March 28, 2025 • 23 mins
In this episode, we speak about the challenges and opportunities in the industry. We explore strategies for scaling a painting business, improving profitability, and avoiding common pitfalls that many entrepreneurs face.
This conversation covers essential topics such as pricing services effectively, streamlining operations, and leveraging marketing to attract high-value clients. Richard Dunton shares insights on how to manage cash flow, build a strong team, and create a business model that sustains long-term success.
This episode is ideal for painting business owners, contractors, and entrepreneurs looking for practical advice on growing their business efficiently.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
This is Daniel, the founder of Bookkeeping for
Painters.
I'm a CPA that worksexclusively with painting
businesses, helping them knowtheir numbers and what they mean
in save big and tax.
And today I'm here with RichardDunton, enrolled agent and
advising director of Bookkeepingfor Painters.
Speaker 2 (00:17):
Hey Daniel, I appreciate that nice
introduction.
Speaker 1 (00:21):
Happy to do it, be here all day.
Speaker 2 (00:24):
Yeah Well, I'm glad you kind of set the stage,
because I think today we'regoing to talk about something
that's a little bit on thedeeper end of the pond.
This is something that's moreadvanced tax planning, more
advanced business structuring,but it is something that we're
seeing more and more of when wetalk to folks and it really is a
(00:46):
good thing for any businessowner to really understand.
And that has to do with havingmultiple entities for your
painting business, and byentities we're talking about
business entities, just to kindof set some definitions.
If we form an LLC with our stateto run our business out of,
(01:08):
that's a business entity, andthere may be situations where
you actually want to have morethan one.
You might have kind of likealmost like Russian nesting
dolls where you have companieswithin companies and you know it
can get a little crazy and kindof expensive if we're that
careful.
But there are a few situationswhere it makes sense.
And I thought we could talkabout two situations that we run
(01:31):
into a lot where a paintingbusiness owner might want to
have multiple entities, and thenalso talk about how you're
going to form these entities,how the taxes are going to work,
how money is going to gettransferred between the two of
them, and I think this will be areally enlightening episode for
folks who have gotten a littlebit bigger in their companies or
(01:53):
maybe thinking along the linesof asset protection or wanting
to branch out into otherbusiness ventures.
I think you're going to enjoythis one.
Speaker 1 (02:02):
Yeah, this is a great topic.
It's something we're seeingmore and more of.
More folks are wanting toestablish more complicated
structures so that they savemore in tax and protect their
assets and also have severalbusiness ventures going on
simultaneously that they couldgrow and then sell off later.
So I think it's a great topicto dive into today.
(02:26):
So I'm excited.
Speaker 2 (02:27):
Yeah.
So let's talk about the firstcase study, and that is using a
holding company for assetprotection.
Now in my mind, when I hearholding company, I'm thinking of
a business entity that holdsassets.
So those assets could be realestate, could be vehicles, could
(02:50):
be equipment.
Generally, a holding company isnot doing operations, it's just
formed to be the owner ofthings that are valuable.
That definition is not set instone.
There's flexibility there.
But that's how I think of aholding company versus an
operations company.
That is a business that isformed to go and do work and
(03:14):
make money.
That's one that's very active.
So those are kind of the twosituations there.
Now you might want to split yourbusiness into a holding company
that owns the assets and anoperations company that runs the
daily business.
The reason for that is, as anoperations company, you have a
(03:36):
greater chance of being sued.
You have greater liabilitybecause you're out there working
on people's homes, you'redriving down the streets, you
have employees.
Most of the risk is going to beon the operations company.
So if your operations companygets sued and you have separated
(03:57):
your most valuable assets intoa separate entity, you might
have a little bit of assetprotection there, where the
person filing the lawsuit isunable to go after the valuable
things that are in the holdingcompany.
So, for example, let's say oneof your contractors falls off a
(04:18):
ladder, gets injured and theydon't have insurance and they
sue you, your company.
They might win a lawsuit.
Hopefully not, but maybe theydo.
Theoretically, they would notbe able to go after the vehicles
and the equipment and maybeeven the real estate that the
company uses, because thosethings are owned by a separate
(04:42):
holding company that's ownseparate LLC.
Along those lines, we can thinkof it the arrow pointing the
other way what if somebody suesyou personally?
Could they go after yourbusiness assets?
So now we're talking aboutprotecting the business from
yourself.
Well, that is a very bigpossibility, and this is where a
(05:07):
holding company can come intoplay.
