Make it Easier: Tax & Legal Building Blocks for Entrepreneurs

Shiloh Johnson:

Let's get started. I'm your host, Shiloh Johnson, founder and CEO of ComplYant. And we are tax software for small business owners. We help you manage all of the tax compliance issues that you may face. So, you can find us a ComplYant.co. I have with me Shivani and I'll let her introduce herself.

Shivani:

I'm Shivani, I've been an attorney for over a decade now and had my own law firm for about seven and a half years. So, I work mainly in the tech entertainment and fashion industries, and a lot of creatives, work on business and immigration law in that realm. And you can find me at Shivanilaw.com. For anyone that has any questions, my paralegal Niloofar is on here monitoring the chat for us. So, after Shiloh and I are done going over some material, she is going to read out some questions. So just feel free to type them into the chat or the Q and A. So, if you are a new entrepreneur and you are looking to start a business, what do you need to think about from a legal perspective? There are about four things you should think about. So, one is your contracts. Two is your intellectual property if you have any. Three is insurance and four is your entity structure. Those aren't necessarily in order; those are just kind of the four big things you should think about whenever you're starting a company. So, I'm gonna delve into each of them a little bit here.

Contracts (01:47):

So contracts. So what I see the most where entrepreneurs make mistakes, even if you're going into business with your best friend, make sure you have a contract. And the contract does not have to be 50 pages. You just need something that lays out what you are doing and who is responsible for what, and if money is involved, how that money is coming into the business and being paid out. So I kind of like to say like maybe when you first started writing your five-paragraph essays in school, they talked about the who, what, when, where, why and the how, that's kind of how you should look at the contract. So who are the parties involved? So again, if it's you and your best friend, put your names in there. What, so what does the contract involve, goods or services? So goods are like products. Are you buying apples from someone? Services, are you providing legal services? Are you providing tax accounting services? So that's the what. The when... When are these products or services being delivered? So is this like a year-long thing? Is it a specific date? Just put that in. If it's a partnership agreement, how long does your partnership go on? If it's your services agreement or a goods agreement? When is that date of delivery?

Who, what, when, where. Where is the delivery occurring? So what state are you? You don't wanna say that you're buying apples and you don't say where and they ship them to Jersey and you're in California. So where is this happening? And then the payment in terms of money. So they say term for when, and then for the payment, they say fees often. So if someone, for example, if you have a partnership agreement and you're each investing capital, how is that money being put into the company and how is it being taken out, very, very important. And many, many, many disputes arise out of not having a clear contract for how this happens. And so you want to write all of this out when you agree. So when you still like each other, you're starting out, you're more agreeable to things, this is when you want to decide how you're going to do all this. A contract is just a plan. It's a plan for how things are going to go in your business. And again, there are contracts between you and your partners if you have any, there are contracts between you and your customers, and there are contracts between you and your affiliates. So there are all sorts of different things. And again, they don't need to be complex. They can be very simple, but you need something in writing. You need it to be signed by both parties.

And so in the event, something goes south and there's a breach or someone doesn't perform the way they're supposed to and you need to figure out what the damages might be or go to court or litigate or any of that. If you have a contract in place, it gives the court and the lawyers, a roadmap for what was supposed to happen and what didn't happen. Now, why. If you have nothing, you might lose everything and that's not a good place to be in. So the example I'm gonna give really quickly is I work in fashion, I had a very talented fashion designer client come to me. And this is before we worked together, she gave all of her designs to a pattern maker to make the patterns, and all of a sudden, a couple of weeks later... She's a high-end fashion designer, she sells her dresses for over a thousand dollars each. And a few weeks later, her friend alerted her that the same designs were on a Chinese website selling for about $10 each. So I asked her, to let me see the contract. She said she didn't have one. So what could we do? Not a whole lot. We reached out to the pattern maker, the pattern maker just said she gave them to me. There was nothing in writing. There was nothing to prove that she actually gave him to her for a specific purpose, to just cut the patterns, not to sell them that she couldn't use them.

So in the end, my client decided not to proceed with litigation, cause it was gonna be a lot of money and very expensive for her to proceed cause she just didn't have that paperwork in place. And then she decided, you know what? My customers are different. They're not gonna go looking on a cheap Chinese website for thousand-dollar dresses. So I'm just gonna let this go and I learned my lesson. Let's get some contracts in place. So contracts are very, very important. I know they're boring, but they will save you.

Insurance (06:30):

The next thing is insurance. So if you are selling a product, you need to have proper insurance for what if it's a defective product and something goes wrong. How do you protect yourself from being sued for that? So there are a lot of great insurance brokers and you need to tell them everything, tell them everything you are doing. Whatever keeps you up at night, whatever you're thinking about, like what if this goes wrong? That's what you should tell your insurance broker so they can get the proper policies for you. So if you have an office space, you're gonna need commercial liability insurance or workplace. So if someone trips and falls in your office, you could be sued for that. So insurance is another big way to protect yourself. And again, it depends on what you're doing and where. So there is no one size fits all policy really, but there are a bunch of different things. So when you talk to your insurance broker, tell them everything that you do and everything that you are worried about, and then they might even flag some other things for you. But being as open as possible with your team, your lawyer, your accountant, your insurance broker, that's gonna set you up for success. That's not where you hide anything.

