EP. 130 More Knowledge, More Wealth: AM 590 Radio Show

Transcript:

Announcer:

This is More Knowledge, More Wealth, with your host, Gabriel Shahin. Gabriel is a certified financial planner and a registered investment advisor at Falcon Wealth Planning. This show is not intended to provide personalized investment advice through this broadcast and does not represent that the services or securities discussed, are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast, in the process of making a full informed investment decision. More Knowledge, More Wealth, on AM 590 The Answer. Now here's your host, Gabriel Shahin.

Gabriel Shahin:

Good afternoon. This is Gabriel Shahin certified financial planner. Your host of More Knowledge, More Wealth! here on every weekend from 12:30 to one o'clock on Saturdays going over all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth. Now, to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird, with any personal questions you have that you want to relate this show to your specific situation.

Now, I'm a principal here at Falcon Wealth Planning. We are the only registered investment advisory firm, which means we don't sell product or make commissions. We are the only independent registered investment advisor. And we do all topics of personal finance. We do manage money as well, but we go over how much you have, what you should do, how much you're spending, how to budget. Making sure you're tackling debt properly, understanding the utilization of debt to increase your wealth, going over leases, loaning, buying. Folks, you name it. Anything that involves a dollar sign, folks.

If you want help with making sure that you get all the right answers that you need, if you want help with that, give us a call, folks. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird or visit our website at falconwealthplanning.com. That's falconwp.com for short.

All right, so I wanted to go over today. Some topics for those business owners out there. It seems to be we help a lot of small business owners and there are different types just those with entities, whether it's C corporation, S corporation or LLC or even those that are what's called a sole proprietor. So today I was going to talk to you about the businesses. I was going to talk to you about taxation of the businesses, and also which ones could make sense for you guys.

Now, there are some businesses as well. Let's just say it's not a business per se. Could be like holding a real estate in a corporation, in an LLC corporation to be exact. So I wanted to talk to you about those few things, but the first thing I want to discuss when talking about the business today is going over your exact situation fixating on what business makes sense for you. Now, first off is understanding the three main concepts. Now, the three main concepts are corporation, which we can classify as sub-classification of C versus S.

Now, those mostly is a IRS distinction. So really there's only one corporation for the state of California and other states, but the IRS has sub-classifications between C and S, which I'll go into a little bit later. The next option is an LLC or partnership. So that is another designation. We'll put those two in the same category. And the last one is a sole proprietor, which we'll call also a single member LLC. Now, the main benefits of a business is of course the option for unlimited wealth accumulation, which is a good thing, but also with that comes liability. Everything is high-risk/high-reward.

So looking at that and that specific situation, you have to know that with a business that you run, you are personally held liable based on what you're selling. If something ends up being hurtful to the person buying it or causes any financial devastation whether it's through misrepresentation, whatever it may be, you can be held liable for that. Which is why companies, which go from a sole proprietorship, which some people call a mom and pop shop into a type of corporation. And the main two, remember, LLC and S or C corp. So what that does, that limits you because now you have an entity that's making those sales. You have an entity that's making those proclamations. You have an entity that is taking that liability. So you'll need separate liability insurance so on and so forth.

But the benefit of that is your restriction, your liability is held just to that entity. So you have three different entities. Let's look at Elon Musk, for example, he has Tesla, SpaceX and the Boring Company. Well, if SpaceX ends up going into space and blowing something up accidentally, well, they're not going to come after Tesla's assets because those are two independent companies. Who cares if the CEO runs them both? So for that reason, the liability is strictly put on SpaceX and it will not affect Elon Musk's net worth, which he has in other stocks like Tesla.

So that is very, very important, folks, and for you to understand. So going back and looking at the liability, I've seen so many companies. It could be restaurant owners, which is very important. They have a sole proprietorship and that's not because if you serve somebody too much alcohol and they get in a DUI or a serious accident, that can come back at you showing that you served too much. So you have to be careful of that when you are running a business. So you should seek professional help on understanding what you should do and how you should protect yourself, especially if you have what is just a sole proprietorship, which is a business that's literally operating off of your social.

By the way, folks, if you're just joining us, you're listening to Gabriel Shahin, certified financial planner, your host of More Knowledge, More Wealth! here on every weekend talking about all important topics of personal finance. And today we are talking about business owners. And the important part of discussing business owners is just how much they're great at fixating on their business. It becomes their life. It becomes their second, third, fourth, only child they have where it's getting majority of the attention and love. And with that, they can neglect the other items in their financial situation, such as structure of an entity that's running a business.