Now, this type of holdingcompany is generally known as a
charging order protection entityor a COPE C-O-P-E.
The idea here is that ifsomebody sues you, they win a
judgment, they might obtainwhat's known as a charging order
against you.
It means that you owe themmoney.
(05:27):
Now, if you do not have goodseparation between your business
and yourself, that person mightbe able to use that charging
order to force you intoliquidating some of your
business assets, liquidatingsome of your business assets or
(05:48):
force you into distributing cashfrom your business to yourself
and then they take that cash.
So a charging order protectionentity would be an LLC that is
formed in a state that hasstrong charging order
protections.
For example, wyoming, nevada,south Dakota, delaware even my
home state of Illinois, are veryfriendly towards these types of
(06:12):
entities.
They have a strong separationbetween the entity and the
individual.
So if someone has a chargingorder against you, they can't
force you to liquidate yourassets.
They can't force you todistribute the money from your
company.
Now, if you distribute themoney in the future anyway, then
(06:36):
they might be able to accessthat.
But it gives you a bit of ashield around your company and
around the assets in thatcompany.
So that's kind of thehigh-level overview of a
charging order protection entity.
If you're interested in doingsomething like this, I strongly
recommend that you talk to a taxattorney or a tax professional
(06:59):
to find out how it should bestructured and what states are
friendly towards that.
If you do not live in a statethat is friendly for charging
order protection, such asCalifornia or Florida, that's
okay.
Your holding company can beformed in that state and your
(07:20):
operations company would have tobe formed in the state in which
you do business.
But you can still have thatCOPE protection if you set that
up right.
Natural question is well, if Itake all my vehicles and
equipment, I stick them in thisWyoming LLC, how do I run my
business?
Well, the holding company thathas the assets is going to lease
(07:45):
those assets to your operationscompany and you are kind of
just, you know, trading moneyback and forth.
There's not really any taxsavings here, but that's how
your operations company can usethose trucks and not actually
own them themselves.
You'll want to make sure thatyou dot your I's cross, your T's
.
The truck should be titled inthe name of the holding company.
(08:09):
If there's any loans on them,those loans would be, you know,
with the holding company.
Make sure you have thatseparation on paper because you
know in a lawsuit the lawyersare going to be all about the
paperwork and you can have thebest intentions.
You can say, well, this is whatI wanted to do, but the only
thing that really matters iswhat's in writing.
So I know it's not somethingthat we like to think about a
(08:31):
lot.
Paperwork is a pain in the neck, but making sure that we have
all of our documents correct andthe proper owners for
everything, that's what's goingto protect us if something bad
happens.
Speaker 1 (08:44):
And one of the things that I see a lot of folks want
to do with these holdingcompanies.
It provides that protection ifone business is sued so that
they can't get into the holdingcompany's assets.
But also, maybe you don't justhave a painting business, maybe
you also have a pressure washingbusiness or some real estate
(09:05):
and those are also in differententities and so you could have
those different operatingcompanies.
You have an LLC for your realestate, an LLC for your other
non-painting business, llc foryour painting business, and then
you have the holding companywhich owns all of those separate
businesses.
So it's all getting funneled upinto that holding company so
(09:29):
that if any one of those, ifsomeone trips on the stairs at
your, on your real estate andthey're suing that LLC, it's not
going to affect the holdingcompany or the other businesses
because it's separated off.
Or if something happens in yourpainting business, it's not
going to impact your holdingcompany or the other businesses
(09:50):
that you own as well or theother businesses that you own as
well.
So not only creates thatseparation between the holding
company and the operatingcompany, but also if you have
other operating companies, likeother businesses going on or
real estate, you can also createthat separation of liability
there.
Speaker 2 (10:08):
Yeah, I like that we sit down with our clients and we
diagram this out and I like touse circles for each LLC and it
kind of makes me think of like alittle protective bubble.
You know, if someone attacks anasset in that bubble, it's
confined to that bubble, itcan't move on to the other ones.
(10:28):
So it's you know, it's puttingyour assets in silos or
segregating them and buildingthose walls between them.
So I think that kind of bringsus to our second case, where you
might have now an operatingcompany that is taxed as an
S-corp for the purposes of taxsavings, purposes of tax savings
(11:00):
.
This is a situation where youwould have an interest in
multiple operating companies anda lot of times when you have
multiple partners, you want toset that up as a partnership.
