Business Formation: Sole Proprietor
I was talking to my my good friend David, my super cool hotel lobby. Today I feel really super cool staying at the Clift Hotel in San Francisco. And one of the things we talked about is a lead in to the next segment, which it's forms of business ownership. And if you remember yesterday I talked about a term, and we've also got a white board that I think might help today. Who gets what. There's a challenge that we're going to try to address in this segment and the challenges, whether I'm starting a business from scratch and some folks in the audience, your are or if I'm advancing and I'm considering collaborating with other people, I have to have a discussion about who gets what. I'm gonna explain more about what who gets what, what that means in a minute. So what we're going to give you today is a solution to that question. Who gets what? How do I set up my business? And what are the factors that come into play when I set up my business? So if you look at the first slide, which I think...
is kind of a cool graphic, there's three forms of business ownership. How many of our folks here are sole proprietors? I think most of you are right. For the most part. So a sole proprietor is your working by yourself. You were the only employee, and basically everything flows through you. Profit loss, ownership. I'm gonna do touch on this just very generically. I know that. I think Renee is either going into or has a partnership with your husband, right? So if ah, partnership, by definition is to orm or people now there are partnerships that are very large that have thousands of partners. The the big accounting firms, the biggest in the world, had thousands of partners. Law firms can have hundreds of partners. So a partnership, by definition, it's two or more people. Okay, Now we're going to get into costs and benefits of being in a partnership. I had a discussion based on a comment that Jackie made yesterday about the last one on the right, which is corporation, and the fact that if you want to grow a large entity, if that's your goal, eventually you have to become a corporation because corporations allow you to sell shares in your business. stock in your business, and it allows you to add on almost an unlimited number of owners, which allows you to raise almost unlimited number of dollars of capital if you need it. Okay, so that's an overview of the three now, Warda caution. There are more complicated versions of this. There are LLC's limited liability corporations. They're s corporations. There are variations on this, but for the purposes of this course, I'm gonna limit it to those three. Okay. Limited to those three sole proprietor, how many people have gone out to the secretary of state and picked out a name for your business and gotten that register? Lot of you have. Okay, so your step And by that I mean for your state. So I'm in Missouri, in the eastern side of the state. We pronounce it Missouri in the middle of state that pronounce it Missouri. So you can always tell where people are from, by the way we call Diet Coke soda in ST Louis. But then when I went to college in Kansas, they called it pop, and I didn't know what anybody was talking about for a couple of weeks. Oh, you got told that soda. So you guys go up. Okay? State of Missouri secretary of State's office. You go online, and there's a form to get a corporate formation done. So my business is actually, I have ST Louis test preparation, but it was actually originally originally registered as an old name that I don't use anymore. So I am actually have a business that's called old Name D. B. A single is test prep D. B. A means doing business ass. So if you want to change the name of your business after you set it up for the secretary of state's office, no problem you could just register is doing business as now Single is test prep abbreviate. That's a fictitious name. That's the name I made up, which is fine. That's a fictitious name. The other nice thing is, is that even though I set up the company name as Old Business Incorporated, I can have multiple fictitious names under the same umbrella a company that I set up a state level. So I'm considering seriously starting a second kind of a business consulting business, so I would go out to the state really easy to do. Go on the site and I would add another what they call a fictitious name. And I'd have to names that are both db a doing business as okay, that's how we would set it up. So you go to your secretary of State's office. Taxation. This is one of the reasons that I wanted to use the flip chart. And I always teach taxation with buckets. So here's a bucket. And this is you sole proprietor. I'm gonna put soul p there. Think of that bucket is you. You have revenue or sales. And again, I use those terms interchangeably coming into the bucket. Save $ for a sole proprietorship I have on the slide. Over here, it is a flow through to the owner. The profit and loss flows straight through. There's a hole in the bucket and those and the profit You got expenses in the bucket to the prophet go straight to you personally. So the money has has flowed. Revenue came in two year business. A sole proprietor bucket. The profit came out the bottom and it went to you there be okay on them. The tax form that it ends up on is you're 10 40 tax form your 10. 40. Okay, again, I don't want to get to taxi, but I do want to take this one more step. So everybody's got files. It fills out of 10. 40 right? Okay, if you look at the first and this is this is needed to clear up some confusion because people ask me all the time. OK? Well, that concept makes sense, but I don't understand where it goes on my tax return very briefly without getting too much into tax. Here's my 10. 