Intellectual property (07:40):

Intellectual property. So trademarks, copyrights, patents, if you're developing a unique product, you might wanna patent it. If you have a unique tagline, you might wanna trademark that. Common trademarks are Nike, the swoosh, and “just do it” copyrights. If you're writing a book, if you're writing a song, things like that, you wanna file for copyright protections so someone doesn't rip off your work. 

Entities (08:04)

And then finally entities. So, forming a business. So, there are a couple of questions that came in for people that signed up that had to do with you know, when to form the entity, how to go about forming it. So, there are a lot of different things that come into play and its kind of like the way you should think about it is, well, what are you doing? So do you have a good or a service? And then if you have a good, are you raising money for that? Because if you have investors coming in, you might need a slightly different entity than if you are just doing something on your own.

So for example, Shiloh has a tax product, she's selling a good, so she's actually registered as a corporation and she's in Delaware because she got venture money, cause she's amazing. Female founder here, raised venture capital money, like the 1% right here. So she needed to do that. But if you're a graphic designer in California, you don't need venture money, you need clients. And so it doesn't make sense for you to file in another state cause then you're taxed twice. You're taxed in the place you live in and you're taxed in the place where you're incorporated. So it's really important to figure out if you have partners, what type of entity, and what goods or services. So are you taking money? Do you need clients? What do you need? And Shiloh's gonna talk a little bit more about that tax structure here cause that really plays into the first step and before you decide what entity to form, you should talk to your tax attorney CPA, about what makes sense.

Shiloh Johnson:

It's funny because I always tell people they need to talk to a lawyer about what makes sense for their energy structure. So, we'll just, you know, pass it on (crosstalking 09:56). I traditionally will say a lot of it depends too on the ownership of liability, which is why I always say talk to a lawyer because I don't know anything about what is legally or liable for and not liable for based on how you structure. I can tell you what tax you're gonna go for, but I can't tell you about ownership of liability. So, make sure that you're doing both sides of this coin. Make sure you're talking to a lawyer about the legal liability of your formation and then obviously a tax person to talk about the tax liability of your formation. That's important because obviously, the few main ones are C Corp S, Corp LLC, Sol prop, partnership. And each of those has a different tax liability structure. It isn't just like get an LLC cause Instagram told you to, it's get an LLC because that makes the most sense for the company that you're building and the liability ownership that you want to take on.

So just think about that, work through and research, and ask questions about that to specific service providers. The other thing I would say she mentioned earlier that I just wanna like hit the nail on the head again cause it's so important is partnership agreements. I see all the time, especially on the tax liability side of things, if they come to the CPA and they say, Hey, we owe this bill or we think we owe this bill and they go back to the partner and say, our tax bill is $20,000, you need to help me pay and another person that's like shoulder shrug. I'm not paying that. And they don't have any kind of agreement in place. And so the person that's operating the business is like, what do I do? So they're left holding the entirety of the tax liability. It isn't just about sharing the wins. It's about sharing the losses too. So make sure, make sure, I cannot say it enough. Even if it's a poor man's agreement, I don't know, do what you gotta do. Get something on paper, that's so important.

The other thing you should think about too is she made a super valid point about where you are not just following the trends because it's what you hear. You hear a lot of tech companies that incorporate in Delaware, but there's a specific reason why they do that. It basically has a lot to do with share ownership and being able to raise funds with outside investors. You don't need to worry about that if you're a graphic designer in California. So be very clear about why you're setting up what you're setting up and don't just follow the, get an LLC rule. The reason being is because LLCs are actually disregarded tax entities. So you're not even paying taxes in LLC, you have to decide how you wanna be taxed. The default is they will put you into like a single member, LLC. But if you have more than one member, now you've gotta figure out are we gonna be taxed as a general partnership? Are we gonna be taxes and S corp? See how it gets crazy? Don't just jump off the cuff at the LLC statement. Make sure it's what you want and need.

Separation of bank account (12:17):

The other thing I wanna jump into a little bit is tax mistakes I see all the time – not separating assets. So, when you start a business, sometimes people will just do everything out of their own personal bank account. And that's fine when you're just trying to figure things out and you're not a hundred percent sure if you're gonna be a business or not. But the second you decide to form, you need to separate your bank account. You cannot have business coming out of your personal account because it will be very difficult if you happen to get audited for the IRS to differentiate what is business money and what is personal. And you may end up getting taxed on something that you shouldn't be. So please, please, please divide the money. Even if you're like, I'm not making any money yet. It doesn't matter. Start the habit, moment one before you make money. That's when you should set up when you don't have any money cause that's when it's the easiest, you don't have a lot of transactions to worry about. But once it kicks up, you don't wanna have to be playing cleanup for all the work that didn't happen when you were new. So please, please separate your funds. Super important.