The reason being is apartnership is the most flexible
type of business entity.
S-corps have certain rules thatyou have to abide by.
(11:20):
C-corps are better, but youhave that dreaded double
taxation.
Partnerships are kind of likethe Wild West.
As long as all the partnersagree, you can handle things
however you want.
You might have one partner whois a 20% owner but he's entitled
to 80% of the profits.
(11:40):
Or you might have one partnerwho says I want to take on all
the losses, I'll give theprofits to somebody else.
Whatever your imagination cancome up with you can pretty much
do in a partnership.
Just please put it in writingand have it in your operating
agreement, because those type ofthings can kind of get you know
(12:02):
disagreements can arise fromthat.
So make sure it's in writing.
But whatever you guys agree toyou can do.
The downside is that partnershiptaxation comes with
self-employment tax and that'sthat 15.3% tax on all of your
business earnings.
It's great for Social Securityand Medicare but it's not good
(12:24):
for you.
You get very low return oninvestment.
So typically what we'll do iswe'll set up a S-corp operating
company to be the parent of allthese child partnerships.
It's going to have its stake inthe partnership.
So, for example, if Daniel andI were going into business
(12:46):
together, we might be 50-50partners and in our partnership
I don't want to be the 50%partner.
I want my S-corp operatingcompany to be the 50% partner.
Because now, whatever incomeDaniel and I make, my share
doesn't flow to me directlybecause then it would be subject
(13:09):
to self-employment tax.
It flows to my S-corp operatingcompany that washes away the
self-employment tax.
It flows to my S-corp operatingcompany.
That washes away theself-employment tax because now
it takes on the taxcharacteristics of the parent.
Yes, I still need to pay myselfa salary as the CEO of my
operating company, but anythingabove and beyond that I can
(13:29):
receive on a Schedule K-1 and itwill be free from
self-employment tax.
And I can have a partnershipwith Daniel.
I can have a partnership withsomebody else, I can have a 10%
stake in a restaurant that myfriend's opening.
Whatever you want to do,there's great scalability here.
But it's all going to flow intoyour one single S-corp
(13:52):
operating company and Iencourage you to have one S-corp
operating company.
If you have multiple S-corps,what happens then?
Well, now you're required topay yourself a salary for each
S-corp that you have and that'sgoing to start to erode away
those tax savings.
(14:13):
Much better to be the CEO ofyou know U Industries and have
all these different littlesubsidiary companies than to be
the CEO of four or fivedifferent businesses.
Speaker 1 (14:29):
So it sounds like we want to have one company that's
taxes and S-corp and then itowns all the other partnerships
that you have going on.
So maybe you have a paintingbusiness, we have a partnership,
Then you have a pressurewashing business, you have a
partnership.
Whatever else you have going on, you have those partnerships,
taxes partnerships but then theowner is the S-Corp that you've
(14:52):
established that owns all thoseand so it's effective with
keeping your tax bill low, Causeyou have that S corp status and
in the main operating company.
And, uh, instead of having likecause, sometimes we have folks
come to us and they have likefour different S corp set up in
you know four differentbusinesses and so it's just a
(15:14):
lot of additional admin costsand payroll that you're running.
That's not necessary, where youcan just make one S-Corp and
then have that S-Corp own allthe other businesses and kind of
streamline things, make thingslower cost admin wise and also
lower in taxes as well.
Speaker 2 (15:35):
Yeah, absolutely.
Every S-Corp would require itsown 1120S tax return.
That's an expensive tax return.
If you have child companies,all their income flows to the
parent.
You file one consolidated taxreturn and all that income takes
(15:55):
on the tax characteristic ofthe parent.
All that income takes on thetax characteristic of the parent
.
So normally these things wouldbe subject to self-employment
tax.
But if it's owned by an S-corpnow, it enjoys S-corp taxation.
So yeah, I think you did agreat job of explaining that.
Recently we talked to a clientwho has a painting business and
(16:17):
he has some very ambitious goals.
He wants to open up 50different businesses in 50
different locations and he wantseach location to be its own
individual LLC and possiblyoffer equity to the local
employees there, and this wouldbe an ideal setup for him.
(16:38):
In fact we drew it all out.
It was really fun.
He can have his one primaryoperations company and it can be
a part owner of all thesedifferent little satellites, and
all these satellites enjoytheir own asset protection and
all the income flows up to thetop and it goes on one tax
(17:02):
return.
