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Welcome to entrepreneur like you with business attorney and entrepreneur chance reynolds, a daily podcast that brings you the best legal tips, marketing strategies and storytelling tactics that will help you grow your business the right way.
OK, so rather than tell a story or talk about the backside of my business, I want to clear something up really quickly about the difference between an LLC and I’m putting up air quotes here and I’ll see an s-corp. The reason I’m using quotes is because an LLC, an s corp are essentially the same thing. Now, if that’s confusing to you, stick around to the end so you can hear the full explanation. So here’s the deal. I get this question. I’m not even joking at least 10 times a day and, uh, as I’ve wanted to do and become an authority in certain real estate investor groups where any question that’s asked about the [inaudible] c a, I get tagged in it, or someone says, talk to chance Reynolds, do whatever. Uh, you know, he’s helped me. He can help you. And it’s amazing to me how many people have this question.
I can see why now legal zoom has, has created over a million [inaudible] because there are just so many people that need [inaudible] and I’m really starting to see that the real estate industry and the real estate niche is probably the most in need of elsies than any other niche. Very specifically. Either way. Here’s the deal. I, so let’s, let’s just play it out. So somebody comes into real estate investing, they get into a facebook group is what happened to me this morning. I wake up and somebody has asked what’s the best llc? An S Corp, a c Corp sole proprietorship or, or, and generally those are the ones that don’t understand. Sole proprietorship is just what their default is. Um, they don’t know. And why should they know that’s not their specialty. They’re just trying to flip real estate. And so understanding the old C isn’t really there. What isn’t what they’re aiming to do.
They just want to do business and be safe. So they’re doing the smart thing by saying like, what should I do? Should I even take a step? Some people don’t even take a step, but here’s what happens in the group. They asked the question and people come in and just say, make you make the deal first. Just do it. You don’t need to know. We’ll see. Just worry about your structure later because they don’t understand liability there. Just thinking these people are looking for an excuse not to take action. That’s what they’re imagining is happening, so they’re just like, just do it. Then somebody else will come in and say, no, you need an S-corp. I have an s corp, and they’re like, what’s an S-corp? And the person who hasn’t an score doesn’t even understand what an S-corp is, and they say, well, you just create an llc and then you just click a box and an s-corp just means like you’re working by yourself and you don’t have a big team or something.
It’s like, no, that is not at all. Or an S-corp is and probably you’d have like no protection. So that’s the big problem. Here’s the deal with an LLC versus an s Corp and LLC is what you file with the state. An S-CORP is how you choose to have your entity where you can have a corporation at the state or no, we’ll see at the state. Most people are going to have an old c at the state because it’s more flexible and it’s just, there’s no reason to use a corporation instead of an llc at the state level. Um, there’s just no reason to do that. Why? Why would you do that? If you’re going to have a c Corp and take on a bunch of investors, but you could even do that with an llc at the state level. Regardless, you definitely don’t need a c Corp.
You need an llc at the state level and if you do nothing at the like, you just apply for your ein with the ears, you’ll have what’s considered pass-through taxation. The ears will consider You either a sole proprietor or a general partnership. don’t tune out. I know this is techno babble. This is the equivalent of techno babbLe, Like somebody who Creates software, like telling you how the software works and you’re like, I don’t care. I just want like, you know, to build, to build a quick landing page or whatever, um, whatever the software does, but you need to know this distinction, so llc at the state level so you know, when you, when you apply for your ein, you, they will, uh, tell you, if you’re going to use pass-through taxation, if you choose, if you’re wanting to be. So let me just lay that out.
Pass-through taxation just means that you’re taking all the income of your llc and just reporting it on your personal tax return just as if you had a job or something where you have income, any other income, and it’s the simplest way to do it. It’s the whole reason that it was created it. So there’s not double taxation. Like if you had a c corp that’s there’s double taxation there. Meaning you’re paying a corporate tax, you’re paying, you’re paying tax at the corporate level as this as if a corporation is an individual in files, its own tax return. This is the organizing. Corporations have the ability to donate money to like political campaigns. And why you hear politicians say like corporations are people, that’s why a corporation like actually pays taxes and llc is not generally the default is not that that the llc operates that way.
