April 10, 2025 • 35 mins
In this episode of the Mainstreet Business podcast, host Mat Sorensen kicks off the LLC Masterclass series with the questions every entrepreneur, investor, and side hustler needs answered:
Do you actually need an LLC?
How do you set one up the right way?
What about paying yourself?
How many LLCs should you have?
And which state should you form it in?
With over 20 years of experience and 10,000+ LLCs formed for clients across all 50 states, Mat breaks down the four main reasons why forming an LLC might be a smart move for your business or real estate investments. He covers asset protection, business legitimacy, partnerships and investors, and how to properly structure rental properties and estate planning.
Whether you're just starting your first business or growing a real estate portfolio, this episode will give you a solid foundation on how LLCs work—and why they matter.
✅ For tax and legal planning with your LLC, visit kkoslawyers.com
✅ For LLC compliance support, go to mainstreetbusiness.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome everyone to the Main Street Business Podcast
.
This is Matt Sorensen, yourhost for today, and I'm going
over LLCs.
This is the LLC MasterclassSeries I'm gonna be talking
about how do I set up an LLC, doI need an LLC?
How do I pay myself from an LLC?
How many LLCs do I need?
What states do I need toregister my LLC?
And answering all thosequestions today for you in the
(00:21):
podcast.
Please enjoy.
Do you need an LLC for yourbusiness or your real estate
investments?
Well, I've been an attorney for20 plus years, set up over
10,000 LLCs for my clientsacross the country, and in
today's video, I'm going tobreak down what you need to know
, or I'm going to go over thefour primary reasons you should
set up an LLC.
Now, you don't have to have anLLC.
(00:42):
I'm not saying everybody needsan LLC, but if one of these four
situations occurs for you, youshould have an LLC.
The first thing do you needasset protection?
Well, who needs assetprotection?
Business owners, whether it's amain hustle or a side hustle.
Real estate investors you'vegot tenants, people going to the
property.
We need asset protection.
(01:02):
What is asset protection?
How does that work in an LLC?
Let me break this down for youquickly here.
All right.
So an LLC is a limited liabilitycompany.
That's what LLC stands for theliability of the business owner.
You is limited so that ifsomething happens in the LLC, in
the business, the plaintiff,whoever it may be, is forced to
sue the LLC.
(01:23):
They can't come after youpersonally.
This is reason number one assetprotection.
So, for example, if you haveyour LLC called XYZ Enterprises,
let's say, and you own thatbusiness 100%.
Or even if you have partners,doesn't matter.
And let's say, somethinghappens on a rental property or
you got a business you'reselling goods or services,
something happens with acustomer or tenant, well,
(01:44):
they're forced to sue the LLC.
They can get what the LLC owns,but they cannot come down to
you, the business owner.
So I'm limiting my liabilityand I'm getting asset protection
from the LLC.
That is the number one reasonto have an LLC is to protect you
from the liabilities of yourbusiness.
And that's not the only reason,but that's the primary reason.
(02:04):
All right now.
The second reason here is you'restarting a company.
You're gonna interact withcustomers, with vendors, you're
gonna have employees.
If you don't have an LLC,you're gonna look like someone
that doesn't know what the hellthey're doing.
You're gonna need some type ofentity to go out and actually
conduct business.
Now a lot of people say saywell, matt, why can't I just
(02:26):
have a DBA?
You can, you can go get like aDBA and just register a name
doing business as.
But if you want that businessto grow and be successful I'm
just saying a lot of people yourpotential customers,
contractors, vendors, employeesare not going to be excited to
go work for a soleproprietorship.
That's a DBA.
They want to understand they'redealing with a real company.
So what do real companies do?
They set up LLCs orcorporations.
(02:47):
All right, so it adds thissense of legitimacy to you.
You may not need it because youdon't have a customer yet, but
if you're going to grow andscale this business, you need to
look like you're a real company, and that's another reason to
have an LLC.
We want some real companyorganization.
Now, the other thing I'll sayabout this is you're starting a
company is you're going to needa separate bank account.
This can't be in your personalbank account.
(03:07):
When we have an LLC, you'regoing to set up a business
checking account, maybe asavings account, in the
business's name.
That's where you're going toreceive the income from the
business.
We want that separate from yourpersonal bank account.
There's asset protectionreasons for doing that, but also
you want to be able to trackyour income and expenses
separate from what's happeningin your personal life.
Your business bank account isthe best place to track the
(03:30):
income and then all the expensesthat you're paying out.
If you're using that businesschecking account is going to be
a clear record as you're doingyour bookkeeping and you're
trying to understand theperformance of your business.
Am I making money or not?
Well, let's look at what theLLC business checking account
has going on, but also from justpast, like the income and
expenses.
Also, are you going to get aline of credit?
Are you going to establish abusiness credit?
(03:51):
If you don't have a separatebusiness entity, you're not
going to be able to do that.
So starting a company is aprimary reason to set up an LLC.
Have some legitimacy, separateyour personal income from your
business income, be clear on theexpenses in the business from
your personal expenses and maybestart establishing a business
line of credit.
All right, now the third reasonyou should have an LLC.
What if you have partners orinvestors?
(04:12):
What if someone's partnering inwith you and providing some
other services in the business.
What if someone's investing inthe company and being a cash
investor or partner in thebusiness?
Well, you need an operatingagreement in the LLC that's
clear on what the ownership is.
What's your responsibility andauthority?
How much ownership do you haveas the founder of the business?
What does this partner in thebusiness get?
(04:33):
Do they have 5% or 50%?
What about the investor in thebusiness that's putting money in
?
Do they have to put more moneyin when you need it?
How do you deal with that?
Okay, your operating agreementfor the LLC is also like a
partnership agreement.
I'm going to talk about that infuture videos, but this lays
out what are the key terms andunderstanding between the
different people who are ownersin the LLC.
(04:53):
I'm just telling you, if youskip having an operating
agreement and you got otherpartners or investors in this
deal, you are going to havechaos in the future.
Okay, you need to be very clearand intentional about this
operating agreement and what'syour role?
What are you getting versus,what's their role and what are
they getting All right now, thelast reason to consider here is
for those of you that haverental property or other assets.
It makes sense to have an LLC tohold those types of assets.
(05:17):
We talked about assetprotection as being the primary
reason, and this is supervaluable.
If you're starting a businesswhere you're selling goods or
services, you have a customer, avendor dispute, an employee
dispute, you don't want themcoming after all of your
personal assets off of your homeor your retirement accounts,
your savings, your brokerageaccount, your other businesses,
your other properties.
We don't want everythingfreaking exposed, so we want to
(05:38):
use an LLC and operate thatbusiness in an LLC.
Same thing if it's a rentalproperty.
If we go back to this exampleup here, the tenant slips and
falls.
They're forced to sue the LLC.
They can't come after youpersonally.
Also, for your real estateinvestors, the same principles
we talked about here income,expenses, tracking this, keeping
it separate critical for you asyou're trying to make sure
(06:00):
you're analyzing your businessproperly and reporting your
taxes properly.
Now, we don't want to put all ofour real estate into the LLC,
but we do want to put rentalproperties or properties that
can create liability into an LLC.
So, for example, if you have ahome, okay, I don't want your
home in the LLC.
There's no reason to do that.
Are you going to sue yourselfat your home?
(06:21):
I mean sure you might havevisitors, but we don't see
really benefits to putting yourhome in an LLC.
Rental properties with tenants,for sure, we're definitely
doing that.
That's what I'm doing withmyself and my clients across all
50 states.
We're using the LLC, but herefor your home, we want to put
that into a revocable livingtrust.
Your revocable living trust isfor estate planning purposes,
(06:41):
it's not for asset protection.
Okay, and I want to make surethat my heirs get my home and it
goes through my estate.
It doesn't have to go toprobate.
That's why we use a revocableliving trust here Again, not
asset protection, but we'redoing it to coordinate and plan
our estate for our loved oneswhen we pass on.
For investment properties,rental properties, we want to
use an LLC because those do haverisk and we want the asset
(07:04):
protection benefits of the LLC.
Now, maybe a second home orsomething as well.
You could put that in a trust.
Let's say it's an Airbnb.
Sometimes you use it or youmight rent it when you're not
there.
Okay, we might put that in theLLC, because there's other risks
associated with other peoplevisiting the property or acting
as tenants.
So now, when you're setting upan LLC, I just want to go back
to those four reasons.
Do I need the asset protectionon this?
(07:26):
Am I starting a company?
I need the legitimacy of an LLC, the separate bank account and
separate treatment.
Do I have other partnersinvestors involved, where an
operating agreement is to makeclear who owns what in the
business?
And what about my real estate,my rentals and other assets?
Do those benefit by bringing inan LLC?
Do they create liabilities?
And I want this layer ofprotection for those assets.
If any of those four reasonshit, you should seriously be
(07:48):
considering an LLC Now.
My law firm, kqs Lawyers, hasbeen setting these up for
decades and we can help you getit set up and structured
properly.
We clean up LLCs across thecountry as well, so we're here
to help.
But if you're not using us, getto a competent lawyer who's
experienced in this area andwatch out for the people that
are not lawyers, that areselling entities online.