So we're getting it set upright from the get-go, which is
a lot easier if you set it upright from the get-go than
trying to undo these things Nowif you are already set up and
maybe you realize like, oh, thisisn't exactly the most
advantageous know, advantageousway of doing things.
You know we can unwind stuff.
You know we partner with lawfirms that have really great
(17:25):
lawyers who can help us kind ofyou know, undo the rat's nest.
But it's super important thatwe have the formation right and
the documents right.
So you know, for example, let'ssay I want to do a holding
company and an operationscompany.
So I, you know, I form my LLCin Nevada.
(17:45):
I've got my operations companyin Illinois because wherever
you're doing business at, youneed to be domesticated there.
So your operations company hasto be either formed with the
state that you're working in ordomesticated which is like a
fancy term for saying registeredin the state where you're
(18:05):
working.
The holding company can beelsewhere.
But let's say I do that and Iput myself as the member of
these LLCs.
Well, in that case I don'tactually have a holding company
and an operations company.
I've got two LLCs which I'm theowner of.
So we need to have the childcompanies be owned by the parent
(18:30):
company and the paperwork needsto be right, because if this
ever gets challenged or we everget sued, we need to show that
we did everything correctly toprotect that corporate veil,
because that's what this is allabout.
Right, we're trying to protectthe assets, strengthen that
corporate veil, and that's onlygoing to happen if we do things
(18:50):
correctly and the paperwork doesmatter.
So if you're looking at thistype of strategy, I strongly
encourage you to work with aprofessional and make sure that
you have everything the way itneeds to be.
Speaker 1 (19:13):
Yeah, branches, all those different companies
throughout the US and have itsown LLC formed and he owns part
of it and then the local teamalso owns the other part.
I think that's a great way ifyou have those ambitious goals,
(19:34):
and it reminds me of Les Schwab,who was the guy who scaled the
tire centers across the US backin the day, and Charlie Munger
often uses him as a greatexample of aligning incentives,
because Les Schwab did the samething.
(19:57):
The way he scaled his businesswas he opened up all these tire
centers everywhere.
He would go in partnership withthe local person who was
operating the store and he wouldown the other portion and he
was able to scale his businessthat way.
And I don't know exactly whatsort of holding companies or
(20:24):
operating companies he had setup, but I would imagine it was
probably something very similarto what we're helping folks set
up, which is basically havingthat holding company that owns a
percentage of all thosepartnerships, owns a percentage
of all those partnerships, andso you're keeping things
efficient tax-wise and alsoprotecting yourself.
(20:46):
So I love the If you have biggoals to expand to different
areas, having aligningincentives with your local team
and while keeping a goodpercentage going back to you as
the founder and the owner.
I think that makes a lot ofsense.
Speaker 2 (21:03):
Yeah, for sure, and there's a certain amount of
privacy that can be enjoyed withthe correct setup too.
Off of a lot of these thingscan give you that privacy so
that people they might know youknow that this asset belongs to
(21:27):
this corporation, this LLC, butit makes it more difficult for
them to get to you personally.
It's kind of like camouflage,you know, for your money, you
know, and we didn't really planon talking about this today.
But there's another level tothis too, where you might end up
with a revocable living trustthat holds some of your real
estate or some of your otherassets, because we don't want
(21:48):
real estate owned by an S-corp.
That's kind of a tax.
No-no, that's a good way to endup paying more taxes than you
really need to.
That's a good way to end uppaying more taxes than you
really need to.
But yeah, like I was saying, oneof the things that we like to
do is we diagram it all out andwe separate your financial life
(22:10):
into your operations side andyour assets side and we show how
these things are going to flowto which entities before they
eventually hit your 1040 taxreturn, how your real estate is
going to rent from youroperations company, how your
real estate is going to be heldby your revocable living trust
and making sure that we have themost tax-efficient flow.
Also what's going to give us themost asset protection and also
(22:33):
what's going to give us privacyas a person.
So definitely worth taking sometime to do that, especially if
you've got some ambitious goals,because the more assets we have
out there, the more things wehave in play, the more we need
to protect them and plan forjust in case someone should try
(22:55):
and file a lawsuit against us orsomething like that.
So this is fun.
It's kind of hard for a podcastbecause you can't really see.
I would love to throw up thediagram, but if you'd like to
see what a sample diagram mightlook like, let us know on our
Facebook group, grow yourPainting Business.
I'd be happy to drop somepictures in there and you can
(23:18):
kind of maybe get a visual ofwhat the flow would look like.