Different tax types (13:14):

The other thing you need to think about is there is more than one tax type. That's why I started ComplYant because what I saw all the time was people thinking, that the only thing they had to pay was the IRS. That is not true. When you start a business, there are seven different types of business tax. Most of you are like seven, oh my God, how did that happen? I tell you, it's insane. There is federal income, state income, payroll tax, sales tax, business, personal property tax. Everyone's like, what is that! Business licenses and annual reports. You see how many points of liability you can be held accountable for. This is also why you have to be careful what type of entity structure you choose because it could make that tax structure a whole lot more fun. And I mean fun as in not fun. <Laugh> So let me tell you ComplYant helps, that's a segue. That is who we are and what we do is we help you understand and organize what pieces of those sort of seven tax types apply to you and how often you're supposed to pay. And we help you work on budgeting because ultimately, it's still a liability whether you made money or not.

That's the other mistake I see people make. Oh, I didn't make money so I'm not gonna worry about it. Doesn't matter. As soon as you notify the state, the city, and the federal government that you are a business, you are on the hook for whatever fees and forms need to be filed. Often time with sales tax, even if you made no money, you still have to file a form. That's crazy, right? But that's their way of determining whether or not you're still in business. Otherwise, the fees and the penalties, just keep racking up. 

Tax penalties (14:41)

Speaking of penalties, let's talk a little bit about that. <Laugh> The little-known fact that I see happen all the time is people forget that there are penalties for paying things. I think what happens is people think, well, you know, I pay my light bill late, it's not a huge deal. That's not so in tax. The day, hour, and moment that a thing is due, you must file that form and pay that fee the day that it's due. Otherwise, they start to, city municipal county, state, the federal government, they attach penalties and interest. And I mean penalties to the tune of... The federal government, I think has 25 separate penalty types that they can apply to one specific bill. I mean, late filing, late payments. There is interest on those late filings and payments. So it just adds up really quickly.

So paying on time is extremely, extremely important. I wanna encourage that. Oftentimes, you'll see exemptions, sort of if a business made less than a certain amount of dollars and they filed on time, the fee tends to be zero. So please pay attention to that. You can find that information out at ComplYant.co And so much more. 

Not paying attention to business money (15:48)

The other thing I would encourage, a mistake I see a lot is people not paying attention to their money. So they'll do something like hire people and then look away and I wanna encourage you all, don't do that. Even if you have the resources to pay people, you need to be involved in understanding how your business' money works. How are you gonna talk about how you'll grow? How are you gonna talk about marketing strategies? How are you gonna talk about sales strategies if you have no idea the comings and goings of the money that's happening within your business? So please, please don't ignore your money. You get a bookkeeper and then you just look the other way. I have seen many, many times fraud happen behind inaccurate bookkeepers or bookkeepers that were given too much control. So, you just wanna make sure, even if you're not sure what you're looking at, have them talk to you. Like, can you walk me through this P and L, I don't know what this is, and I'm not sure what it's supposed to be telling me. And learn, learn what you should sort of be thinking about so that you can be aware of anything that doesn't look right.

Shivani:

And P and L mean profit and loss for those of you that are brand brand new and don't know what that means yet. I had to learn all that too. <Laugh>

Shiloh Johnson:

A lot of tax tracks. I know. So I think that's good. Do you have anything else?

More on separation of bank accounts (17:01):

Shivani:

Yeah, I have a couple of things based on what you said. So Shiloh made a really good point about separating things, business and personal. And so where this comes into play from a legal side is when you form an entity like you might ask, what's the purpose, like, why can't I be a sole proprietor? Why would I want to incorporate? So one of those things has to do with in case you get in trouble and someone decides to sue you, if you have an entity, they can only come after the company assets, they can't come after you personally. So if you're developing a product for example, and there's an issue with it and it injures someone, if you're just a sole proprietor, they can sue you personally and take everything that you have. They can come after your family's money, they can come after your home, all of that. But if you're protected with a company, they can only come after what's in your company bank accounts.

So that's another key reason to separate everything. Because if you treat your company bank account like your personal piggy bank, and you're not separating things, and you're just using money wherever, not keeping accurate records. Then what happens is if someone comes and sues you and it looks like you were commingling everything, they'll do what's called piercing the corporate veil, which means that you're no longer protected by your entity and they can still come after you personally because you didn't do a good job of separating your business and your personal. So that's really, really important. Get a separate bank account, and only like separate credit cards and business expenses get paid out of the business account, on the business credit card, your groceries are on your personal credit card.