Frankly, they oversell them forthe wrong situations and they
(08:08):
sell you way too many entitiesthan you need.
So you want to make sure youget to the right professionals
that can help guide you properly.
All right.
You need to make sure that youset up your LLC properly so
you're afforded all the benefitsof the LLC that you thought you
were receiving, and this issomething a lot of people mess
up.
So I'm going to go through theprocess to make sure you
understand how to set up yourLLC proper.
All right, now there's fourthings you're going to need to
set up your LLC properly.
(08:29):
The first is articles andcertificate of organization.
Second is your tax ID and EINand the proper tax
classification.
We'll get into more detailsthere.
Next is your operatingagreement and initial minutes
that clarify ownership and someother key asset protection
issues.
And then, fourth, is choice oftax status.
(08:50):
There can be additional filingsdepending on whether you have
partners or you're an operatingbusiness versus an asset holding
business.
We're going to get into thathere.
So first, let's start off withthe articles and certificate of
organization that you need tofile.
Now, what this is is the actualfiling to the state that says,
hey, I want to be an LLC.
Here's my name.
Here's who's going to managethe LLC.
Here's the address.
Here's my registered agentthat's going to get legal
(09:12):
notices.
This is the official filingthat has certain requirements
with the state where you'resetting up the LLC.
Now you have a few options whenyou're filing the certificate
of organization or the articles.
Different states call itdifferent things.
But the first choice you haveis what state to even file this
in.
And a lot of people hear oh, youshould do it in Wyoming or you
(09:32):
should do it in Delaware orNevada.
That's BS.
You should set up the LLC inthe state where you're actually
conducting business.
If you're conducting businessin Indiana, you should have an
LLC in Indiana.
If you're conducting businessin Florida, you should have an
LLC in Florida.
If you live in California andyou have a rental property in
Ohio, you're conducting businessin Ohio.
Okay, we're setting up the LLCin the state where you're
(09:53):
actually conducting business.
If you set up the LLC in thestate you live let's say Florida
, and you have a business or aproperty, a rental, in Ohio,
you're going gonna need toregister it into Ohio.
Anyways, you need to registerthe LLC in the state where
you're actually conductingbusiness.
So why pay two different statefees?
As a lawyer, I've been doingthis for 20 plus years.
We've never understood this.
Make sure you're just going tothe state you're actually
(10:16):
conducting business in.
Now the one caveat to that isthere is Wyoming and some
certain strategies for privacyor double layer asset protection
called charging orderprotection.
I've got another video on that.
Make sure you go over that ifyou wanna look into the Wyoming
LLC and the benefits there.
But nine out of 10 clients inour law firm we're just setting
up the LLC in the state wherethey reside.
All right.
Now the second choice on yourarticles or certificate of
(10:38):
formation is is this gonna bemanager managed or member
managed?
Now we always wanna go managermanaged or member managed?
Now we always want to gomanager managed with our LLCs.
The reason being is I don'thave to disclose ownership.
No one knows who owns an LLC ona manager managed entity.
I only have to disclose who themanager is and the manager is
like president of thecorporation.
They don't have to be theshareholder or owner, that's
(10:58):
just the person listed with thestate that has authority to act
for the entity.
If I did member managed and Ilist myself as the member, then
it's very clear that I'm themember and owner of that LLC.
So I'm losing some privacybecause of that.
We typically prefer managermanaged entities.
There are some strategies onprivacy where you could have a
Wyoming entity serving as themanager, so nobody knows it's
(11:20):
you in the state where you'reregistering the entity.
But for a lot of people,particularly if this is your
business you're out sellinggoods or services or you're the
entrepreneur in the face of thecompany we don't really care
about privacy.
We're just going to list you asthe manager of that entity.
All right.
Now the next thing you're goingto need is a tax ID or EIN
employer identification number.
Now, this is a number thatcomes from the IRS.
Now this operates like thesocial security number does for
(11:42):
you personally.
This identifies the LLC as aseparate entity for tax purposes
.
It will get 1099s and other taxreporting for the business
instead of it going to you.
You need to get a separate taxID.
When you're setting up a bankaccount in the LLC's name, the
two things every bank asks foris we want to see your
certificate of organization orarticles for the LLC and we want
(12:03):
your tax ID or EIN.
They want that number becausethey associate that with your
entity and that gets the taxreporting, as opposed to your
personal social security number.
Now, to file this, you can doit online with the IRS.
Our law firm, of course, isdoing it.
We're setting up entities forclients.
When you're filing this, youalso need to decide how you want
your LLC to be taxed.
Now there's sole proprietorshipstatus, partnership status,
(12:27):
s-corporation status.
I'm going to come back to thathere in the final point about
making sure you have the righttax selection for your LLC.
Now the next document you needfor the LLC is your operating
agreement or initial minutes.
Now, if it's just you as theowner of the LLC, we still want
to do an operating agreement tosay you own it a hundred percent
.
If you got partners, it's evenmore critical because we want to
(12:51):
be clear who the partners inthe LLC are.
How much ownership do they haveand what is their
responsibility and roles in theLLC.
This happens in the operatingagreement and the initial
minutes of the LLC that areoutlining and approving all of
these things.
All right.
Now the final point here is yourchoice of tax status.
When you're setting up an LLCand you're getting your EIN, you
need to decide how do I want myLLC to be taxed.
A lot of people mistakenlythink LLCs save taxes.
(13:12):
Llcs do not save taxes.
Okay, but your tax statuselection for your LLC may make a
difference on taxes.
So you understand this very,very critical point.
This is probably one of thethings people screw up the most
is they mistakenly elect thewrong tax election and they end
up paying the IRS too much money.
Now you have one criticaldecision here.
(13:32):
Do I need to make an S electionfor the LLC and be taxed like
an S corp, or should I just betaxed like a sole proprietorship
?
Now maybe you have partners.
You're taxed as a partnership,but the really critical thing
here is should I be taxed as anS-corporation?
Now what we want you to file asan S-corporation if you are
conducting an ordinary incomebusiness where you're selling
(13:53):
goods or services and you havemore than $50,000 of net income.
If you hit that bucket, yourLLC should be taxed as an
S-corporation.
If you have rental properties,your business is only making 10
grand a year, even though you'reselling goods or services.
You have a side hustle.
Don't worry about theS-selection, it doesn't matter
for you, but any of you smallbusiness owners making 50K or
more main hustle, side hustlethis is net income.
(14:15):
You will save money by doing anS-selection.
Here's how it works.
In an S-selection to an LLC orjust in an S-corporation itself.
What happens is, when you arepaid income, you get to divide
that income into salary and intodividend or net income, and
that benefits you because it'san opportunity to save on
self-employment tax.
Let's say you made $100,000 ayear.
(14:37):
Okay, this is after all yourexpenses.
You made 100K.
And let's say you're a soleproprietorship, you just did an
LLC, taxed as a sole proprietor,you didn't file the S-election,
the 2553 form with the IRS, andyou just take that 100K.
Well, how much self-employmenttax do I pay?
You pay 15.3%.
Okay, this is Medicare andSocial Security.
(14:58):
That's the total tax that youend up paying on a hundred
thousand, that results in$15,300 of self-employment tax.
Guys, this is before you evenpay federal income tax.
Okay, this is just Medicare andsocial security because you're
self-employed.
Well, that kind of sucks.
All right, I've got 85,000 leftto pay myself here and I still
got to pay federal income tax onthis money.
(15:19):
Well, if you're doing an Scorporation, paying yourself the
same $100,000, what happens isin an S corporation, you're
allowed to pay yourself a salary, which you do have to pay
self-employment tax on, butanother portion of the funds you
can pay yourself as net incomeor dividend profit out of the
business, which is exempt fromself-employment tax, which is
where you get tax savings.
(15:40):
So, for example, if you'remaking a hundred K, maybe we
take a $40,000 salary which youtake as a W-2, and the other 60
K you're going to pay yourselfas dividend or net income.
Now I pay 15.3% over here onthat 40 K and I pay nothing in
self-employment tax over here.
(16:01):
And now the savings here is I'monly paying $6,000 in
self-employment tax over hereversus paying 15,300.
This is where I saved.
I didn't pay 15% over here, Ididn't have to.
Okay, that saved me $9,000 intaxes to the federal government.
This is $9,000 you can besaving every year if this is
(16:22):
your income level.
So make sure you understand theS-corporation tax strategy when
you're using an LLC.
When you have an LLC, you canelect to be an S-corporation.
Maybe in year one you're like,eh, I don't know that, I need
this.
I might make 10 grand this year, but year two I'm going to bump
up and I'm going to hit this50,000 net income.
Well, you can make the Selection status in that second
(16:42):
year.
Okay.
So you have some optionalityhere, but you need to make sure
that you understand that,because it's more money in your
pocket If you get the taxelection right and if you jack
it up, you're going to beoverpaying the IRS.
So make sure you're focused onthis and paying attention.
All right Now.
The last thing here I want tomention is you don't need to
file a beneficial ownershipinformation report to FinCEN and
the Department of Treasury.
(17:03):
This is a new thing that cameout a couple of years ago, where
you had to make a filing foryour LLC or corporation to the
federal government, disclosingUS Supreme Court on it, going
back and forth on this.