In this case as a sole proprietor, we're talking about limited liability. Great. What also should be discussed is looking at the taxation of those entities. So when you look at a sole proprietorship or an LLC, those specific situations are taxed at one of the higher rates. And let me explain why. If you have an LLC, that's just in your name. Arguably, if it's an LLC with somebody else's name, that's more of a partnership. So an LLC just in your name is the IRS classifies that as a single member LLC. Which means it goes yet again on your Schedule C which is a sole proprietor. That's extremely important to note, folks. Why? Because as an employee or as a business owner, you are the employee and the employer.

So we understand everybody pays tax on the net profits. They pay it on the federal level and on the state level. But when you are self-employed, you have to pay into your payroll tax. Now, that payroll tax could be the Social Security and Medicare. Now, I'm going to keep it simple here. Let's just say the Social Security is 6% and Medicare is one and a half percent. So that's seven and a half percent. I know it's more than that, but big picture here, seven and a half percent is going to fund your Social Security and future Medicare.

Here's the thing. If you work for an employer, if you get a W-2 work for somebody, your boss pays the other seven and a half percent. So it's actually a 15% tax, but your boss pays half of it. So if you make $100,000 a year, you can look at that FICA and OSHA and all those other things. And you are paying even if you save into a 401(k), you can't avoid this part. You are paying seven and a percent of your paycheck. So your $100,000, you're paying $7,500, seven and a half percent into those two things. No way around it.

If you're an employer, which is self-employed, you're paying that other half of the seven and a half percent. So if you net 100,000, you're paying $15,000 in self-employment tax. They actually call it that on the top tax return. Your tax return makes sure you owe nothing, but maybe you have a lot of write-offs or real estate or whatever the case is or losses on investments, whatever it is. But your taxes will still show you owe $15,000 because of self-employment tax. It is so important, folks, to meet with a financial tax professional that understands your overall situation because a lot of people get that wrong. They think it's easy. They think it's expensive to do a corporation. It's too much of a hassle.

Heck, God willing, you're netting $100,000. And if you are, that is $15,000 in payroll tax you may be paying unnecessarily. Listen, I'm saying there's no illegal way to not pay anything, but there are proper ways depending on the entity structure that you have where you should strategically pay yourself a salary. Now, with a sole proprietorship or a single member LLC, you cannot pay yourself a salary. You're actually not allowed to. You can pay employees, but you can't pay yourself because it doesn't matter because it goes on your Schedule C, which then has self-employment tax. So it's extremely important to understand those major distinguishes.

So understanding your entity structure could save you a bunch of money, especially for companies that are newer it's extremely important to understand and talk with a financial and tax professional about what you should be doing. Because there is times I see people unnecessarily paying 5, 10, 15-plus thousand dollars on taxes and they don't have to. And so for business owners, it's so important to do that. This is why we're offering you a free financial tax assessment, folks. We want you to give us a call, especially with tax season always seems like it's around. But especially now, because these are the type of times you can do structures where you can start place as of 2022 and you can make sure that you don't make any mistakes.

Because I can't tell you how many times I've seen somebody. I saw a pool man. I mean, God bless him. He's making $200,000 a year net, by the way. So he was doing very well, but he's been a sole proprietor his whole life. And one of the reasons he's looking to change is because his barber who established a corporation was telling him, "You're absolutely crazy for not doing so." So instead of hearing it from your barber that you should be some type of different entity structure, folks, we can help. We can help point you in the right direction, tell you what you need to do. And we'll give that to you absolutely at no cost, folks.

We got offices all across Southern California, including here in the Inland Empire. We do help people nationwide as well, folks. Give us a call. We'll be happy to help. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird. We can help put together a financial tax assessment that can make sure we can find any opportunities where you can save money, folks. Give us a call or visit our website at falconwealthplanning.com. That's falconwp.com for short.

Folks, we're going to go on a quick break here and we're going to talk about taxation differences on S corp versus an LLC versus a C corporation and what makes sense for you. I think the first thing that we establish is the insurance, just structure of making sure you are having limited liability from your personal assets. But we're going to take it a step further and talk about tax and the things that you should be doing to save some money and to make sure that you are not unnecessarily paying more in taxes. Folks, we're going to come back after a few words. Stay with us. Look forward to serving you.

This is Gabriel Shahin certified financial planner, your host of More Knowledge, More Wealth! that's on every weekend covering all important topics of personal finance. We're going over retirement planning making sure you're prepared for retirement, Social Security and strategies, real estate, taxes; avoiding them now and in the future, investments, reducing fees, commissions and so on, insurance and estate planning.

Folks, we are offering a free financial assessment that you could take advantage of. We have offices all across Southern California, including the Inland Empire. Give us a call to take advantage. It's a $500 offer. Our phone number's 855-963-2526. 855-96-FALCON like the bird or visit our website, falconwealthplanning.com. That's falconwp.com for short. Enjoy the show. We look forward to serving you.

AM 590 The ANSWER.