So all of those things just really keep it separate. And that's why it's also really important to talk to a tax attorney or a CPA early on to also understand what can you take as business expenses once you form that entity. So for example, I am an attorney, so I use a phone and a computer for everything that I do. So if I need to buy a new computer, that's actually a business expense for me. So I can deduct that for my taxes, which is amazing. But I am not a photographer so if I wanted to buy some fancy camera, that's not a business expense for me. But if you are a photographer and you're a wedding photographer, lighting equipment, cameras, computers for editing, all of that can be business expenses for you. So it's something that people don't realize and think about. Cause it's important to talk to someone who knows what expenses you can take and how, and so then it helps you set up a structure of how to separate that. So what can you charge to the business? And you might use them personally here and there, but predominantly this computer is used for me to respond to client emails or draft contracts. And so that's still a business expense, so I can put it on that form.

So it's important to kind of meet with someone early on, lawyers, CPAs, anyone that can kind of help you structure things. So you set yourself up for success from the beginning and not the cleanup career that Shiloh was talking about cause that can get messy, can get the corporate Vale peers, and just open yourself up to lots of penalties, interest, and liabilities. I actually didn't even know until just now that it was seven. I knew about the licenses and I knew about all these things but this is why even as a lawyer, I still say, go talk to someone familiar with tax cause I don't do it. Cause there are so many ways you can shoot yourself on the foot by just missing one thing.

Shiloh:

You made a super valid point about the record-keeping too that applies to the tax accounting piece. Cause ultimately how do you sort of benefit at the tax level if you're not keeping track of how you're spending and what you're spending. And a lot of times I've seen people do that like in Excel or still keeping paper receipts. You don't have to do that to yourself. <Laugh> Let me encourage you to research bookkeeping technology. There are lots of them out there. Bench even does the bookkeeping for you. There are lots of companies, pilot will do it for you. If you don't feel comfortable with software and you prefer to have a person, odds are they probably use software. So you'll still wanna be familiar with at least understanding how it works. And super basically just understand that it's the tracking of the comings and goings of your business money. So any dollar you make any dollar you spend, it is the process of tracking what that is. That's all bookkeeping is. So when you meet bookkeepers that are like, ah, I can help you do everything. Be wary because bookkeeping is literally just the maintenance of tracking your ins and outs.

It's once you get to the higher-level folks that tend to be more expensive, where you're talking about tax attorneys, CPAs, and sometimes even enrolled agents where they actually can and are charged with filing tax returns. Those people tend to be a bit higher priced. And I always like to give the sort of like the Bootlegged cheap option. Do not be wary if you do not have the money to talk to at least an accountant, I have seen many times I've even done this. I have traded (Inaudible 22:13) time. So if you are like a photographer and you're like, I don't have a lot of money, but I really need to have like an hour-long conversation. Can we do a barter? I will shoot a headshot for you if you will give me some advice. Use your resources, don't be scared to ask or just think I don't have the money so I'm not gonna do anything. There are some things you can do. There are lots of really great blogs out there. ComplYant writes a ton of great blog content that you can read through and learn some things for free. Please exercise your resources. Don't be so afraid of tax that you don't do anything cause doing nothing is extremely expensive.

Shivani:

Yes. And going off of that, I do a lot of these talks as well and I know a lot of my colleagues do. So if there's something that you wanna learn about more, if you're like, oh, I can't do a consultation with a lawyer then just start Googling in your area. Just see what's out there because there are a lot of resources.

Budgeting for legal and tax consultations (23:06):

And that being said, it's also really important to budget for this stuff. You budget to get your cut, to get your nails done, to get a massage, to go on that trip, you budget for gas, you pay for a makeup artist here and there. Like whatever you pay for, there's services that you pay for and that you are like an okay expense because that's something you've been doing your whole life. And I understand that paying for a lawyer, paying for a CPA, it can sound scary cause you maybe haven't done that before, but when you're opening a business and operating a business, you need to look at it as a necessary expense. And it's important to do it upfront.

And there are a lot of lawyers, like not just the bartering thing, but also like you can use that. You can also kind of talk to them about deferring payment and say, okay, so your consultation fee is X to start. Can I pay you like half now and then this and I will set up a payment plan. I do that with people. If they're like, I need this to start but then once I do this, I'll get this money in because I'm setting myself up. So I'll pay it by this date. So there are different ways that you can work with people. And overall, a lot of lawyers/CPAs, they wanna help people. So it's not that it's just here's the fee and you need to walk away because that number scares you. Don't stick your head in the sand. Just think about like, okay, this is part of me setting myself up. I didn't go to law school. I didn't get my CPA certificate. What was it, series seven or whatever? I don't know, whatever you had to do. <Laugh> I don't know, I didn't do that. <Laugh>. I call my account all the time, he hates me half the time and loves me the other half cause I refer him a ton of business. But I'm always like, I don't know what I'm doing. He's like, I know, just send me this.

And that brings me to another really important point cause Shiloh raised it. So I just wanna say it again. You cannot just delegate all of these things to someone else and expect it to be okay. If you are the owner of your company or the CEO, COO, or CFO, you have some sort of title like that, at the end of the day, it's still you that is responsible. So if someone that you're paying messes something up, you can still be responsible for that. So it's really important for you to have a really clear paper trail with all of that as well. Say your account made a mistake, you don't know tax, but you were diligent in following all of those steps to give them what they needed. And if then they committed a professional error, then there's a way that you can prove that you were like, I follow these instructions, I did everything that I could on my end so I shouldn't be held liable for that. But you would still need to prove that. So it's really important to keep accurate records of everything.