So, bottom line, don't worryabout the FinCEN BOI filing.
That may come back in a lateradministration, who knows?
(17:25):
But in 2025, right now, don'teven have this on your radar.
You don't need to stress aboutit.
Skip that step for your LLC,all right.
How do I actually pay myselffrom an LLC Once you've already
set it up?
This is kind of a criticalquestion.
Right?
I'm making money in this thing.
How do I actually get paid?
All right Now.
The first thing I want you tothink about is you are now an
entrepreneur.
Okay, You're not getting apaycheck.
We are not talking aboutenrolling and getting a paycheck
(17:47):
cut every two weeks.
All right, I'm going to gothrough a number of different
considerations that you need tohave as you're paying yourself
from your LLC.
Now, the first thing you'regoing to need to have is an LLC
business checking account, allright, so we're going to have
our LLC and let's say it'sVandelay Industries LLC.
Okay, and you've got your bankaccount that the LLC owns.
All right, this is not you.
(18:08):
You're going to have yourseparate personal bank account.
This is just your business bankchecking account.
You're receiving your income.
This is your goods or servicesyou're selling.
This could be your rentalproperty income doesn't matter
here.
But the business has its ownseparate checking account.
Great for tracking your incomeand expenses, but also critical
here to make sure you'remaintaining asset protection.
What you're going to do isyou're going to take a draw from
(18:30):
the LLC business checkingaccount to yourself personally.
This can go to your personalbank account.
This is all we're doing here.
It might seem simple, but we'retransferring money from the
business checking account toyour personal checking account.
Now, how you tax support ithere we're going to come to in a
second.
It depends on your structure,but for now, no matter what
(18:51):
you're doing or how your tax oryour sole proprietorship.
You're an S corporation.
We are simply transferringmoney from our business checking
account to our personal account.
There's income there and whenwe want you could leave money in
the business checking accountfor purposes of working capital
or you might need it to grow thebusiness.
And if you want moneypersonally, you simply take a
draw.
Generally we don't want toleave a lot of cash in the LLC
(19:13):
business checking account.
Don't accumulate cash there.
It's a liability risk.
You're conducting businessthere.
You might have tenants.
They could sue the LLC and getat that cash.
We only want to keep enoughcash in the business checking
account necessary for businessoperations.
Otherwise we want to send itdown to you personally, get in
your personal checking accountand from there go out and invest
(19:34):
and build and grow other assetsor use it for your personal
expenses, whatever your scenariomay be.
But the bottom line here isyou're going to simply do bank
transfers to your personalchecking account.
Now, depending on how you'retaxed, is the tax reporting
that's going to occur?
Now you simply have twodifferent scenarios here.
Typically, we're going to haveyou taxed as a sole proprietor,
(19:55):
as a sole prop.
This means this is just goingon schedule C or maybe it's a
rental property going onschedule E, but you didn't do
what's called an S selection.
If you're a sole prop, allyou're going to do is this is a
draw.
You're going to track it thatway in your QuickBooks or in
your accounting or financialsand the money's going off the
balance sheet of the companydown to you as the owner of the
company.
Now then, at the end of theyear, you're simply going to do
(20:18):
your profit and loss for yoursole proprietorship on Schedule
C or again on Schedule E for therental property, and you file
your taxes.
No payroll reporting, no W-2shappening, all right.
This is simply self-employmentincome coming down on Schedule C
for those of you selling goodsor services and this is the sole
proprietorship.
It's a lot simpler and ifyou're making 10, 20 grand a
year, this makes sense.
(20:39):
This is a side hustle.
Do the sole prop, or even ifthose of you that have rental
properties, again, you don'tneed an S selection for this.
It's just flowing down ontoyour personal 1040.
We got the LLC for assetprotection.
It's not saving us taxes, butwe are still having the business
bank account and taking drawsand transferring that money to
us personally whenever we havethe necessary cash flow or
(21:00):
whenever we need it personallyto live off of or make other
investments.
Now, if you are an Scorporation, it's different.
Okay, we're still doing thissame step up here, where I have
the LLC with its checkingaccount at a bank.
Okay, and this is a businesschecking account and it is
transferring to you personallyand you're still doing that
(21:21):
whenever you want.
Okay, we're still doing atransfer from the business
checking account to yourpersonal bank account and this
is still essentially a draw.
Now, the big distinction herefor those of you that are an S
corporation is, even thoughyou're taking draws and
transferring the money from thebusiness account to your
personal account whenever theheck you want, you're not
necessarily doing a payroll andcutting yourself a paycheck and
doing a withholding every twoweeks, but you need to be doing
(21:43):
at least a quarterly payroll.
Okay, I have my own Scorporation.
This is what I do for mine.
This is what are many of ourclients at KQS Lawyers that
we're setting up, that areoperating in LLC taxes and S
corporation or that have an Scorporation directly.
You're doing a quarterlypayroll.
This is like a little after thefacts payroll.
So how much do I actually claimas payroll.
For example, maybe you paidyourself $30,000 in draws that
(22:05):
you took from the business, butonly 10,000 of that are you
going to consider to be wages orpayroll income.
That is the amount you're goingto put on the quarterly $10,000
, and maybe it's 15.3%self-employment tax.
So I'm going to need to send in$1,500 in my self-employment
tax for Medicare and socialsecurity.
But the other 20K that I tookfrom the business I'm deeming
(22:27):
that to be profit or net incomefrom the business, again exempt
from self-employment taxes.
I went over in the earliervideo.
So, but this is a critical stephere understanding that salary
dividend split or salary netincome split here, but making
sure you're at least filing aquarterly payroll and then at
the end of the year you're goingto do a 940.
It's an annual form.
Now your accountant will dothis for you.
(22:47):
If you have an accountant, theycan do your payroll for you.
You could use QuickBooks or ADP.
Many of them understand this.
I actually use ADP.
We do an after the factquarterly payroll like this for
my own S-corporation prettyseamless, easy strategy.
Now for those of you with LLCswith rental real estate or other
investment assets, don't dothat S-corporation.
Don't file a quarterly, youdon't need to do that.
(23:07):
Okay, you're just going to takedraws to your personal bank
account.
Now you may have estimated taxpayments.
You're doing on a quarterlybasis.
This is different from payroll.
Okay is different from payroll.
Okay.
Your estimated tax payment issomething you can send in the
IRS every quarter.
Let's say you're going to owe ahundred thousand dollars in
taxes at the end of the yearfrom your business, your real
estate, your otherentrepreneurial activities not
from your W-2, because your W-2is going to have payroll
(23:30):
withholding.
But if you're having estimatedtax payments a hundred K, you
expect for the year you'd sendin $25,000 to the IRS.
That is a separate form fromthe 940 and the 941.
That is your payroll stuff.
Okay, I'm just talking aboutestimated income tax payments
that you could send to the IRSand the state.
So don't forget about those.
Make sure you're tracking whatyou're making.
(23:51):
If you don't send an estimatedtax payments when you file your
tax return at year end, you willhave some penalties.
Now, they're not substantial,but the IRS will make you pay
some interest and penaltybecause you're paying in late.
They expect you If you made ahundred K, let's say in quarter
one.
They want a little bit of taxon that.
Whatever the tax would be due,they want you to send that in an
(24:13):
estimated amount and as long asyou're close you're fine.
There's no penalties orinterest charge.
Now a lot of small businessowners don't do that.
Okay, I've been around longenough.
They kind of send in money whenthey can and they true it up at
year end but realize you'll bepaying a little bit of interest
and penalty to go that route.
The safe way is make sureyou're sending in estimated tax
payments.
(24:33):
You don't get caught off guardand you'll avoid having to deal
with interest and penalties whenyou file your final return next
year.
Now, a good rule of thumb of howmuch to send the IRS each
quarter is, let's say, 30%.
Whatever your net income afterexpenses is, just send the IRS
30%.
If you're making good money,more than a couple hundred
thousand dollars a year, you'regoing to at least be in a 30%
plus tax bracket, all right.
Well, that's it here.
As you're paying yourself fromthe LLC, it's mostly just going
(25:02):
to be a transfer from oneaccount to the other, going from
the business account to yourpersonal account.
Remember for any of you thatare S corporations.
You do have that quarterlypayroll report you do need to
file to the IRS.
You have some stateunemployment stuff that needs to
be filed.
I just use a payroll company tohandle that for you.
Go, make more money in yourbusiness.
Don't be a bookkeeper on theside.
All right, hire that out, getyour account or a payroll
company to handle that for you.
Now, a common question I get asa lawyer is how many LLCs do I
need for my rental properties?
Now, as a lot of people get tothis issue, they think well,
(25:23):
matt, I have 10 properties.
Should I have 10 LLCs?
Should I have a separate LLCfor each property?
Well, our answer to that isalways it depends, and I know
people hate that answer, but I'mgoing to flesh it out for you
here in a second, because itreally depends on not how many
properties you have, but howmuch equity you have between the
different properties.
All right, let's say you havean LLC, xyz Properties LLC, okay
(25:48):
.
And let's say it owns fiverentals, okay.
Now the downside to having fiveproperties in one LLC is if I
have something happen onproperty number five here, let's
say the tenant slips and falls,well, they can sue the LLC.