40. There's a section on page one that says income Say it's 500 bucks. Well, it says income, many of you in the audience. And in fact, people that I've met this week do freelance work in addition to working either as a contract employees somewhere or working on their own, right, lots of folks. That complicates your tax return. I was having a conversation lunch with somebody from creativelive yesterday about this issue. Fact, I'm going. I'm gonna do it on the other page because I think it's important enough, and I'm gonna flip back to this one. Okay. Big problem. For those of you in the audience you've got income for multiple sources. This is very frustrating to Mrs. Boyd was on a plane on the way out here. So I better do well tomorrow because she's gonna be here. What in the world is going on with your income? I've got to know, because in my business, I get book royalties I get. I get 10 90 nines from I may end up with eight or 1999 this year. Okay. Not unusual for people in this audience. All right, so let's let's take a moment and talk about that, cause I think it's worth it without getting into a tax course. This is your 40. It has a section that has income. You noticed it on page one? That's where your W two goes, right? That's $20,000. I'm gonna try to ride a little more clearly. Sorry. How many of you get to right? 10. 99 is going that section. I'll say it's one more. This is the thing I'm trying to tie together because most of you watching this or in this boat, the profit from your business view sole proprietor also goes on this line and we total it up. Okay. It's a flow through concept. The income flows through your personal tax return. The profit from your business ends up on a line in the income section. Your tax return along with W two income. If you have it. 10 99 income if you have and you add it up at the bottom of page one. Okay, next issue withholding. And again, I'm not gonna go too far down this road just enough for the audience. You need to make sure. And you need to go to an accountant and do this, that you are withholding dollars somehow to pay the taxes on the 10 99. The sole proprietorship. Okay, Do you have with holdings in your W two? Sure, you don't have withholdings taken out of your 10 or your business so somehow, whether it's extra deposits, tax deposits or money, you set aside the bank account. Somebody creativelive was telling me I set the money aside in a bank account cause I have discipline to do that. And when the tax bills do, I write him a check. Most people do not have that discipline. This person did. What I do with my wife is we withhold a whole bunch on her W two toe offset some of this impact that I bring in because we're filing a joint return. How many of you file a joint return? Right. You may have a spouse who has the W two and you're doing this stuff down here and you're not withholding anything. And you need to have that conversation. And don't wait till the end of the year. Have the conversation with your accountant during the year. How do you do that? Call him up. Given some idea of where you're at and say, can you estimate what my tax bill will be so I could get the withholding street. Okay, don't wait till the end of the year, okay? I want to bring this chart up one more time and give you another analogy to help you with this. This is like this is like a sieve or a sponge and all that. All the incompetent and losses flow through the sponge to sponge flows through. It doesn't keep anything that Okay, that's taxes for a sole proprietor. Taxes. I have L l C up there in the corner. As we get into this part of the course, I want to recommend that in addition to an accountant that you talked to an attorney about the legal aspects of setting up your business formation. I'm gonna make some general comments, but I'm not a lawyer, and I don't play one on TV, so I'm not a journey. Um, a limited liability company is a method of having a sole proprietorship with some limitation on your liability. Here's what I mean. Generally, if you are a sole proprietor, you obviously have unlimited liability. If there's a problem in your business, you have unlimited liability. So if you on a pizzeria and somebody slips on the fault, the floor and hurts themselves ensues, you and you're just a sole proprietor. In theory, you have unlimited liability for that situation. That's a problem. So that and again. And I don't want to go down too far down the tax road. But you need to talk to an accountant because there are vehicles where you can be a sole proprietor and put limits on your liability. And I'm gonna leave that to your account to do that. Okay, I have down here in the corner. The individual in the business may be considered the same person legally. Okay, now most of this audience is not are not in the types of professions where there's a lot of people harming themselves with your product, so to speak. I used to work on when I worked in auditing again. Ken can keep job. How many jobs is here through tickles? Who has a garbage to school? You ever looked at the name on the garbage disposal? Anybody know what itself it says in sync Aerator. That's a That's a product that is produced by a company in ST Louis, one of the few Fortune 500 we still have. You can imagine that if you produce a product like a car bridge disposal, some people are going to get her. They also produce. They also make fire huge ladders for, ah, fire trucks and emergency response vehicles. You can imagine people hurt themselves on ladders, those air businesses where this legal liability is a big deal for most of this audience, that's probably not the case with the exception. With this exception, I can imagine that there are situations where people in creative field have committed to do something by a deadline, and they don't meet the deadline, and it's somehow harms the client. I can kind of imagine that in terms of a legal liability issue, talk with an attorney. But I did want to mention that that legal liability Israel for a sole proprietor, probably not a lot of legal liability for those people in this audience I wouldn't imagine. Okay. Oh, I just want to say that a lot of wedding photographers have formed LLC's just for that reason. Great examples. A wedding photographer performs an LLC. I told you about my wedding photographer, Kim, who I think did some time in the joint but had great pictures. But I did have the thought run through my mind. Now here's how I think I didn't think G I'd really be upset if you screw up the wedding pictures. What do you think? I said to myself, G, my wife is gonna be really upset. Skirts up the wedding pictures was about her. So yes, there's some liability there on the line. If you drop the ball on that, the clients harm so speaking, and that's a legal issue and I'll leave that to an attorney. But that's a great exam. Okay, so we talked about the sponge. We talked about the tax form. Have an attorney help you decide on what type of form you'd like to set up because its sole proprietor. But there's some variations, okay?