So the money passes through at the llc comes to you, your personal tax return and if you have a business partner or something in the [inaudible] to their personal tax return and you just pay your taxes on turbo tax or whatever. I mean you shouldn’t use turbotax but you understand what I’m saying? Like you just pay your taxes on the income that you made. You don’t have that file a separate term for your llc or anything like that. You just file your personal return. If you have an s-corp, it’s infinitEly more complicated. But the upside is that there are big savings on the backside potentially. So with it, with an s corp, you’ve fallen llc at the state level, then you file a 25, 53 with the irs. See already your, this is just a big pain in the ass. Um, when you file that [inaudible], you know, you have to follow that within 70, I think 75 days of creating your llc to do elect to get the s corp status.
There are some other ways you can do it, a late filing and waiting a year and then changing the way that your entity as structured. But this is just generally, if you don’t file in the first 75 days, you’ve kind of missed your window on the s-corp and you’re going to end up paying the default pass-through taxation, which is just fine. You’re still protected. The s-corp requires you to take a reasonable salary given your industry. The reason they do this is because in an s-corp you take a salary that’s taxed at one rate, like the higher rate, the rate, that’s like at least probably 20 percent because you’re going to pay, you know, if that’s just what it, what it is. I’m not a cpa, I’m not going to explain that. Your salaries tax, just like how you would, your, your money that you made on your llc that had pass-through through taxation is taxed.
Then you can take, you can pay out dividends to yourself from the, from the s corp, you know, quarterly or at the end of the year, however you want to do it. Uh, and those will be text. Those are taxed as dividends at a lower rate, generally around 15 percent. So you can say five to 10 percent on taxes, on those [inaudible] dividends. But this is a complicated thing to do. I mean, it’s not complicated for cpa or an accountant or somebody that understands that that’s been doing it, but for just the regular person who’s just trying to operate a business, you shouldn’t be doing that wing of it yourself because if you don’t do it exactly right, you could lose your liability protection. Not only will you not get the tax benefits, but the ears are the. Even the courts, if you get sued, might take a look at it and say you’re not operating this thing as a business.
You have to give them a reasonable salary. And it has to be, you know, it can’t be like you pay yourself $10,000 salary and then 100,000 dollars dividends with the lower tax rate, like the ears isn’t going to let you get away with that. It has to be like you’d pay yourself a hundred grand and maybe you get 10 or 20 grand, you know, at the [inaudible] dividends. That’s just a random example. But you understand what I’m saying? Direct is wants to get their money and they’re going to get their money. Like regardless. So s corp can give you good sale, big savings if you have a team in place that can help you structure it. And that’s not an insult. Like I wouldn’t operate an s-corp just because I don’t want the hassle of it unless I was. It was like major savings. I’m an llc with default taxation to me.
I just don’t like to mess around with my taxes. You know, you have a right to pay the smallest amount of taxes that you possibly can. And I’m all for that. But at the same time, like I just want the peace of mind of knowing that I’m operating my llc properly because it takes like nothing to operate an loc properly other than just keeping your bank account separate, you know, keeping your business stuff with your business, keeping your personal stuff with your personal. If you do an s-corp, iT’s not that easy and the court can see really easily. Just say you’re not operating this thing properly, so we’re just gonna. Set the whole entity aside and just let somebody sue you personally. That’s what happens with people that set up their own. So don’t set up your own s-corp llc if you don’t understand escorts, and if you don’t have an accountant, just get an llc and just use the default pass-through taxation until you can hire a team, an accountant, a cpa that understands escorts to operate it for you. Gosh, there’s probably not that many people still listening, but that is the difference between an llc and an escort. Essentially, they’re the same thing. It’s just how you choose to have them taxed.
Hey guys, thank you so much for listening. I really, really appreciate everybody tuning in and all the great feedback I’m getting about the podcast, so I’m going to keep it up and I just wanted to say thank you. Also if you want to figure out the three ways that most entrepreneurs are getting themselves sued, you can head over to llc, freedom dot [inaudible] slash get sued. I have a little freebie there that kind of outlines the three major ways that people are getting sued and how they can easily be avoided. So hop over to llc, freedom [inaudible] slash get sued and pick that up today.