They can't come down to mepersonally and get at my
personal assets or any otherLLCs or businesses I have.
Those are all protected.
I get asset protection there.
(26:08):
But what is at risk is theother four properties in the LLC
.
I've got exposure here of allthe equity from property number
five, four, three, two and one.
They're all in the same basket,so to speak, and people say,
don't have all your eggs in onebasket.
Well, the problem here is,let's say, I have 200,000 of
equity between each property.
(26:30):
I've exposed a million dollarsof equity here.
Something goes wrong here onproperty number five.
Well, that has put allproperties at risk and their
equity could be drained.
Now we don't want that.
So how do I prevent that fromhappening?
Now, obviously, I could do thisoption here and just have one
LLC for each property, right?
Well, that's a good option, andif these are like multifamily
(26:52):
properties or commercialproperties, we're definitely
going to do that.
But if these are single familyrentals that have $20,000 of
equity a piece in them, youleverage out the equity, their
mortgage, to the hill, but theycashflow.
I think you're overcooking ithere.
That is not worth it.
Our rule of thumb is somethingin the middle here.
What we say is we want aseparate LLC once you have more
(27:15):
than $250,000 of equity betweenmultiple properties.
So for example here, let's say Ihave an LLC that owns two
properties, all right, and oneof them is worth a million
dollars and it's got a $600,000mortgage Okay, so I've got 200K
of equity.
The other is worth $700,000 andhas $300,000 mortgage.
(27:35):
So it's got 400K of equity.
Okay, so I got a milliondollars of equity here.
Well, if something happens onproperty number one, again
property number two is at risk.
So in this example, it makessense to separate out each
property into its own LLC, notbecause I have two properties,
because I have two propertieswith enough equity at risk,
where the value of theseproperties each of them has more
(27:57):
than $250,000 of equity isworth the cost and maintenance
of an additional LLC.
Another LLC is going to costyou $1,200.
You're going to have annualfees to the state to keep it
active.
I mean, we set up thousands ofentities in my law firm, kqs
Lawyers, every year.
We'd love to just set up moreentities and say you need an LLC
for every property, but I don'tthink that's the case.
Again, if you got fiveproperties here, you could all
(28:18):
have them in one LLC.
If there's only 10 grand ofequity, there's not enough
equity at risk where aplaintiff's going to go after
the properties.
But if I got two down here witha lot of equity in them, I want
the additional asset protectionand the cost of that is now
worth it, okay, because I haveenough equity to be at risk.
Now if I'm down here in thisstructure we have an LLC for
each property.
They both have hundreds ofthousands of equity.
(28:40):
If something goes wrong onproperty number one, the tenant
is forced to sue LLC number one.
They can't get over to propertynumber two and LLC number two.
They get separate liabilitytreatment.
They can't get over to propertynumber two and LLC number two.
They get separate liabilitytreatment.
They can't come after mepersonally, so I'm able to
contain that liability and thatseparate LLC.
That is the benefit to havingmultiple LLCs.
Again, don't think about howmany properties I have.
(29:01):
Think about how much equity doI have between the multiple
properties.
We always say if you have 10properties with 10,000 of equity
between those 10 properties,put them in one LLC, we don't
care, you have 100,000 of equityat risk.
You still get the assetprotection.
If something happens on one ofthose 10 properties, they sue
the LLC.
They can't come after youpersonally.
(29:22):
They can't get to any of yourother entities, your other
businesses you may have.
So we've still got thatliability protection.
Now, sure, those other nineproperties are at risk, but I'm
just telling you, no plaintiffis going to chase down that LLC
that has very thin equity.
But a plaintiff will chase down$200,000, $300,000 of equity.
That is worth their time andtheir money to chase down those
(29:42):
properties.
That is when we like separateLLC treatment.
Now just a little caveat herewhen you're doing multiple LLCs,
some states have somethingcalled a series LLC and what
that is is you have one LLC youfile with the state and you can
adopt something called asub-series that can own separate
assets and get separateliability treatment without
having to file a new LLC at thestate level.
(30:03):
States like Utah, texas, nevada, tennessee, illinois there's
about 15 other states that havewhat's called a series LLC.
Now in that instance we love touse the series LLC for any of
you that have multipleproperties, real estate
investments with some equity,because we only have to file one
series LLC with the state andwe can adopt these sub-series
that get separate liabilitytreatment and that way we're
(30:25):
getting the benefit of multipleLLCs, but we only have one state
LLC filing.
So, for example, you hadsub-series number one,
sub-series number two,sub-series number three.
These get separate liabilitytreatment, just as a separate
LLC does, but you don't have tohave the multiple filings here.
Okay, so that can be a littlebit of a cheat code for any of
you that are in those statesthat allow for series LLCs with
(30:45):
multiple entities.
We definitely love those andwant to set that up if it works
in your situation.
And again, this is where theproperties are located, not
where you're located.
Okay, we're going to be settingup this series LLC in the state
where the properties arelocated.
Okay, so if you live in Arizonabut you have 10 properties in
Texas, we're going to do a Texasseries LLC for those 10
(31:05):
properties in Texas, and thatcould be a great solution for
those again in the states thatallow for series LLCs, and that
could be a great solution forthose again in the states that
allow for series LLCs.
Now, do you need to registeryour LLC into multiple states?
A lot of people are confusedabout where they need to
register their LLC, whether theygot a rental property or an
operating business.
Now I'm assuming here in thevideo that you've set up an LLC
already in a particular stateand you have the question of I'm
(31:25):
conducting business in anotherstate.
Do I need to register my LLCforeign into that other state?
You can have an LLC registeredinto multiple states.
For example, I'm here inArizona and I've had an Arizona
LLC for rental real estate thatI also registered foreign into
Indiana.
The reason I did that is I hada rental property in Indiana, so
I registered the same LLC anArizona LLC as a foreign LLC
(31:49):
into Indiana.
If you're an operating business, you might be doing the same
thing.
I'm conducting business inanother state.
Do I need to register in thatother state?
Okay, I'm going to go over thereasons here of why you need to
make sure you're doing thisproperly, because there's fines
and penalties and potential lossof asset protection, but also
want to get into when are yourequired to register foreign?
Okay, so let's get into thefirst part here of why should I
(32:10):
be focused on this?
Well, the first thing is, ifyou don't register LLC into the
state you're actually conductingbusiness, you can lose your
asset protection benefits.
Actually, if your LLC is notregistered in a state and you
get sued in that state.
Let's say you have a WyomingLLC for a property in Florida
and you have a plaintiff sue youin Florida Guess what?
You can't even go into court.
(32:30):
You have to register thatWyoming LLC into Florida for a
Florida court to even recognizeyou All right.
So you got to be careful aboutthis, just from asset protection
and the fact of conductingbusiness, that you make sure
you're registered in the stateyou're operating.
Now I'm going to get into whenthis triggers and when you need
to file in another state.
But the first thing here is Iwant to make sure you understand
(32:52):
you need to do this to makesure you're actually able to
protect yourself and have theasset protection benefits and to
be able to be a legitimatecompany able to transact or
represent yourself in court ifyou are sued or need to conduct
business.
A lot of times I've had clientswith rental properties in other
states and the title companywon't transact with them, they
won't transfer title.
(33:13):
They're like this LLC isn'teven registered in this state.
Okay, so you've got to makesure that you're registering the
LLC in the states where you'reactually conducting business.
Now the second consideration isfines and penalties.
Let's say you're in Nevada andyou're conducting business into
California and you have a Nevadaentity.
Well, the state of Californiawill fine you up to $10,000, a
(33:33):
maximum fine if you don'tactually register in that state
when you're actually conductingbusiness in that state.
Now I'm going to come back hereagain to what constitute
conducting business.
That's important, but obviously, if you're servicing customers,
you have an office or employeesin California and you're
operating out of Nevada eventhat's where you live but you
don't register into California,you are going to be subject to
(33:54):
these fines and penalties.
So, again, you're going to needto get compliant and register
into that state where you'reconducting business.
Now I know people hateCalifornia.
They don't want to registertheir LLCs there because they've
got an $800 annual LLC fee, nomatter whether you make money or
not, I know it sucks, but ifyou're going to conduct business
there, you got to pay the price.
You're going to need to getregistered there and you will be
subject to that $800 minimumannual fee.
(34:16):
All right, let's get into thecritical question here of when
am I required to register intoanother state?
Well, the key consideration isare you conducting business in
that state.
Now for a rental property, it'squite simple.
Do you have a rental propertyin that state that you rent to a
tenant that's conductingbusiness?
That LLC needs to be registeredin that state where the
property is located and you'rerenting to the tenant?
(34:36):
Simple okay.
If you're a business sellinggoods or services, okay, you're
an operating business.
Do you have employees or astorefront there?
If so, you're going to need toregister to conduct business.
If you just have customersthere and you don't have an
active presence in that state,you don't need to register.
But definitely if you haveemployees in that state or you
have a storefront or an activeoffice in that location, you
(34:57):
will need to register yourentity to do business in that
state.
Thanks everyone for listening.
I hope this episode was helpfulin understanding LLCs and how
you can use them to youradvantage.
Now, if you want to get intothe diagrams and some of the
numbers I was writing down as Iwas going through this, get over
to my YouTube channel, wherethese videos are as well.