Shiloh Johnson:

Absolutely. I talk a lot about that and behavior in the terms of money management because what we forget is like if we're poor with managing our personal finances, we tend to be bad at managing our business finances. So start to do some corrective behaviors so that you can get in a space where you can be present in the money-making process of your business. Everybody wants to be an entrepreneur, I think that's beautiful, but we've gotta be present in the way the money is spent and also earned so that you don't get wrapped up in places where you're just kind of spending purposely and not paying attention. I have seen it happen so, so many times, fraud, I have seen professional service providers steal from people, I have seen embezzlement. I've seen, I cannot tell you just the amount of gobbly group. And then they get sort of taxed at this successive rate. And then they're like, I didn't even know this was happening. And the IRS says we don't care. You still have to pay the fee. So be present in the way that money moves through your business.

I know it's scary. I know it's like, ah, I don't wanna make a mistake. I'll just give it to my accountant. Yes. Do that. But also have them walk you through things. When they give you your return back, ask them questions about it. Can we go through it page by page? Can you explain to me what goes in this box? Or why is this amount this amount? Being inquisitive so that you're not left holding sort of this liability bag and shrugging your shoulders like well I just signed it. You signed it, meaning you agreed that it was accurate. So just be careful that you're not again, sticking your head in the sand.

Shivani:

And that also brings me to a really important point in general about working with attorneys, CPAs, or professional service providers. You may not get along with someone that your friend uses or your colleague and that's okay. You need to find the person that works for you. I know I'm not the attorney for everyone but the people that I work with, I love working with my clients and they enjoy working with me. And I went through several accountants before I found the one that I like working with. And I like working with my accountant because he is a complete tax nerd. And it doesn't matter how many times I ask him to explain something to me, he will still explain it to me with the same patients he did the first time. He never makes me feel dumb about it. And that's really important to me cause I've had accounts that have made me feel dumb. They're like, you're a lawyer, you should know this. And I'm like, I don't know taxes. I'm asking you this question for help. So just be mindful of that, that just because you use someone for something, it doesn't mean that you're locked into them for life. You can change service providers. Find people that make sense for what you need. Some people are more hands-off. Some people are more hands-on. You have to figure out what that is for you and what makes you comfortable for where you can ask those questions. And just have things explained to you the way you need them explained to you.

Shiloh Johnson:

Absolutely. Don't be afraid to check references and check credentials as well. Try not to take people's word for things because sometimes that word can be misconstrued. So you just wanna kind of cover your bases when you're looking for service providers that work in specific areas. So if you are in retail per se, it doesn't probably make a ton of sense to work with someone that only focuses on manufacturing. So just sort of making sure you ask questions and you work with businesses like mind. Do you have any references for businesses that you worked with like mine? Anything I should be thinking about that you would be mindful of? So use that consultation call to really as a Q and A process like you're interviewing them just like they're interviewing you as potential clients. So you just wanna make sure you're definitely doing your diligence.

Shivani:

I think that's really important because for you to be successful as an entrepreneur in whatever you're building, you need people around you that can do their jobs really well. Cause you can't do everything. It doesn't matter what industry you're in or what you're building, you're going to need outside help from something or someone. And so that's really key to make sure that you tap into resources that you can rely on. And that you can have that confidence so you can be doing what you're doing best.

Shiloh Johnson:

Absolutely. That's beautiful. I think it's a great place to pause for questions. Oh no, just a comment.

Q & A (30:03):

Shivani;

Does anyone have any questions?

Shiloh Johnson:

Should we open it up to the questions that were pre-submitted?

Shivani:

Sure. I think Erin sent those to me or Kelly

Niloofar:

Hi. Can I read the questions to you?

Shiloh Johnson:

Sure.

Entrepreneur accounting and tax skills (30:27):

Niloofar :

So someone wanted to know proper accounting and tax skills as an entrepreneur

Shiloh Johnson:

Outside of what we already discussed. I would additionally encourage people, this might be a stretch for some, but I will encourage folks to learn how to do their own bookkeeping. Even if they don't actually do it, even if you still hire someone to maintain that for you, I would encourage you to learn how to do your own bookkeeping. As I mentioned earlier, it's really just the tracking of the ins and outs. And obviously, there is a lot more sort of extremities to that. You get into journal entries and asset tracking, obviously saving that for your accountant, but to basically understand how to categorize and how to check a reconciliation report is really important. And you can find those videos everywhere, no matter what software you use, fresh books, into it, zeros or hope books, they all have how to do videos. I would encourage you to at a bare minimum, learn how to categorize your transactions and how to check a reconciliation report.