Speaker 1 (23:24):
Awesome, cool.
Well, love to hear yourthoughts.
Go to Grow your PaintingBusiness in the Facebook group
and drop a comment for ideas forfuture episodes, and with that,
we will see you next week.
This is Daniel, the founder of Bookkeeping for
Painters.
I'm a CPA that worksexclusively with painting
businesses, helping them knowtheir numbers and what they mean
in save big and tax.
And today I'm here with RichardDunton, enrolled agent and
advising director of Bookkeepingfor Painters.
Speaker 2 (00:17):
Hey Daniel, I appreciate that nice
introduction.
Speaker 1 (00:21):
Happy to do it, be here all day.
Speaker 2 (00:24):
Yeah Well, I'm glad you kind of set the stage,
because I think today we'regoing to talk about something
that's a little bit on thedeeper end of the pond.
This is something that's moreadvanced tax planning, more
advanced business structuring,but it is something that we're
seeing more and more of when wetalk to folks and it really is a
(00:46):
good thing for any businessowner to really understand.
And that has to do with havingmultiple entities for your
painting business, and byentities we're talking about
business entities, just to kindof set some definitions.
If we form an LLC with our stateto run our business out of,
(01:08):
that's a business entity, andthere may be situations where
you actually want to have morethan one.
You might have kind of likealmost like Russian nesting
dolls where you have companieswithin companies and you know it
can get a little crazy and kindof expensive if we're that
careful.
But there are a few situationswhere it makes sense.
And I thought we could talkabout two situations that we run
(01:31):
into a lot where a paintingbusiness owner might want to
have multiple entities, and thenalso talk about how you're
going to form these entities,how the taxes are going to work,
how money is going to gettransferred between the two of
them, and I think this will be areally enlightening episode for
folks who have gotten a littlebit bigger in their companies or
(01:53):
maybe thinking along the linesof asset protection or wanting
to branch out into otherbusiness ventures.
I think you're going to enjoythis one.
Speaker 1 (02:02):
Yeah, this is a great topic.
It's something we're seeingmore and more of.
More folks are wanting toestablish more complicated
structures so that they savemore in tax and protect their
assets and also have severalbusiness ventures going on
simultaneously that they couldgrow and then sell off later.
So I think it's a great topicto dive into today.
(02:26):
So I'm excited.
Speaker 2 (02:27):
Yeah.
So let's talk about the firstcase study, and that is using a
holding company for assetprotection.
Now in my mind, when I hearholding company, I'm thinking of
a business entity that holdsassets.
So those assets could be realestate, could be vehicles, could
(02:50):
be equipment.
Generally, a holding company isnot doing operations, it's just
formed to be the owner ofthings that are valuable.
That definition is not set instone.
There's flexibility there.
But that's how I think of aholding company versus an
operations company.
That is a business that isformed to go and do work and
(03:14):
make money.
That's one that's very active.
So those are kind of the twosituations there.
Now you might want to split yourbusiness into a holding company
that owns the assets and anoperations company that runs the
daily business.
The reason for that is, as anoperations company, you have a
(03:36):
greater chance of being sued.
You have greater liabilitybecause you're out there working
on people's homes, you'redriving down the streets, you
have employees.
Most of the risk is going to beon the operations company.
So if your operations companygets sued and you have separated
(03:57):
your most valuable assets intoa separate entity, you might
have a little bit of assetprotection there, where the
person filing the lawsuit isunable to go after the valuable
things that are in the holdingcompany.
So, for example, let's say oneof your contractors falls off a
(04:18):
ladder, gets injured and theydon't have insurance and they
sue you, your company.
They might win a lawsuit.
Hopefully not, but maybe theydo.
Theoretically, they would notbe able to go after the vehicles
and the equipment and maybeeven the real estate that the
company uses, because thosethings are owned by a separate
(04:42):
holding company that's ownseparate LLC.
Along those lines, we can thinkof it the arrow pointing the
other way what if somebody suesyou personally?
Could they go after yourbusiness assets?
So now we're talking aboutprotecting the business from
yourself.
Well, that is a very bigpossibility, and this is where a
(05:07):
holding company can come intoplay.
Now, this type of holdingcompany is generally known as a
charging order protection entityor a COPE C-O-P-E.
The idea here is that ifsomebody sues you, they win a
judgment, they might obtainwhat's known as a charging order
against you.
It means that you owe themmoney.