Thanks for listening.
We'll see you next time andthank you everyone for listening
.
Speaker 2 (35:16):
A quick disclaimer and reminder this presentation
does not constitute an attorneyor CPA client relationship and
it is always in your bestinterest to consult competent
legal and tax professionals whenconducting your own personal
transactions.
Speaker 1 (35:32):
We also want to make sure you know this is not
investment advice or financialadvice.
We're just trying to give youeducation, ideas and strategies
you can take to yourprofessionals or conduct your
own research on.
We'll see you next time.
Welcome everyone to the Main Street Business Podcast
.
This is Matt Sorensen, yourhost for today, and I'm going
over LLCs.
This is the LLC MasterclassSeries I'm gonna be talking
about how do I set up an LLC, doI need an LLC?
How do I pay myself from an LLC?
How many LLCs do I need?
What states do I need toregister my LLC?
And answering all thosequestions today for you in the
(00:21):
podcast.
Please enjoy.
Do you need an LLC for yourbusiness or your real estate
investments?
Well, I've been an attorney for20 plus years, set up over
10,000 LLCs for my clientsacross the country, and in
today's video, I'm going tobreak down what you need to know
, or I'm going to go over thefour primary reasons you should
set up an LLC.
Now, you don't have to have anLLC.
(00:42):
I'm not saying everybody needsan LLC, but if one of these four
situations occurs for you, youshould have an LLC.
The first thing do you needasset protection?
Well, who needs assetprotection?
Business owners, whether it's amain hustle or a side hustle.
Real estate investors you'vegot tenants, people going to the
property.
We need asset protection.
(01:02):
What is asset protection?
How does that work in an LLC?
Let me break this down for youquickly here.
All right.
So an LLC is a limited liabilitycompany.
That's what LLC stands for theliability of the business owner.
You is limited so that ifsomething happens in the LLC, in
the business, the plaintiff,whoever it may be, is forced to
sue the LLC.
(01:23):
They can't come after youpersonally.
This is reason number one assetprotection.
So, for example, if you haveyour LLC called XYZ Enterprises,
let's say, and you own thatbusiness 100%.
Or even if you have partners,doesn't matter.
And let's say, somethinghappens on a rental property or
you got a business you'reselling goods or services,
something happens with acustomer or tenant, well,
(01:44):
they're forced to sue the LLC.
They can get what the LLC owns,but they cannot come down to
you, the business owner.
So I'm limiting my liabilityand I'm getting asset protection
from the LLC.
That is the number one reasonto have an LLC is to protect you
from the liabilities of yourbusiness.
And that's not the only reason,but that's the primary reason.
(02:04):
All right now.
The second reason here is you'restarting a company.
You're gonna interact withcustomers, with vendors, you're
gonna have employees.
If you don't have an LLC,you're gonna look like someone
that doesn't know what the hellthey're doing.
You're gonna need some type ofentity to go out and actually
conduct business.
Now a lot of people say saywell, matt, why can't I just
(02:26):
have a DBA?
You can, you can go get like aDBA and just register a name
doing business as.
But if you want that businessto grow and be successful I'm
just saying a lot of people yourpotential customers,
contractors, vendors, employeesare not going to be excited to
go work for a soleproprietorship.
That's a DBA.
They want to understand they'redealing with a real company.
So what do real companies do?
They set up LLCs orcorporations.
(02:47):
All right, so it adds thissense of legitimacy to you.
You may not need it because youdon't have a customer yet, but
if you're going to grow andscale this business, you need to
look like you're a real company, and that's another reason to
have an LLC.
We want some real companyorganization.
Now, the other thing I'll sayabout this is you're starting a
company is you're going to needa separate bank account.
This can't be in your personalbank account.
(03:07):
When we have an LLC, you'regoing to set up a business
checking account, maybe asavings account, in the
business's name.
That's where you're going toreceive the income from the
business.
We want that separate from yourpersonal bank account.
There's asset protectionreasons for doing that, but also
you want to be able to trackyour income and expenses
separate from what's happeningin your personal life.
Your business bank account isthe best place to track the
(03:30):
income and then all the expensesthat you're paying out.
If you're using that businesschecking account is going to be
a clear record as you're doingyour bookkeeping and you're
trying to understand theperformance of your business.
Am I making money or not?
Well, let's look at what theLLC business checking account
has going on, but also from justpast, like the income and
expenses.
Also, are you going to get aline of credit?
Are you going to establish abusiness credit?
(03:51):
If you don't have a separatebusiness entity, you're not
going to be able to do that.
So starting a company is aprimary reason to set up an LLC.
Have some legitimacy, separateyour personal income from your
business income, be clear on theexpenses in the business from
your personal expenses and maybestart establishing a business
line of credit.
All right, now the third reasonyou should have an LLC.
What if you have partners orinvestors?
(04:12):
What if someone's partnering inwith you and providing some
other services in the business.
What if someone's investing inthe company and being a cash
investor or partner in thebusiness?
Well, you need an operatingagreement in the LLC that's
clear on what the ownership is.
What's your responsibility andauthority?
How much ownership do you haveas the founder of the business?
What does this partner in thebusiness get?
(04:33):
Do they have 5% or 50%?
What about the investor in thebusiness that's putting money in
?
Do they have to put more moneyin when you need it?
How do you deal with that?
Okay, your operating agreementfor the LLC is also like a
partnership agreement.
I'm going to talk about that infuture videos, but this lays
out what are the key terms andunderstanding between the
different people who are ownersin the LLC.
(04:53):
I'm just telling you, if youskip having an operating
agreement and you got otherpartners or investors in this
deal, you are going to havechaos in the future.
Okay, you need to be very clearand intentional about this
operating agreement and what'syour role?
What are you getting versus,what's their role and what are
they getting All right now, thelast reason to consider here is
for those of you that haverental property or other assets.
It makes sense to have an LLC tohold those types of assets.
(05:17):
We talked about assetprotection as being the primary
reason, and this is supervaluable.
If you're starting a businesswhere you're selling goods or
services, you have a customer, avendor dispute, an employee
dispute, you don't want themcoming after all of your
personal assets off of your homeor your retirement accounts,
your savings, your brokerageaccount, your other businesses,
your other properties.
We don't want everythingfreaking exposed, so we want to
(05:38):
use an LLC and operate thatbusiness in an LLC.
Same thing if it's a rentalproperty.
If we go back to this exampleup here, the tenant slips and
falls.
They're forced to sue the LLC.
They can't come after youpersonally.
Also, for your real estateinvestors, the same principles
we talked about here income,expenses, tracking this, keeping
it separate critical for you asyou're trying to make sure
(06:00):
you're analyzing your businessproperly and reporting your
taxes properly.
Now, we don't want to put all ofour real estate into the LLC,
but we do want to put rentalproperties or properties that
can create liability into an LLC.
So, for example, if you have ahome, okay, I don't want your
home in the LLC.
There's no reason to do that.
Are you going to sue yourselfat your home?
(06:21):
I mean sure you might havevisitors, but we don't see
really benefits to putting yourhome in an LLC.
Rental properties with tenants,for sure, we're definitely
doing that.
That's what I'm doing withmyself and my clients across all
50 states.
We're using the LLC, but herefor your home, we want to put
that into a revocable livingtrust.
Your revocable living trust isfor estate planning purposes,
(06:41):
it's not for asset protection.
Okay, and I want to make surethat my heirs get my home and it
goes through my estate.
It doesn't have to go toprobate.
That's why we use a revocableliving trust here Again, not
asset protection, but we'redoing it to coordinate and plan
our estate for our loved oneswhen we pass on.
For investment properties,rental properties, we want to
use an LLC because those do haverisk and we want the asset
(07:04):
protection benefits of the LLC.
Now, maybe a second home orsomething as well.
You could put that in a trust.
Let's say it's an Airbnb.
Sometimes you use it or youmight rent it when you're not
there.
Okay, we might put that in theLLC, because there's other risks
associated with other peoplevisiting the property or acting
as tenants.
So now, when you're setting upan LLC, I just want to go back
to those four reasons.
Do I need the asset protectionon this?
(07:26):
Am I starting a company?
I need the legitimacy of an LLC, the separate bank account and
separate treatment.
Do I have other partnersinvestors involved, where an
operating agreement is to makeclear who owns what in the
business?
And what about my real estate,my rentals and other assets?
Do those benefit by bringing inan LLC?
Do they create liabilities?
And I want this layer ofprotection for those assets.
If any of those four reasonshit, you should seriously be
(07:48):
considering an LLC Now.
My law firm, kqs Lawyers, hasbeen setting these up for
decades and we can help you getit set up and structured
properly.
We clean up LLCs across thecountry as well, so we're here
to help.
But if you're not using us, getto a competent lawyer who's
experienced in this area andwatch out for the people that
are not lawyers, that areselling entities online.
Frankly, they oversell them forthe wrong situations and they
(08:08):
sell you way too many entitiesthan you need.
So you want to make sure youget to the right professionals
that can help guide you properly.
All right.
You need to make sure that youset up your LLC properly so
you're afforded all the benefitsof the LLC that you thought you
were receiving, and this issomething a lot of people mess
up.
