matter if your mom’s hedge fund that she runs wants to put money in, they can’t put money into an S corp because you have to be a US citizen human being.
An S corporation’s nice because it goes out there, it still has same tax deductions, basically the same liability protection as a C corp. At the end of the day, at the end of the year, gains or losses flow directly under your personal schedule C or the schedule C of the individual shareholders. An S corporation is really terrific for a one owner company or a company that’s owned by spouses. I’ll tell you why in a minute.
If just you and your spouse are going to own the company and you want to have your own individual ownership but you want it to be simple, you’re going to go with an S corporation almost every single time. It’s a really good thing for most closely held companies. S corporation’s simple, easy, super good for liability protection, super good for tax, savings and simplification. S corp is a great way to go.
A Strong Foundation: The idea of an LLC was that it would be an upgraded version of a general partnership.
The third entity that is typical is the limited liability company, LLC. LLCs are a fantastic invention. Corporations have been around for over 500 years. LLCs have only been around since 1976 when the state of Wyoming passed the very first LLC legislation. The idea of an LLC was that it would be an upgraded version of a general partnership.
Multiple of us could come together and start a company and have ownership of the company and have whatever we decided on how we would divide the company up. Even if, let’s say, I had 90% ownership of the company but you put all the money in and we were going to be losing money for a while as we got started, I might own 90%, but you could take 100% of the losses from the company on those startup years. You’re putting the money in, the company’s losing money, you take all of those losses back and apply them against other gains you have in other places.
LLCs give you tremendous flexibility, tremendous protection because your liability is limited to whatever is in that company. You can’t have somebody from the outside, some adversary from the outside come in and sue and win a lawsuit and take away your ownership. You’re never going to lose the ownership and you’re never going to end up with some partner that you never desired to have.
LLCs are great from a flexibility perspective, from a safety perspective, from understanding who the owners are always going to be perspective, terrific flexibility, unbelievable flexibility in an LLC. The problem with LLC is that because they’re really meant to be an upgraded version of a partnership, they’re not really ideal as a single member, a one owner company.
Right now, I see a big problem in the United States where there are a lot of one owner, one member LLCs. The problem with those is they are generally just look straight through. In other words, if you’re the only owner of the LLC, the government, whether it’s the court or the tax collector, they go, “Oh, there’s only one person to have a liability.” It’s a called a disregarded entity. They just disregard that the company’s there and they look right through and that puts all your personal stuff at risk.
A Strong Foundation: I usually discourage people from using an LLC if they’re the only owner and that’s going to be their main operating business.
I usually discourage people from using an LLC if they’re the only owner and that’s going to be their main operating business. I often encourage to look at an S corp or a C corp versus an LLC. When you have two, three, five, ten unrelated parties who are all coming together, they’re going to work in the business, they are going to bring their own unique and disparate talents and resources, then I would say, “Hey, an LLC would probably be perfect for you. You got to take a look at that.”
There it is sole proprietor, C corp, S corp, LLC. Very, very simple. The litmus test that I use when I’m going to form a new company, I think, who’s going to own it, is it just me? If it’s just me then maybe it’s going to be a C corp. If it’s going to be me and a few other people who are all going to be day to day involved in the business, probably an LLC. If it’s me and my spouse, probably an S corp. If it’s me and other people because I’m going to raise outside equity, it’s almost certainly going to a C corporation.
Those are the way that you can look at where you are now. If you find that maybe you’re in wrong entity based on my description just now and maybe you should be an LLC instead of an S corp or you shouldn’t be an LLC because you and your spouse own the company, you’re the only owners and you thought you had individual ownership but now I’ve just told you that you don’t, then you say, “Oh, maybe I should be an S corp,” whatever it is.
You can go ahead and put stuff in the comments or you can reach out to me through support@AaronScottYoung.com. Let’s talk about what would be the right structure, what would be the right strategy for your business.
The main thing is to be thinking and be intentional and be proactive in deciding what entity is really right for you. Because that entity is going to be the vehicle that’s going to drive you to your destination. It’s like saying I can have a race care or I can have a dump truck or I can have a school bus and they’re all going to get me from point A to point B. But they’re all used for very different purposes.
Your C corp, S corp, Limited Liability Company, they all are designed for very specific, very unique results. They’re designed to manage something that’s organized in a certain way. It’s not one size fits all, it’s not, “Oh, that’s a cool or trendy or sounding entity so I’m going to do that.” No, you want to make sure you get the right vehicle to get you from where you are to where you want to be and do it with the least amount of adjustments, changes, reorganizations as you have to do.
You want to make sure that the tax code and the law associated with that business entity is going to be the most favorable thing for you so you get the best possible result, the best possible tax treatment, the best possible liability protection, the best possible exit planning so that everything is right.
A Strong Foundation: When you start, you begin with the end in mind. What’s the end result you want?
In other words, when you start, you begin with the end in mind. What’s the end result you want? Let’s make sure that the entity, the corporation or LLC that you set up is the right thing to get you to that end goal.
All right, that’s it for today here with The Unshackled Owner podcast. I hope that you enjoyed that. I want you to let me know what other topics would be exciting for you to hear about. I’m going to bring on special guests. I’m going to be doing these little training sessions and I’m going to be giving you my musings, my philosophies on how to build a successful business.
At the end of the day, what I want for you, for you the listener, is to be able to have the shortest, most direct and least bloody trail from where you are to what you want to build. I want you to build a company that gives you the freedom, the money, the lifestyle, the wealth and the ability to serve that is what you’ve always wanted. That’s what we’re doing here at The Unshackled Owner podcast.
It’s not about walking away from your company. It’s about building a company that leverages your strength, your talent, your superpowers and then also shows you how to bring around you a wonderful team that will be able to help you just magnify everything you’re doing. That’s what the podcast’s about. That’s what I’m going to be teaching you.
Tell your friends, go ahead and like this, share this podcast and let’s build the community. I want to see thousands and thousands and hundreds of thousands of unshackled owners out there all over the world. I’m Aaron Young, I’m your host. I’m glad that you are with me today for this lesson about building your business on a rock solid and a strong foundation.
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