(05:27):
Now, if you do not have goodseparation between your business
and yourself, that person mightbe able to use that charging
order to force you intoliquidating some of your
business assets, liquidatingsome of your business assets or
(05:48):
force you into distributing cashfrom your business to yourself
and then they take that cash.
So a charging order protectionentity would be an LLC that is
formed in a state that hasstrong charging order
protections.
For example, wyoming, nevada,south Dakota, delaware even my
home state of Illinois, are veryfriendly towards these types of
(06:12):
entities.
They have a strong separationbetween the entity and the
individual.
So if someone has a chargingorder against you, they can't
force you to liquidate yourassets.
They can't force you todistribute the money from your
company.
Now, if you distribute themoney in the future anyway, then
(06:36):
they might be able to accessthat.
But it gives you a bit of ashield around your company and
around the assets in thatcompany.
So that's kind of thehigh-level overview of a
charging order protection entity.
If you're interested in doingsomething like this, I strongly
recommend that you talk to a taxattorney or a tax professional
(06:59):
to find out how it should bestructured and what states are
friendly towards that.
If you do not live in a statethat is friendly for charging
order protection, such asCalifornia or Florida, that's
okay.
Your holding company can beformed in that state and your
(07:20):
operations company would have tobe formed in the state in which
you do business.
But you can still have thatCOPE protection if you set that
up right.
Natural question is well, if Itake all my vehicles and
equipment, I stick them in thisWyoming LLC, how do I run my
business?
Well, the holding company thathas the assets is going to lease
(07:45):
those assets to your operationscompany and you are kind of
just, you know, trading moneyback and forth.
There's not really any taxsavings here, but that's how
your operations company can usethose trucks and not actually
own them themselves.
You'll want to make sure thatyou dot your I's cross, your T's
.
The truck should be titled inthe name of the holding company.
(08:09):
If there's any loans on them,those loans would be, you know,
with the holding company.
Make sure you have thatseparation on paper because you
know in a lawsuit the lawyersare going to be all about the
paperwork and you can have thebest intentions.
You can say, well, this is whatI wanted to do, but the only
thing that really matters iswhat's in writing.
So I know it's not somethingthat we like to think about a
(08:31):
lot.
Paperwork is a pain in the neck, but making sure that we have
all of our documents correct andthe proper owners for
everything, that's what's goingto protect us if something bad
happens.
Speaker 1 (08:44):
And one of the things that I see a lot of folks want
to do with these holdingcompanies.
It provides that protection ifone business is sued so that
they can't get into the holdingcompany's assets.
But also, maybe you don't justhave a painting business, maybe
you also have a pressure washingbusiness or some real estate
(09:05):
and those are also in differententities and so you could have
those different operatingcompanies.
You have an LLC for your realestate, an LLC for your other
non-painting business, llc foryour painting business, and then
you have the holding companywhich owns all of those separate
businesses.
So it's all getting funneled upinto that holding company so
(09:29):
that if any one of those, ifsomeone trips on the stairs at
your, on your real estate andthey're suing that LLC, it's not
going to affect the holdingcompany or the other businesses
because it's separated off.
Or if something happens in yourpainting business, it's not
going to impact your holdingcompany or the other businesses
(09:50):
that you own as well or theother businesses that you own as
well.
So not only creates thatseparation between the holding
company and the operatingcompany, but also if you have
other operating companies, likeother businesses going on or
real estate, you can also createthat separation of liability
there.
Speaker 2 (10:08):
Yeah, I like that we sit down with our clients and we
diagram this out and I like touse circles for each LLC and it
kind of makes me think of like alittle protective bubble.
You know, if someone attacks anasset in that bubble, it's
confined to that bubble, itcan't move on to the other ones.
(10:28):
So it's you know, it's puttingyour assets in silos or
segregating them and buildingthose walls between them.
So I think that kind of bringsus to our second case, where you
might have now an operatingcompany that is taxed as an
S-corp for the purposes of taxsavings, purposes of tax savings
(11:00):
.
This is a situation where youwould have an interest in
multiple operating companies anda lot of times when you have
multiple partners, you want toset that up as a partnership.
The reason being is apartnership is the most flexible
type of business entity.
S-corps have certain rules thatyou have to abide by.
(11:20):
C-corps are better, but youhave that dreaded double
taxation.
Partnerships are kind of likethe Wild West.
As long as all the partnersagree, you can handle things
however you want.