So I'm going to go through theprocess to make sure you
understand how to set up yourLLC proper.
All right, now there's fourthings you're going to need to
set up your LLC properly.
(08:29):
The first is articles andcertificate of organization.
Second is your tax ID and EINand the proper tax
classification.
We'll get into more detailsthere.
Next is your operatingagreement and initial minutes
that clarify ownership and someother key asset protection
issues.
And then, fourth, is choice oftax status.
(08:50):
There can be additional filingsdepending on whether you have
partners or you're an operatingbusiness versus an asset holding
business.
We're going to get into thathere.
So first, let's start off withthe articles and certificate of
organization that you need tofile.
Now, what this is is the actualfiling to the state that says,
hey, I want to be an LLC.
Here's my name.
Here's who's going to managethe LLC.
Here's the address.
Here's my registered agentthat's going to get legal
(09:12):
notices.
This is the official filingthat has certain requirements
with the state where you'resetting up the LLC.
Now you have a few options whenyou're filing the certificate
of organization or the articles.
Different states call itdifferent things.
But the first choice you haveis what state to even file this
in.
And a lot of people hear oh, youshould do it in Wyoming or you
(09:32):
should do it in Delaware orNevada.
That's BS.
You should set up the LLC inthe state where you're actually
conducting business.
If you're conducting businessin Indiana, you should have an
LLC in Indiana.
If you're conducting businessin Florida, you should have an
LLC in Florida.
If you live in California andyou have a rental property in
Ohio, you're conducting businessin Ohio.
Okay, we're setting up the LLCin the state where you're
(09:53):
actually conducting business.
If you set up the LLC in thestate you live let's say Florida
, and you have a business or aproperty, a rental, in Ohio,
you're going gonna need toregister it into Ohio.
Anyways, you need to registerthe LLC in the state where
you're actually conductingbusiness.
So why pay two different statefees?
As a lawyer, I've been doingthis for 20 plus years.
We've never understood this.
Make sure you're just going tothe state you're actually
(10:16):
conducting business in.
Now the one caveat to that isthere is Wyoming and some
certain strategies for privacyor double layer asset protection
called charging orderprotection.
I've got another video on that.
Make sure you go over that ifyou wanna look into the Wyoming
LLC and the benefits there.
But nine out of 10 clients inour law firm we're just setting
up the LLC in the state wherethey reside.
All right.
Now the second choice on yourarticles or certificate of
(10:38):
formation is is this gonna bemanager managed or member
managed?
Now we always wanna go managermanaged or member managed?
Now we always want to gomanager managed with our LLCs.
The reason being is I don'thave to disclose ownership.
No one knows who owns an LLC ona manager managed entity.
I only have to disclose who themanager is and the manager is
like president of thecorporation.
They don't have to be theshareholder or owner, that's
(10:58):
just the person listed with thestate that has authority to act
for the entity.
If I did member managed and Ilist myself as the member, then
it's very clear that I'm themember and owner of that LLC.
So I'm losing some privacybecause of that.
We typically prefer managermanaged entities.
There are some strategies onprivacy where you could have a
Wyoming entity serving as themanager, so nobody knows it's
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you in the state where you'reregistering the entity.
But for a lot of people,particularly if this is your
business you're out sellinggoods or services or you're the
entrepreneur in the face of thecompany we don't really care
about privacy.
We're just going to list you asthe manager of that entity.
All right.
Now the next thing you're goingto need is a tax ID or EIN
employer identification number.
Now, this is a number thatcomes from the IRS.
Now this operates like thesocial security number does for
(11:42):
you personally.
This identifies the LLC as aseparate entity for tax purposes
.
It will get 1099s and other taxreporting for the business
instead of it going to you.
You need to get a separate taxID.
When you're setting up a bankaccount in the LLC's name, the
two things every bank asks foris we want to see your
certificate of organization orarticles for the LLC and we want
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your tax ID or EIN.
They want that number becausethey associate that with your
entity and that gets the taxreporting, as opposed to your
personal social security number.
Now, to file this, you can doit online with the IRS.
Our law firm, of course, isdoing it.
We're setting up entities forclients.
When you're filing this, youalso need to decide how you want
your LLC to be taxed.
Now there's sole proprietorshipstatus, partnership status,
(12:27):
s-corporation status.
I'm going to come back to thathere in the final point about
making sure you have the righttax selection for your LLC.
Now the next document you needfor the LLC is your operating
agreement or initial minutes.
Now, if it's just you as theowner of the LLC, we still want
to do an operating agreement tosay you own it a hundred percent
.
If you got partners, it's evenmore critical because we want to
(12:51):
be clear who the partners inthe LLC are.
How much ownership do they haveand what is their
responsibility and roles in theLLC.
This happens in the operatingagreement and the initial
minutes of the LLC that areoutlining and approving all of
these things.
All right.
Now the final point here is yourchoice of tax status.
When you're setting up an LLCand you're getting your EIN, you
need to decide how do I want myLLC to be taxed.
A lot of people mistakenlythink LLCs save taxes.
(13:12):
Llcs do not save taxes.
Okay, but your tax statuselection for your LLC may make a
difference on taxes.
So you understand this very,very critical point.
This is probably one of thethings people screw up the most
is they mistakenly elect thewrong tax election and they end
up paying the IRS too much money.
Now you have one criticaldecision here.
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Do I need to make an S electionfor the LLC and be taxed like
an S corp, or should I just betaxed like a sole proprietorship
?
Now maybe you have partners.
You're taxed as a partnership,but the really critical thing
here is should I be taxed as anS-corporation?
Now what we want you to file asan S-corporation if you are
conducting an ordinary incomebusiness where you're selling
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goods or services and you havemore than $50,000 of net income.
If you hit that bucket, yourLLC should be taxed as an
S-corporation.
If you have rental properties,your business is only making 10
grand a year, even though you'reselling goods or services.
You have a side hustle.
Don't worry about theS-selection, it doesn't matter
for you, but any of you smallbusiness owners making 50K or
more main hustle, side hustlethis is net income.
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You will save money by doing anS-selection.
Here's how it works.
In an S-selection to an LLC orjust in an S-corporation itself.
What happens is, when you arepaid income, you get to divide
that income into salary and intodividend or net income, and
that benefits you because it'san opportunity to save on
self-employment tax.
Let's say you made $100,000 ayear.
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Okay, this is after all yourexpenses.
You made 100K.
And let's say you're a soleproprietorship, you just did an
LLC, taxed as a sole proprietor,you didn't file the S-election,
the 2553 form with the IRS, andyou just take that 100K.
Well, how much self-employmenttax do I pay?
You pay 15.3%.
Okay, this is Medicare andSocial Security.
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That's the total tax that youend up paying on a hundred
thousand, that results in$15,300 of self-employment tax.
Guys, this is before you evenpay federal income tax.
Okay, this is just Medicare andsocial security because you're
self-employed.
Well, that kind of sucks.
All right, I've got 85,000 leftto pay myself here and I still
got to pay federal income tax onthis money.
(15:19):
Well, if you're doing an Scorporation, paying yourself the
same $100,000, what happens isin an S corporation, you're
allowed to pay yourself a salary, which you do have to pay
self-employment tax on, butanother portion of the funds you
can pay yourself as net incomeor dividend profit out of the
business, which is exempt fromself-employment tax, which is
where you get tax savings.
(15:40):
So, for example, if you'remaking a hundred K, maybe we
take a $40,000 salary which youtake as a W-2, and the other 60
K you're going to pay yourselfas dividend or net income.
Now I pay 15.3% over here onthat 40 K and I pay nothing in
self-employment tax over here.
(16:01):
And now the savings here is I'monly paying $6,000 in
self-employment tax over hereversus paying 15,300.
This is where I saved.
I didn't pay 15% over here, Ididn't have to.
Okay, that saved me $9,000 intaxes to the federal government.
This is $9,000 you can besaving every year if this is
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your income level.
So make sure you understand theS-corporation tax strategy when
you're using an LLC.
When you have an LLC, you canelect to be an S-corporation.
Maybe in year one you're like,eh, I don't know that, I need
this.
I might make 10 grand this year, but year two I'm going to bump
up and I'm going to hit this50,000 net income.
Well, you can make the Selection status in that second
(16:42):
year.
Okay.
So you have some optionalityhere, but you need to make sure
that you understand that,because it's more money in your
pocket If you get the taxelection right and if you jack
it up, you're going to beoverpaying the IRS.
So make sure you're focused onthis and paying attention.
All right Now.
The last thing here I want tomention is you don't need to
file a beneficial ownershipinformation report to FinCEN and
the Department of Treasury.
(17:03):
This is a new thing that cameout a couple of years ago, where
you had to make a filing foryour LLC or corporation to the
federal government, disclosingUS Supreme Court on it, going
back and forth on this.
So, bottom line, don't worryabout the FinCEN BOI filing.
That may come back in a lateradministration, who knows?
(17:25):
But in 2025, right now, don'teven have this on your radar.
You don't need to stress aboutit.
Skip that step for your LLC,all right.
How do I actually pay myselffrom an LLC Once you've already
set it up?
This is kind of a criticalquestion.
Right?
I'm making money in this thing.
How do I actually get paid?
All right Now.