Again, this is so that you can spot fraud and I don't just mean fraud by your service providers, but I mean fraud in your accounts. You're really the only person that knows that the transaction is accurate or not. So either way, your account is gonna default to you, does this look right? Because they don't know what you bought at Lows. Like that's you, right? So you're ultimately responsible for what's happening in these transactions if you're the only person with credit cards and especially understanding how to do it if you have staff that you've given cards to that are spending so that you can track their spending and be able to make sure you're getting receipts. So that's some basic tax accounting advice I would give is just learn how to do your bookkeeping. That matters because bookkeeping ultimately feeds into your tax returns. Those numbers are the numbers that are the basis for all the forms that'll get filled out, sales tax forms, annual reports, franchise tax forms, income tax forms, all of that is the basis. So if your bookkeeping isn't clean, your tax can't get that. So you just wanna make sure you at least have the bare minimum and have some clarity around that.

Shivani:

And with that also the way I do it, again, cause I'm not a bookkeeper or accountant and I have people that do help me with this. But I set 30 minutes every Friday for me to reconcile my books. And I do it every week. I used to do it once a month, but it would just be too long and I would miss things. Because I would have random fraudulent credit card charges that I would have to fight. And it takes longer when you're doing it 30 days later verses that week and you're like, no, decline. I don't know what this is, send me a new card. So it's 30 minutes once a week that I just look at what invoices were sent out, what money came in, what's missing, and what's being charged to my account. Like, okay, these are all subscription payments for Adobe, like whatever, these are fine. These charges are fine. Okay, great. Set a date with yourself like you set an appointment to meet a friend for lunch or to talk to your client. So for me, it's a standing time on my calendar that this is what I do.

Shiloh Johnson:

I love that. Thanks.

Shivani:

Just consistency

Do you file taxes even if there’s no income? (33:23):

Niloofar:

So, Shannon asked, is it necessary to file taxes even if the business made no income in a particular year?

Shiloh Johnson:

Yes. So, here's the way that you should think about it. The minute that you register, incorporate, fill out a DPA, DBA, whatever type of entity structure you're gonna be, you're telling the government that you are a business. You cannot just do nothing. That's not the same as personal income. I know if you make under 12,000 a year, you don't have to file tax returns. That is not the case for business. Business is not that way. The second you become a business, or you create one, you are required to file forms and pay fees. It is just a requirement. Now, the form may result in a $0 or a negative dollar, but the form still has to get filed. If you do not do that, what happens is the statute of limitation stays open. And that means that the IRS or whatever government entity can come back and basically audit you for every single year, no matter how far back it is that you never filed.

When you do file, it closes it so then the look back period is only four years. So you wanna make sure, even if it's zero, file the forms. And oftentimes if you made no money, you probably have losses and you wanna file those and roll them forward so that when you do have income, you can get some of that loss back. So don't just think it's like worth nothing. Taking a loss is worth something to you, it will be in the future. So please, please, yes, file the forms. You're always gonna have to pay a business license, whether you made money or not, that doesn't matter. You're always gonna have to pay the secretary of state when you register. That doesn't matter if you made money or not. So just get in the thought process that it's never zero. Yes. You must.

Shivani:

And just like a random pop culture example for this is because it's all like "tax the billionaires". So how like Jeff Bezos or Trump or El Musk aren't paying $0 in taxes. Why is that? They're losses because they're entrepreneurs and like they're taking a lot of business losses because they're still filing stuff. So they're getting the benefit of that because they're claiming losses. So again, to highlight Shiloh's point of how can losses help you? Look at these billionaires

Shiloh Johnson:

Yeah. It's something called roll forward. This is way deeper in accounting than you ever wanna know. I'm so sorry. But I'll just explain it to you. There's something called roll forward. Just says that basically, if I took a hundred thousand dollars in losses on my tax return, I can roll that forward into the years where I do make money. So let's say two years from now, you have a slamming year, you're doing so good. You have some of that role forward you can claim that will lower your tax liability. That's all taxes, it's just understanding the rules and being able to work around them so that it benefits you the most. That's why the rich tend to benefit because they're paying people that know a crap ton about tax law.

Shivani:

And again, you don't need to know everything, you just need to understand what's coming in and out for you and work with competent professionals that can help you in navigating that plan for you. But file stuff, file. Always file. There's something you're gonna need to file for everything yearly, like maintaining your LLC or your C Corp or whatever it is. With the state you're incorporated in, you're going to need to do those things. So please do that. Even if you're like I'm losing so much money, still file

Shiloh Johnson:

Still file. Perfect. <laugh> what's next?

Do you need an accountant? (36:48):

Niloofar:

The next question, I think both Shiloh and Shivani already answered this but I'm gonna repeat it. Do I need an accountant? The question is from Tracy.

Shiloh Johnson:

I'll start. Not always. So sometimes when you are very small or you have a very simple business structure, you may not need someone every day to come into your books and do all your bookkeeping and accounting for you. Sometimes a lot of that, you can do yourself at least for the first year or two, especially when you aren't making much money or any at all. It doesn't wholly make a ton of sense to have an accountant on retainer if you don't have any customers. It might make sense to pay them for a consultation. It might make sense to pay them to help you set up, but it doesn't always make sense to keep them around if you don't necessarily have the fee structure. And there are a lot of things you can do without having to pay an accountant to sort of come in and do them for you, bookkeeping is one of them. I do not recommend doing your own taxes.