You might have one partner whois a 20% owner but he's entitled
to 80% of the profits.
(11:40):
Or you might have one partnerwho says I want to take on all
the losses, I'll give theprofits to somebody else.
Whatever your imagination cancome up with you can pretty much
do in a partnership.
Just please put it in writingand have it in your operating
agreement, because those type ofthings can kind of get you know
(12:02):
disagreements can arise fromthat.
So make sure it's in writing.
But whatever you guys agree toyou can do.
The downside is that partnershiptaxation comes with
self-employment tax and that'sthat 15.3% tax on all of your
business earnings.
It's great for Social Securityand Medicare but it's not good
(12:24):
for you.
You get very low return oninvestment.
So typically what we'll do iswe'll set up a S-corp operating
company to be the parent of allthese child partnerships.
It's going to have its stake inthe partnership.
So, for example, if Daniel andI were going into business
(12:46):
together, we might be 50-50partners and in our partnership
I don't want to be the 50%partner.
I want my S-corp operatingcompany to be the 50% partner.
Because now, whatever incomeDaniel and I make, my share
doesn't flow to me directlybecause then it would be subject
(13:09):
to self-employment tax.
It flows to my S-corp operatingcompany that washes away the
self-employment tax.
It flows to my S-corp operatingcompany.
That washes away theself-employment tax because now
it takes on the taxcharacteristics of the parent.
Yes, I still need to pay myselfa salary as the CEO of my
operating company, but anythingabove and beyond that I can
(13:29):
receive on a Schedule K-1 and itwill be free from
self-employment tax.
And I can have a partnershipwith Daniel.
I can have a partnership withsomebody else, I can have a 10%
stake in a restaurant that myfriend's opening.
Whatever you want to do,there's great scalability here.
But it's all going to flow intoyour one single S-corp
(13:52):
operating company and Iencourage you to have one S-corp
operating company.
If you have multiple S-corps,what happens then?
Well, now you're required topay yourself a salary for each
S-corp that you have and that'sgoing to start to erode away
those tax savings.
(14:13):
Much better to be the CEO ofyou know U Industries and have
all these different littlesubsidiary companies than to be
the CEO of four or fivedifferent businesses.
Speaker 1 (14:29):
So it sounds like we want to have one company that's
taxes and S-corp and then itowns all the other partnerships
that you have going on.
So maybe you have a paintingbusiness, we have a partnership,
Then you have a pressurewashing business, you have a
partnership.
Whatever else you have going on, you have those partnerships,
taxes partnerships but then theowner is the S-Corp that you've
(14:52):
established that owns all thoseand so it's effective with
keeping your tax bill low, Causeyou have that S corp status and
in the main operating company.
And, uh, instead of having likecause, sometimes we have folks
come to us and they have likefour different S corp set up in
you know four differentbusinesses and so it's just a
(15:14):
lot of additional admin costsand payroll that you're running.
That's not necessary, where youcan just make one S-Corp and
then have that S-Corp own allthe other businesses and kind of
streamline things, make thingslower cost admin wise and also
lower in taxes as well.
Speaker 2 (15:35):
Yeah, absolutely.
Every S-Corp would require itsown 1120S tax return.
That's an expensive tax return.
If you have child companies,all their income flows to the
parent.
You file one consolidated taxreturn and all that income takes
(15:55):
on the tax characteristic ofthe parent.
All that income takes on thetax characteristic of the parent
.
So normally these things wouldbe subject to self-employment
tax.
But if it's owned by an S-corpnow, it enjoys S-corp taxation.
So yeah, I think you did agreat job of explaining that.
Recently we talked to a clientwho has a painting business and
(16:17):
he has some very ambitious goals.
He wants to open up 50different businesses in 50
different locations and he wantseach location to be its own
individual LLC and possiblyoffer equity to the local
employees there, and this wouldbe an ideal setup for him.
(16:38):
In fact we drew it all out.
It was really fun.
He can have his one primaryoperations company and it can be
a part owner of all thesedifferent little satellites, and
all these satellites enjoytheir own asset protection and
all the income flows up to thetop and it goes on one tax
(17:02):
return.
So we're getting it set upright from the get-go, which is
a lot easier if you set it upright from the get-go than
trying to undo these things Nowif you are already set up and
maybe you realize like, oh, thisisn't exactly the most
advantageous know, advantageousway of doing things.
You know we can unwind stuff.