The first thing I want you tothink about is you are now an
entrepreneur.
Okay, You're not getting apaycheck.
We are not talking aboutenrolling and getting a paycheck
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cut every two weeks.
All right, I'm going to gothrough a number of different
considerations that you need tohave as you're paying yourself
from your LLC.
Now, the first thing you'regoing to need to have is an LLC
business checking account, allright, so we're going to have
our LLC and let's say it'sVandelay Industries LLC.
Okay, and you've got your bankaccount that the LLC owns.
All right, this is not you.
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You're going to have yourseparate personal bank account.
This is just your business bankchecking account.
You're receiving your income.
This is your goods or servicesyou're selling.
This could be your rentalproperty income doesn't matter
here.
But the business has its ownseparate checking account.
Great for tracking your incomeand expenses, but also critical
here to make sure you'remaintaining asset protection.
What you're going to do isyou're going to take a draw from
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the LLC business checkingaccount to yourself personally.
This can go to your personalbank account.
This is all we're doing here.
It might seem simple, but we'retransferring money from the
business checking account toyour personal checking account.
Now, how you tax support ithere we're going to come to in a
second.
It depends on your structure,but for now, no matter what
(18:51):
you're doing or how your tax oryour sole proprietorship.
You're an S corporation.
We are simply transferringmoney from our business checking
account to our personal account.
There's income there and whenwe want you could leave money in
the business checking accountfor purposes of working capital
or you might need it to grow thebusiness.
And if you want moneypersonally, you simply take a
draw.
Generally we don't want toleave a lot of cash in the LLC
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business checking account.
Don't accumulate cash there.
It's a liability risk.
You're conducting businessthere.
You might have tenants.
They could sue the LLC and getat that cash.
We only want to keep enoughcash in the business checking
account necessary for businessoperations.
Otherwise we want to send itdown to you personally, get in
your personal checking accountand from there go out and invest
(19:34):
and build and grow other assetsor use it for your personal
expenses, whatever your scenariomay be.
But the bottom line here isyou're going to simply do bank
transfers to your personalchecking account.
Now, depending on how you'retaxed, is the tax reporting
that's going to occur?
Now you simply have twodifferent scenarios here.
Typically, we're going to haveyou taxed as a sole proprietor,
(19:55):
as a sole prop.
This means this is just goingon schedule C or maybe it's a
rental property going onschedule E, but you didn't do
what's called an S selection.
If you're a sole prop, allyou're going to do is this is a
draw.
You're going to track it thatway in your QuickBooks or in
your accounting or financialsand the money's going off the
balance sheet of the companydown to you as the owner of the
company.
Now then, at the end of theyear, you're simply going to do
(20:18):
your profit and loss for yoursole proprietorship on Schedule
C or again on Schedule E for therental property, and you file
your taxes.
No payroll reporting, no W-2shappening, all right.
This is simply self-employmentincome coming down on Schedule C
for those of you selling goodsor services and this is the sole
proprietorship.
It's a lot simpler and ifyou're making 10, 20 grand a
year, this makes sense.
(20:39):
This is a side hustle.
Do the sole prop, or even ifthose of you that have rental
properties, again, you don'tneed an S selection for this.
It's just flowing down ontoyour personal 1040.
We got the LLC for assetprotection.
It's not saving us taxes, butwe are still having the business
bank account and taking drawsand transferring that money to
us personally whenever we havethe necessary cash flow or
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whenever we need it personallyto live off of or make other
investments.
Now, if you are an Scorporation, it's different.
Okay, we're still doing thissame step up here, where I have
the LLC with its checkingaccount at a bank.
Okay, and this is a businesschecking account and it is
transferring to you personallyand you're still doing that
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whenever you want.
Okay, we're still doing atransfer from the business
checking account to yourpersonal bank account and this
is still essentially a draw.
Now, the big distinction herefor those of you that are an S
corporation is, even thoughyou're taking draws and
transferring the money from thebusiness account to your
personal account whenever theheck you want, you're not
necessarily doing a payroll andcutting yourself a paycheck and
doing a withholding every twoweeks, but you need to be doing
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at least a quarterly payroll.
Okay, I have my own Scorporation.
This is what I do for mine.
This is what are many of ourclients at KQS Lawyers that
we're setting up, that areoperating in LLC taxes and S
corporation or that have an Scorporation directly.
You're doing a quarterlypayroll.
This is like a little after thefacts payroll.
So how much do I actually claimas payroll.
For example, maybe you paidyourself $30,000 in draws that
(22:05):
you took from the business, butonly 10,000 of that are you
going to consider to be wages orpayroll income.
That is the amount you're goingto put on the quarterly $10,000
, and maybe it's 15.3%self-employment tax.
So I'm going to need to send in$1,500 in my self-employment
tax for Medicare and socialsecurity.
But the other 20K that I tookfrom the business I'm deeming
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that to be profit or net incomefrom the business, again exempt
from self-employment taxes.
I went over in the earliervideo.
So, but this is a critical stephere understanding that salary
dividend split or salary netincome split here, but making
sure you're at least filing aquarterly payroll and then at
the end of the year you're goingto do a 940.
It's an annual form.
Now your accountant will dothis for you.
(22:47):
If you have an accountant, theycan do your payroll for you.
You could use QuickBooks or ADP.
Many of them understand this.
I actually use ADP.
We do an after the factquarterly payroll like this for
my own S-corporation prettyseamless, easy strategy.
Now for those of you with LLCswith rental real estate or other
investment assets, don't dothat S-corporation.
Don't file a quarterly, youdon't need to do that.
(23:07):
Okay, you're just going to takedraws to your personal bank
account.
Now you may have estimated taxpayments.
You're doing on a quarterlybasis.
This is different from payroll.
Okay is different from payroll.
Okay.
Your estimated tax payment issomething you can send in the
IRS every quarter.
Let's say you're going to owe ahundred thousand dollars in
taxes at the end of the yearfrom your business, your real
estate, your otherentrepreneurial activities not
from your W-2, because your W-2is going to have payroll
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withholding.
But if you're having estimatedtax payments a hundred K, you
expect for the year you'd sendin $25,000 to the IRS.
That is a separate form fromthe 940 and the 941.
That is your payroll stuff.
Okay, I'm just talking aboutestimated income tax payments
that you could send to the IRSand the state.
So don't forget about those.
Make sure you're tracking whatyou're making.
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If you don't send an estimatedtax payments when you file your
tax return at year end, you willhave some penalties.
Now, they're not substantial,but the IRS will make you pay
some interest and penaltybecause you're paying in late.
They expect you If you made ahundred K, let's say in quarter
one.
They want a little bit of taxon that.
Whatever the tax would be due,they want you to send that in an
(24:13):
estimated amount and as long asyou're close you're fine.
There's no penalties orinterest charge.
Now a lot of small businessowners don't do that.
Okay, I've been around longenough.
They kind of send in money whenthey can and they true it up at
year end but realize you'll bepaying a little bit of interest
and penalty to go that route.
The safe way is make sureyou're sending in estimated tax
payments.
(24:33):
You don't get caught off guardand you'll avoid having to deal
with interest and penalties whenyou file your final return next
year.
Now, a good rule of thumb of howmuch to send the IRS each
quarter is, let's say, 30%.
Whatever your net income afterexpenses is, just send the IRS
30%.
If you're making good money,more than a couple hundred
thousand dollars a year, you'regoing to at least be in a 30%
plus tax bracket, all right.
Well, that's it here.
As you're paying yourself fromthe LLC, it's mostly just going
(25:02):
to be a transfer from oneaccount to the other, going from
the business account to yourpersonal account.
Remember for any of you thatare S corporations.
You do have that quarterlypayroll report you do need to
file to the IRS.
You have some stateunemployment stuff that needs to
be filed.
I just use a payroll company tohandle that for you.
Go, make more money in yourbusiness.
Don't be a bookkeeper on theside.
All right, hire that out, getyour account or a payroll
company to handle that for you.
Now, a common question I get asa lawyer is how many LLCs do I
need for my rental properties?
Now, as a lot of people get tothis issue, they think well,
(25:23):
matt, I have 10 properties.
Should I have 10 LLCs?
Should I have a separate LLCfor each property?
Well, our answer to that isalways it depends, and I know
people hate that answer, but I'mgoing to flesh it out for you
here in a second, because itreally depends on not how many
properties you have, but howmuch equity you have between the
different properties.
All right, let's say you havean LLC, xyz Properties LLC, okay
(25:48):
.
And let's say it owns fiverentals, okay.
Now the downside to having fiveproperties in one LLC is if I
have something happen onproperty number five here, let's
say the tenant slips and falls,well, they can sue the LLC.
They can't come down to mepersonally and get at my
personal assets or any otherLLCs or businesses I have.
Those are all protected.
I get asset protection there.
(26:08):
But what is at risk is theother four properties in the LLC
.
I've got exposure here of allthe equity from property number
five, four, three, two and one.
They're all in the same basket,so to speak, and people say,
don't have all your eggs in onebasket.
Well, the problem here is,let's say, I have 200,000 of
equity between each property.
(26:30):
I've exposed a million dollarsof equity here.
Something goes wrong here onproperty number five.
Well, that has put allproperties at risk and their
equity could be drained.