Let me just say that again. I do not recommend doing your own business taxes. If you are sort of a higher tier company, if you have a lot of transactions or a lot of moving parts or you make a lot of revenue, I don't recommend doing that. I think in some instances, self-filing works really well when you're a sole prop or you're small or something like that, or you're just sort of working on the side and you have this sort of side income. I think that totally makes sense to file an E file or something like that. But sometimes when your structure is a little more complex, you have like complex assets or manufacturing or things like that, you do need to hire someone because the tax returns can get really complex and you don't want to get wrapped up in liability. But there are ways like payroll, you can get a long way filing payroll using technology. You don't necessarily need to have a person for that. So it just depends on where you are and what makes sense for your business?

Shivani:

I didn't use an accountant the first year I started because I started later in the year, didn't have a lot and it was kind of a little bit easier for me. But as I grew, it got a little more complex and tax laws changed and what I could take it as expenses changed, I moved states, and things changed for me. And this just goes back to my comment about budgeting for things as a business expense and paying for professionals. It's really important to do that. So look at your trade-off. So for me, what I pay my accountant yearly is worth a little bit less than two hours of my time for what I charge at an hourly rate. So for me to not have to learn and figure out how to do all of that, I'd rather work those two hours and do stuff that I can do and pay my accountant to do that for me. And I still have to do work. I still have to get in my numbers. I still have to track things, like I'm not doing nothing, but the fact that I can give him numbers and then he can tell me, you owe this much for this, this much for this. And I can pay that or I can budget for that. It saves me so much stress and anxiety certainly to not have the IRS penalizing me. And also tax like you hear this on the news, people with large tax lie can go to jail. Lauren Hill went to jail. There are so many reasons why, as scary as taxes can be for all these reasons, it's also why it's so important to keep up to date with them and file them properly.

Shiloh Johnson:

Yeah, absolutely. Great advice.

How to fix it if you don’t file (40:10):

Niloofar:

Great. So, Shannon has a follow-up question. She's asking if she did not file or if someone did not file during the tax season because they didn't make any revenue. How do you rectify that situation?

Shiloh Johnson:

You can always file a return at any point, or any time doesn't matter. The IRS never closes, they will take your forms. You can file. Because you missed the deadline doesn't mean that you missed your window to file. You can file any time, late returns. You can file returns years after, I would just encourage you if zero revenue, maybe try looking through some kind of E file tool that you trust, and think is reliable. And if you don't wanna pay someone to do it, you absolutely can do that yourself. Especially if you're keeping accurate records, you may not have made money, but you probably spent money. So, I'm sure you wanna track that and then count that as part of your return.

Shivani:

Like late returns, amended returns, all of that is fine, just try and be as accurate as possible. And in the event, something comes up, if you can show that you at least were doing due diligence and trying to file and trying to keep up, or when you learned you made an error, you tried to fix it. The IRS can be more lenient in terms of setting up a payment plan with you, not putting you in jail right away. Being like, listen, if you pay this amount by this date, we're good. So that's why you want to show that you didn't just ignore everything and you're like, I'm just gonna spend all my money like that. You were like, no, I knew I owe you money and I'm trying to pay you

Series LLC (41:41):

Niloofar:

Great. So next question is from K, they ask what are series LLC actually for, how do I switch from sol pro to LLC without creating the new EIN, employment identification.

Shivani:

I'm not exactly sure what a series LLC is. And the switching entities, there are a lot more nuances to that. This disclaimer that we didn't put at the beginning that I'm gonna put now is this is just general information. Shiloh and I, even though we are a CPA and an attorney, this is not going to be specific to your situation. We're not gonna answer specific questions like that cause we are not your attorney or your CPA. So please consult a professional for specific questions because the entity switch part, there are so many different nuances to how you're doing it if you're switching states like there's a lot of other information. So I'm not gonna answer that today because I don't wanna give incorrect information or have someone glean the incorrect answer for that. Just because it's too specific to answer today.

Advice for Multi state entrepreneurs  (42:54):

Niloofar:

The next question is from Cat. Just asking, what advice do you have for entrepreneurs residing and working in two different states in regards to taxes and incorporating?

Shiloh Johnson:

Ooh, you could get an accountant <laugh> that's my advice. Get an accountant. Cause multi-state structure is very nuanced. You have to take into consideration the money that is made from customers that are in your state of residents. And if you live in both states that creates liability in both states. And so you have to also take into account, where are you registered and how that works into where you live in terms of both states, how much time you spend in certain states. So there are a lot of nuances. There are a lot of legal tax nuances like the tax log specifically states if you spend more than X amount of days in certain areas then you're liable. So I would certainly encourage you, especially if you're making money in those states that you certainly need to get a tax professional to help organize how you account for living and making money in multiple places.