You know we partner with lawfirms that have really great
(17:25):
lawyers who can help us kind ofyou know, undo the rat's nest.
But it's super important thatwe have the formation right and
the documents right.
So you know, for example, let'ssay I want to do a holding
company and an operationscompany.
So I, you know, I form my LLCin Nevada.
(17:45):
I've got my operations companyin Illinois because wherever
you're doing business at, youneed to be domesticated there.
So your operations company hasto be either formed with the
state that you're working in ordomesticated which is like a
fancy term for saying registeredin the state where you're
(18:05):
working.
The holding company can beelsewhere.
But let's say I do that and Iput myself as the member of
these LLCs.
Well, in that case I don'tactually have a holding company
and an operations company.
I've got two LLCs which I'm theowner of.
So we need to have the childcompanies be owned by the parent
(18:30):
company and the paperwork needsto be right, because if this
ever gets challenged or we everget sued, we need to show that
we did everything correctly toprotect that corporate veil,
because that's what this is allabout.
Right, we're trying to protectthe assets, strengthen that
corporate veil, and that's onlygoing to happen if we do things
(18:50):
correctly and the paperwork doesmatter.
So if you're looking at thistype of strategy, I strongly
encourage you to work with aprofessional and make sure that
you have everything the way itneeds to be.
Speaker 1 (19:13):
Yeah, branches, all those different companies
throughout the US and have itsown LLC formed and he owns part
of it and then the local teamalso owns the other part.
I think that's a great way ifyou have those ambitious goals,
(19:34):
and it reminds me of Les Schwab,who was the guy who scaled the
tire centers across the US backin the day, and Charlie Munger
often uses him as a greatexample of aligning incentives,
because Les Schwab did the samething.
(19:57):
The way he scaled his businesswas he opened up all these tire
centers everywhere.
He would go in partnership withthe local person who was
operating the store and he wouldown the other portion and he
was able to scale his businessthat way.
And I don't know exactly whatsort of holding companies or
(20:24):
operating companies he had setup, but I would imagine it was
probably something very similarto what we're helping folks set
up, which is basically havingthat holding company that owns a
percentage of all thosepartnerships, owns a percentage
of all those partnerships, andso you're keeping things
efficient tax-wise and alsoprotecting yourself.
(20:46):
So I love the If you have biggoals to expand to different
areas, having aligningincentives with your local team
and while keeping a goodpercentage going back to you as
the founder and the owner.
I think that makes a lot ofsense.
Speaker 2 (21:03):
Yeah, for sure, and there's a certain amount of
privacy that can be enjoyed withthe correct setup too.
Off of a lot of these thingscan give you that privacy so
that people they might know youknow that this asset belongs to
(21:27):
this corporation, this LLC, butit makes it more difficult for
them to get to you personally.
It's kind of like camouflage,you know, for your money, you
know, and we didn't really planon talking about this today.
But there's another level tothis too, where you might end up
with a revocable living trustthat holds some of your real
estate or some of your otherassets, because we don't want
(21:48):
real estate owned by an S-corp.
That's kind of a tax.
No-no, that's a good way to endup paying more taxes than you
really need to.
That's a good way to end uppaying more taxes than you
really need to.
But yeah, like I was saying, oneof the things that we like to
do is we diagram it all out andwe separate your financial life
(22:10):
into your operations side andyour assets side and we show how
these things are going to flowto which entities before they
eventually hit your 1040 taxreturn, how your real estate is
going to rent from youroperations company, how your
real estate is going to be heldby your revocable living trust
and making sure that we have themost tax-efficient flow.
Also what's going to give us themost asset protection and also
(22:33):
what's going to give us privacyas a person.
So definitely worth taking sometime to do that, especially if
you've got some ambitious goals,because the more assets we have
out there, the more things wehave in play, the more we need
to protect them and plan forjust in case someone should try
(22:55):
and file a lawsuit against us orsomething like that.
So this is fun.
It's kind of hard for a podcastbecause you can't really see.
I would love to throw up thediagram, but if you'd like to
see what a sample diagram mightlook like, let us know on our
Facebook group, grow yourPainting Business.
I'd be happy to drop somepictures in there and you can
(23:18):
kind of maybe get a visual ofwhat the flow would look like.
Speaker 1 (23:24):
Awesome, cool.
Well, love to hear yourthoughts.
Go to Grow your PaintingBusiness in the Facebook group
and drop a comment for ideas forfuture episodes, and with that,
we will see you next week.
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