Now we don't want that.
So how do I prevent that fromhappening?
Now, obviously, I could do thisoption here and just have one
LLC for each property, right?
Well, that's a good option, andif these are like multifamily
(26:52):
properties or commercialproperties, we're definitely
going to do that.
But if these are single familyrentals that have $20,000 of
equity a piece in them, youleverage out the equity, their
mortgage, to the hill, but theycashflow.
I think you're overcooking ithere.
That is not worth it.
Our rule of thumb is somethingin the middle here.
What we say is we want aseparate LLC once you have more
(27:15):
than $250,000 of equity betweenmultiple properties.
So for example here, let's say Ihave an LLC that owns two
properties, all right, and oneof them is worth a million
dollars and it's got a $600,000mortgage Okay, so I've got 200K
of equity.
The other is worth $700,000 andhas $300,000 mortgage.
(27:35):
So it's got 400K of equity.
Okay, so I got a milliondollars of equity here.
Well, if something happens onproperty number one, again
property number two is at risk.
So in this example, it makessense to separate out each
property into its own LLC, notbecause I have two properties,
because I have two propertieswith enough equity at risk,
where the value of theseproperties each of them has more
(27:57):
than $250,000 of equity isworth the cost and maintenance
of an additional LLC.
Another LLC is going to costyou $1,200.
You're going to have annualfees to the state to keep it
active.
I mean, we set up thousands ofentities in my law firm, kqs
Lawyers, every year.
We'd love to just set up moreentities and say you need an LLC
for every property, but I don'tthink that's the case.
Again, if you got fiveproperties here, you could all
(28:18):
have them in one LLC.
If there's only 10 grand ofequity, there's not enough
equity at risk where aplaintiff's going to go after
the properties.
But if I got two down here witha lot of equity in them, I want
the additional asset protectionand the cost of that is now
worth it, okay, because I haveenough equity to be at risk.
Now if I'm down here in thisstructure we have an LLC for
each property.
They both have hundreds ofthousands of equity.
(28:40):
If something goes wrong onproperty number one, the tenant
is forced to sue LLC number one.
They can't get over to propertynumber two and LLC number two.
They get separate liabilitytreatment.
They can't get over to propertynumber two and LLC number two.
They get separate liabilitytreatment.
They can't come after mepersonally, so I'm able to
contain that liability and thatseparate LLC.
That is the benefit to havingmultiple LLCs.
Again, don't think about howmany properties I have.
(29:01):
Think about how much equity doI have between the multiple
properties.
We always say if you have 10properties with 10,000 of equity
between those 10 properties,put them in one LLC, we don't
care, you have 100,000 of equityat risk.
You still get the assetprotection.
If something happens on one ofthose 10 properties, they sue
the LLC.
They can't come after youpersonally.
(29:22):
They can't get to any of yourother entities, your other
businesses you may have.
So we've still got thatliability protection.
Now, sure, those other nineproperties are at risk, but I'm
just telling you, no plaintiffis going to chase down that LLC
that has very thin equity.
But a plaintiff will chase down$200,000, $300,000 of equity.
That is worth their time andtheir money to chase down those
(29:42):
properties.
That is when we like separateLLC treatment.
Now just a little caveat herewhen you're doing multiple LLCs,
some states have somethingcalled a series LLC and what
that is is you have one LLC youfile with the state and you can
adopt something called asub-series that can own separate
assets and get separateliability treatment without
having to file a new LLC at thestate level.
(30:03):
States like Utah, texas, nevada, tennessee, illinois there's
about 15 other states that havewhat's called a series LLC.
Now in that instance we love touse the series LLC for any of
you that have multipleproperties, real estate
investments with some equity,because we only have to file one
series LLC with the state andwe can adopt these sub-series
that get separate liabilitytreatment and that way we're
(30:25):
getting the benefit of multipleLLCs, but we only have one state
LLC filing.
So, for example, you hadsub-series number one,
sub-series number two,sub-series number three.
These get separate liabilitytreatment, just as a separate
LLC does, but you don't have tohave the multiple filings here.
Okay, so that can be a littlebit of a cheat code for any of
you that are in those statesthat allow for series LLCs with
(30:45):
multiple entities.
We definitely love those andwant to set that up if it works
in your situation.
And again, this is where theproperties are located, not
where you're located.
Okay, we're going to be settingup this series LLC in the state
where the properties arelocated.
Okay, so if you live in Arizonabut you have 10 properties in
Texas, we're going to do a Texasseries LLC for those 10
(31:05):
properties in Texas, and thatcould be a great solution for
those again in the states thatallow for series LLCs, and that
could be a great solution forthose again in the states that
allow for series LLCs.
Now, do you need to registeryour LLC into multiple states?
A lot of people are confusedabout where they need to
register their LLC, whether theygot a rental property or an
operating business.
Now I'm assuming here in thevideo that you've set up an LLC
already in a particular stateand you have the question of I'm
(31:25):
conducting business in anotherstate.
Do I need to register my LLCforeign into that other state?
You can have an LLC registeredinto multiple states.
For example, I'm here inArizona and I've had an Arizona
LLC for rental real estate thatI also registered foreign into
Indiana.
The reason I did that is I hada rental property in Indiana, so
I registered the same LLC anArizona LLC as a foreign LLC
(31:49):
into Indiana.
If you're an operating business, you might be doing the same
thing.
I'm conducting business inanother state.
Do I need to register in thatother state?
Okay, I'm going to go over thereasons here of why you need to
make sure you're doing thisproperly, because there's fines
and penalties and potential lossof asset protection, but also
want to get into when are yourequired to register foreign?
Okay, so let's get into thefirst part here of why should I
(32:10):
be focused on this?
Well, the first thing is, ifyou don't register LLC into the
state you're actually conductingbusiness, you can lose your
asset protection benefits.
Actually, if your LLC is notregistered in a state and you
get sued in that state.
Let's say you have a WyomingLLC for a property in Florida
and you have a plaintiff sue youin Florida Guess what?
You can't even go into court.
(32:30):
You have to register thatWyoming LLC into Florida for a
Florida court to even recognizeyou All right.
So you got to be careful aboutthis, just from asset protection
and the fact of conductingbusiness, that you make sure
you're registered in the stateyou're operating.
Now I'm going to get into whenthis triggers and when you need
to file in another state.
But the first thing here is Iwant to make sure you understand
(32:52):
you need to do this to makesure you're actually able to
protect yourself and have theasset protection benefits and to
be able to be a legitimatecompany able to transact or
represent yourself in court ifyou are sued or need to conduct
business.
A lot of times I've had clientswith rental properties in other
states and the title companywon't transact with them, they
won't transfer title.
(33:13):
They're like this LLC isn'teven registered in this state.
Okay, so you've got to makesure that you're registering the
LLC in the states where you'reactually conducting business.
Now the second consideration isfines and penalties.
Let's say you're in Nevada andyou're conducting business into
California and you have a Nevadaentity.
Well, the state of Californiawill fine you up to $10,000, a
(33:33):
maximum fine if you don'tactually register in that state
when you're actually conductingbusiness in that state.
Now I'm going to come back hereagain to what constitute
conducting business.
That's important, but obviously, if you're servicing customers,
you have an office or employeesin California and you're
operating out of Nevada eventhat's where you live but you
don't register into California,you are going to be subject to
(33:54):
these fines and penalties.
So, again, you're going to needto get compliant and register
into that state where you'reconducting business.
Now I know people hateCalifornia.
They don't want to registertheir LLCs there because they've
got an $800 annual LLC fee, nomatter whether you make money or
not, I know it sucks, but ifyou're going to conduct business
there, you got to pay the price.
You're going to need to getregistered there and you will be
subject to that $800 minimumannual fee.
(34:16):
All right, let's get into thecritical question here of when
am I required to register intoanother state?
Well, the key consideration isare you conducting business in
that state.
Now for a rental property, it'squite simple.
Do you have a rental propertyin that state that you rent to a
tenant that's conductingbusiness?
That LLC needs to be registeredin that state where the
property is located and you'rerenting to the tenant?
(34:36):
Simple okay.
If you're a business sellinggoods or services, okay, you're
an operating business.
Do you have employees or astorefront there?
If so, you're going to need toregister to conduct business.
If you just have customersthere and you don't have an
active presence in that state,you don't need to register.
But definitely if you haveemployees in that state or you
have a storefront or an activeoffice in that location, you
(34:57):
will need to register yourentity to do business in that
state.
Thanks everyone for listening.
I hope this episode was helpfulin understanding LLCs and how
you can use them to youradvantage.
Now, if you want to get intothe diagrams and some of the
numbers I was writing down as Iwas going through this, get over
to my YouTube channel, wherethese videos are as well.
Thanks for listening.
We'll see you next time andthank you everyone for listening
.
Speaker 2 (35:16):
A quick disclaimer and reminder this presentation
does not constitute an attorneyor CPA client relationship and
it is always in your bestinterest to consult competent
legal and tax professionals whenconducting your own personal
transactions.
Speaker 1 (35:32):
We also want to make sure you know this is not
investment advice or financialadvice.
We're just trying to give youeducation, ideas and strategies
you can take to yourprofessionals or conduct your
own research on.
We'll see you next time.
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