Shivani:

And also like even speaking to a tax attorney or a CPA, they can give you that structure for you to track your days between the states or how much money you made and what part. Because like Shiloh said, I think there's a trigger for like 180 days. If it's like you spend more than six months in one place, it means something else. Again, not a tax professional or a tax attorney. So I don't know the exact numbers, but definitely go, if you're complex like that, get help.

Shiloh Johnson:

You need to get help. Yeah.

Q & A (44:28):

Niloofar:

So Aldo asks how should 10 99 workers plan for taxes?

Shiloh Johnson:

Ooh <laugh> So I would say 10 99 workers should think about their tax quarterly and not annually. So the difference between the 10 99 and a W-2 employee is that W-2 employees, their payroll tax gets paid by their employer every single paycheck. Quarterly tax payments are the government's way of making that up for 10 99 people. So if you avoid or don't pay your quarterly taxes, there are penalties and fees that come with that. So it isn't just a, I have to pay once a year. No, you need to be paying four times a year. And then the tax return you file, it's just to true everything up, but you should have already made all of your tax payments quarterly. So I would say that's my advice. Think about your taxes quarterly and not annually. You are quarterly estimated tax payment system when you are 10 99. I see that happen a lot, a lot of mistakes, and there are penalties that come with not paying that. So please don't fall into that trap.

Shivani:

And I have two really quick comments about Shiloh's comment here. One, your quarterly estimated payments are based on your prior tax year. So when you file your taxes for the first year over the year prior, that amount is basically split into kind of four payments. And that's why it's your estimated tax. And that's kind of how you should think about it so you can budget for that amount every quarter. And two, the penalties. Sometimes if your business is really tanking, it might be a business decision for you to say, I need that money now to make payroll or to pay for this. So I'm gonna pay the penalty for making this payment late. You're not gonna go to jail for that. I just wanna clarify that part. You have to make business decisions here and there, but that's why it's important if you work with a professional, they can help you navigate that.

And I bring this up because during COVID, for example, a lot of my clients had to make that choice. In that, they made like decent money in 2019, and then in 2020 their deals just tanked. So they made the choice because their penalties were a couple of hundred dollars, but their taxes were a couple thousand. So they were like, I'm gonna keep the couple thousand now to stay afloat and keep people in houses. And I will pay those couple hundred dollars come April of 20, the next year. So again, it's not ideal, I'm not encouraging this, but the reason I bring this up is so you don't panic. And you have to look at your cash flow in your business because it's a rectification later. So you're just kind of evening it out when you go to file your tax. That you're like, okay, I was late, but I needed that money then. And so I'm gonna pay this penalty now, but I'm okay now cause I figured it out and I knew how much I needed overall.

Shiloh Johnson:

Keep in mind too, that if you're a new business and you don't have a prior-year tax return to base that estimated payment on you, there's actually a quick math that you get on the 10 40 S or whatever form you're using. There's quick math that you get, like basically 20% of the money you made that quarter. So just because you're new doesn't mean you should not make your estimated payments. You still should. And in fact, they're probably cheap because you're new so probably isn't much. So it's not worth avoiding. If you've made money in a quarter, you should be filling that form.

Shivani:

If you can pay, pay. I'm just saying that. I just had clients that hit in 2020, and we just went through all of that. So I'm raising that in case, for some reason, a pandemic happens and your business tanks, that this is reality and it happens. And you just need to, it's okay. <Laugh>

Business investments (48:20):

Niloofar:

So we have two more questions coming from the same person that might be a little specific, but the panelists will decide. How do you accept investments in your business from high net worth individuals to be compliant with any tax regulations?

Shiloh Johnson:

Interesting. I don't know if I can answer that question. But what I can say is back to what we said earlier, which is to think about how your entity is structured that determines if, whether, or not, and how you can take investment in.

Investor accreditation (48:54):

Niloofar:

The second part of this first question is how does an investor become accredited?

Shiloh Johnson:

Oh, I have no idea. <laugh> I have no clue.

Paying tax after investments/fundraising (49:02):

Niloofar:

So the second question that we have, which is our last question, if it's not too specific. If you accept investments/fundraise in one calendar year, but cannot use them for your business until the following year, do you pay taxes on all the funds you received?

Shiloh Johnson:

You don't pay tax on investment funds. That's a quick answer. <Laugh> investment funds are not revenue made. It's an investment. So it's nontaxable.

Niloofar:

Thank you.

Outro (49:33):

Shiloh Johnson:

This was great, everyone. Thank you so much. I think in the chat, you will see a popup from someone on my team talking about the next upcoming webinars we have. We have something on procrastination. We've got something on taxability for content creators. We're all over the gamut, Friday with the good content to help you operate your business better. I am your co-host Shiloh and this is my co-host Shivani. And we're gonna go have some Mexican food and thank you so much for attending. We appreciate you all.

Shivani:

Thank you.

Shiloh Johnson:

Have a great afternoon.

Shivani:

Bye.