Welcome back, folks. This is Gabriel Shahin, certified planner, your host of More Knowledge, More Wealth! on every weekend talking about all important topics of personal finance. And today we are talking about entity structure and what you should be looking at when you're looking to do so. So we establish a limited liability. That part is easy, folks. Outside of those who are sole proprietors, that is something you should be doing whether it's an LLC or any type of corporation, whether it's C or S. So for those who aren't doing that, shame on you and I would recommend talking with a financial and tax expert to help point you in the right direction of what you should do.

But going back and looking at what you should be doing and we talked about the sole proprietor, having the highest tax rates, because you have to pay self-employment tax, which is 15%. What is self-employment tax again? It is you paying for Social Security and Medicare. And if you're a self-employed person, you're paying both the employee and the employer side of it. So if you're an employee, then you are paying seven and a half percent. You're paying half of 15% where your boss in essence is paying the other half. So of course with the self-employed people, they're both the boss and the employee, but now let's take it a step further and looking at corporations.

Now, remember the S corp election is only through the IRS. The states don't care if you're a C or an S corp. So looking at what you should do really depends on a few things. I like to say S corp should be the main way to structure depending on your industry. I know certain industries will require C corporations. If you're look going to do funding like you see a lot of these tech companies and people that get their MBAs from Stanford and they can have an idea of a talkable toothpick, and all of a sudden they'll get 10 million thrown their direction. For that situation, of course, C corps make a lot of sense for different types of funding and stock.

But for most of us, whether it's a restaurant owner, whether you're an attorney or whatever the case is that's where it makes sense for you to do an S corporation. And here's why. It's very simple. It just gives you more control and gives you more power. And I'll give you an example. Let's say in that same explanation I was giving earlier of netting $100,000. And if you're a sole proprietor, you would be paying 15,000 in self-employment tax.

Now, if you're an S corporation and you make 100,000 net, you do not pay that 15,000 in self-employment tax. Now, I know what you're all thinking, "Why are we not doing this? That's great. Thank you, Gabriel. This is amazing. Let me go tell my accountant and yell at him. How come you haven't told me to do an S corporation?" We'll back up. Number one, the comment I would make to you is you can't just do that. The IRS is smarter than that. They're not going to let you get out of not paying into Social Security and Medicare and have you not pay that $15,000.

So you have to do what's called reasonable salary. And there's also other things to take a look at. If you just started the company it's expected depending on your industry, you may not need to pay yourself a salary for the first year or two depending on how much you net until you start building up cash reserves. Then from there, you can start paying yourself a salary.

Now, if you net $100,000 a year, are you going to pay yourself a salary of $100,000 a year where every penny comes back to you? The answer is no. That makes no sense. What if something bad happens like COVID and you need to go dip into reserves? In a situation where you're netting 100,000 it could make sense to only pay yourself 20,000, 30,000, 40,000, maybe 50,000 on the high-end regardless of a reasonable salary because you have to prepare for the inevitable. So you might be saying, "But Gabriel, then I have $50,000 left to my corporation. What does that mean? I don't want to just leave it there. Do I have to pay tax on that?" The answer is you do have to pay tax, but it's at your normal tax bracket. Just like if you paid yourself a W-2, it's the same thing.

It's not like a C corporation where you hear about that double tax where the corporation pays the tax and then you pay the tax. It's not like that in an S corp because you get what's called a K-1 that shows up on your personal tax returns.

By the way, folks, if this sounds like you and your situation and the questions that you've always asked yourself over time. Folks, give us a call. This is what we do on a daily basis. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird. We help thousands of people in your situation answer these questions. And we are offering a free financial assessment where we give one to two hours of our time, one to two meetings where we can tell you what you need to do. We're not going to withhold it and say, "We're not going to tell you we found out how to save you money, but we're not going to tell you unless you hire us."

That's not how we operate, folks. We are transparent. We're one of the good guys in this industry. We'll tell you what it is. We grow ridiculously off referrals. And if we're not a good fit for you, that's fine. You're either going to do it on your own or not. If you do it on your own, just please spread the good word. You can visit our website as well at falconwealthplanning.com. That's falconwp.com for short.

So looking at an S corp, going back, it's extremely important because now you can avoid that 15% self-employment tax. But all that means is you don't avoid it because that's not legal. It's you're in control of it of how much to pay yourself. And you don't need to bonus yourself out at the end of the year like people do in C corporations. It doesn't work like that with an S corp. It's unnecessary. It's unneeded. So it's extremely important to look at structuring.

Now, there are certain things depending on the state you live in, for example, let's pick on California. California charges a $800 minimum fee. They also charge a one and a half percent fee for net profits on S corporations. So if the S corporation nets $100,000, well, what's one and a half percent of that? That's 1,500. Now, they already paid a minimum tax of 800 for the state of California. So you would only owe $700 in that exact example. So it could make sense for you. There's still costs. You have to do a separate tax return now called an 1120-S for an S corporation. You might have to pay payroll now. That could be $500 a year. So there are some things you have to take a look at on your situation to make sure it makes sense.

By the way, folks, if you're just joining us, you're listening to Gabriel Shahin, certified financial planner, host of More Knowledge, More Wealth! here on every weekend talking about all important topics of personal finance. And today I wanted to give the attention to corporations and structure, especially against tax seasons. We're kind of in tax season right now. And most of your accountants you meet with once or twice a year and why? Because they're tax preparers. They're just trying to prepare your taxes.

Most accountants don't want to do tax planning because they have to know everything about you. They have to know what your mortgage is. They have to know how long you plan to live there. How much you have in your investment accounts. They have to understand your Social Security. They have to understand pension. They have to understand so much. And that's just a lot of work. There's a whole separate profession for that. Heck, that's what we do. That's our profession. That's what we do as tax planners, we're holistic and look at everything.

And so understanding what makes sense from a corporation and entity structure point of view could make a lot of sense. And even if you have accountant you extremely trust, you've been meeting with them forever, they're not tax planners and it could be very important to understand what you should be doing and what makes sense for you. So that's why yet again we are offering that for financial assessment where we offer a few hours of our time at no cost. Whether it's on Zoom, in person, whatever the case is because we've got offices all across Southern California. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird.

So remember, going back S corp could make a lot out a sense for you because you're in control of when to pay that 15% of self-employment tax. Because remember, you're the employer and the employee. So you're still going to pay it. But if you net $100,000, you're in very well control where you can go ahead and pay yourself a salary of $50,000. Well, in that case, I could save you 7,500. And depending on your entity, you could be eligible. And depending on how much you pay yourself, you could be eligible for something called QBI, which is qualified business income, which with the Trump Tax Act that enacted in 2018, you could get up to 20% of your net profit.

So in that example of 100,000 you net, you can potentially get up to $20,000 as a free write-off. Could make a lot of sense for you guys. These are the things that you have to look at, folks. Extremely important. A couple of entities I want to go over and that is a Schedule C. Schedule C, you would have to pay yourself a salary to get money out of the corporation. So it's the same thing as a sole proprietor. If you think about it. You have to pay yourself. If you netted 300,000, you want to take out 100,000, you're going to have to of course pay federal and state tax potentially.

And you're for sure going to have to pay that payroll tax at 15% and in corporation pays the other half, which is you and then the other side you pay just through your W-2 salary. A lot of people like zeroing out C corporations. Why? Because there is a 21% tax on that as of now. It was a lot higher than that, up to 35% back in the day. And they're looking at Congress to raise that even now. So you do have to pay some people say double taxation. If you don't zero it out, you pay that 21%. And if you take it out the next year, then you have to pay whatever your payroll tax or whatever your tax bracket is on the personal level. So this could make a lot of sense for you guys to take a look at your C corporation and if it makes sense to convert it to an S. It may be eligible to do that. So these are the things I'd recommend you doing. T.

He last one is for those who have real estate in an LLC, which makes a lot of sense from a tax point of view and a liability point of view. There's asbestos in the home or it just collapsed on them, deferred maintenance, whatever it is. Your liability is limited to that one property. And a lot of people like to limit per property. If you have 10 properties, I see a lot of people do LLC for every one of their properties. Keep in mind, in the state of California it's $800 per entity so some people bundle it up to save 800 bucks.

But my point is is because it's only you or your spouse's name on the LLC, the IRS looks at that yet again as a single member LLC and it goes straight on your Schedule E which is where you have your real estate anyway.

Folks, if you need help with that, if what I'm saying sounds like you, whether you have real estate, whether you have a business, whatever the case is we can help you with that, folks. Give us a call. We'll give you a free financial and tax assessment to tell you what you should be doing, folks. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird or visit our website at falconwealthplanning.com. That's falconwp.com for short. We can help relate this show to your specific situation, folks. This is what we do on a daily basis.

Folks, anything regards to taxes, tax planning, anything that involves a dollar sign, that's what we do. That's what we specialize in. We would love to help you. Most financial professionals out there that manage your money they say, "Please consult with a tax advisor." Most tax advisors out there only meet with you once or twice a year anyway. And they're just doing tax preparation advice. They're answering that question in silos. And as our CPA says at the office, Pete, he goes, "We are trained in compliance as a CPA." So they're just not trained to do planning. Give us a call. We can help.

Folks, we want to thank you for tuning in with us this afternoon. As we close out, just make sure you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird. We can help put together a personal assessment for you to help relate this show to your specific situation, folks. We want to thank you for tuning in with us every weekend. We give you the knowledge you need to increase your wealth. We want to thank you for listening. We want you to enjoy your weekend. Have a great afternoon and God bless.