Picking the best business model or entity for you and your business is the first step to inherit success. If you’re serious about becoming an entrepreneur, you have to educate yourself about which entity is the best for you and what you’re trying to achieve. In this episode of Minority Business Access, join Solomon Ali as he dives into the murky waters of business entities and go more into the specifics of how each one will actually help you and which one might be the best for you to actually utilize.
—
Watch the episode here
Listen to the podcast here
Finding The Best Business Entity For You
I hope everyone is staying safe during this COVID-19 and practicing social distances. Minorities were being hit so hard. It’s very important that you practice social distancing, wear a mask, keep your circles to your family and friends. That way you’re not bringing anything to them and they’re not bringing anything to you. Keep your circles very small. If you don’t need to go out to restaurants right now, cook a good home meal and have a good conversation. That’s always an awesome thing to do. Catch up and exercise a lot. If you look like me, please practice social distancing. We got many things that we want to do this year and things that we want to talk about, trying to help you to get prepared.
A lot of you have already seen a lot of employers get you working from home. Some of you won’t be coming back to a brick and mortar building to work from a brick and mortar building. Some of you will be working as an independent contractor or a sub-contractor, and that’s one of the things that we’re going to talk about. We’re going to talk about a sole proprietorship. We’re going to talk about limited partnerships or partnerships. We’re going to talk about LLCs, S corporations and C corporations. Most people don’t even call them C corporations. They call them corporations. We’re not going to go into detail because what we’re going to do is break each segment down and go more into the specifics of how that will help you and which one might be the best for you to utilize. Hopefully, we can also share why it may be the best so that you can get the most in the best benefits from the one that you choose and feel that it will meet your needs.
What we’re going to do is we’re going to start with sole proprietorships. Years ago, when I say years ago, I’m talking about I was in probably my twenties right out of the military. I think that was pretty much the first business. How I started, went out, gave it a business name. A sole proprietorship is risky. Here’s why it’s risky. It’s attached to your name and your Social Security. It provides you no protection whatsoever. If something was to happen or go wrong, they’re able to come after you and your assets. It provides you no tax advantages or anything like that. Other than if you’re basically self-employed working as a sole proprietor, all the taxes, you don’t have the double taxation, but we’re going to talk about all of that and each and every segment of what that looks like and what it means.
There’s no such thing as a limited partnership; it’s just partnerships.
Understand I’m not a tax professional. I have a lot of years of experience of working with tax attorneys, CPAs, accountants. I learned a handful of things along the way in which works the best. We’ll talk about that. If you’re trying to think about, “My money is a little bit funny,” and the sole proprietorship is the way you should go, let’s wait until you get all the information. Let’s get educated on it. Let’s talk about what a sole proprietorship is, what it means, the risks that you will be exposing yourself and your family that you may not be aware of. Sometimes doing something because it’s the most frugal way to do it could end up being the most costly way to do it. Let’s not jump out quite yet and say, “We’re going to do a sole proprietorship,” because there’s a lot of factors.
I like financing, raising money for companies. Sometimes as a sole proprietor, it’s a little more difficult to raise money for companies. We’re going to talk about those things. For me, if I’m looking at a sole proprietorship, it probably wouldn’t fit me. Knowing what I know today, I probably wouldn’t have done one back in the day but definitely not now because I want to have access to capital. I want to be able to raise capital. I don’t want the pain to come home. What I’m saying is, I don’t want people to be able to sue me and take whatever I may have. I’m pretty sure you feel the exact same way. The next entity or structure we’re going to be referring to or talking about is going to be limited partnerships and limited liability companies or partnerships. In fact, I said that incorrectly. There’s no such thing as limited partnerships as a structure, but there is a partnership or a joint venture. We’re going to talk about the limited partnerships and how they work and what that mean.
The next thing that we’re going to refer to is going to be partnerships and joint ventures. What’s the difference between a partnership and a joint venture, what it means, what it can do for you? Does it provide any protections for you? Does it help you or can it help you with financing? Can it minimize your risk? It’s very important especially right now in the current day and age that we’re living in under COVID-19 is for everyone to understand getting your structure right, the right structure for you is going to mean everything. It could be the difference between you being successful and you failing. I know a lot of attorneys or have a few minute conversation with you and they’ll get an idea of your concept of what it is that you may want to do.
Business Entities: Pick a board of who can bring stuff to the table, who understands what a legal entity is, who understands how to move your business forward.
They’ll go ahead and say, “Do this particular structure.” We don’t want to do that. What we want to do is have you understand what the differences are. We’re going to go through the outline of all the different structures. We’ll talk about, what does it mean to be in a partnership or to have a partnership or to have a joint venture? What does that mean? What does it look like? What is your risk? What is your exposure? Are you able to raise capital or will it be difficult to raise capital? Will it be challenging to draw a team and get them a board and wanting to work with you and participate? When you’re starting out, a lot of you are going to probably start where I started, especially if you look like me. If you’re a person of color or you’re a minority, you may have a few dollars, but your money is very thin.
As I used to say, my money is funny. I didn’t have enough money to go out and say, “I can write checks endlessly for what everybody wanted to do.” I had to get people to buy in and want to work with me. That means you got to pick the right structure because you may have to give them some equity in the company and what does that look like? You may want to be able to redeem or buy that equity back. What does that look like? Those are the kinds of things that we’re going to be talking about. We’ll move on to the next one. The next thing that we’re going to talk about is going to be S corporation. It’s a corporation. It typically have less than 75 people with less than 75 shareholders. Normally, you want to have what’s called accredited shareholders.
Accredited shareholders of people who have a particular net worth and their net worth is very important because it helps to minimize the risk to you as well as to them. Them being accredited investors mean one simple thing, that they can stand to take the loss and that they are educated enough about business matters to be able to make a sound decision. They have a certain net worth that if they lost all their money, it wouldn’t make them broke. We’ll go into what that net worth for accredited investor is. We’ll also talk about, should you have $10 million shares to capitalize your companies? Should you have $100 million shares? What should the par value be? What should it look like? Those are the things that are very important.
What you want to do is have people around you who are smarter than you, people who are thinking ahead.
When you’re starting in a business, you’re not going to have any idea. If you’re paying someone to do a transaction, they’re going to tell you what it is and at the end of the day, they’re going to take your money, do the transaction, provide the service. You don’t want that. We’ve talked about, on other episodes. You’ve heard me probably talk about it on the radio. Some of the things that are extremely important is placing a team of experts who are very good at what it is that they do in their field. If that’s attorney, you want the best attorney who’s known for doing what he does. If it’s an accounting, same thing. You want to build the best solid team. What you want to do is have people around you who are smarter than you. People who are thinking ahead. That’s where the people that you want.
You’re sharing your vision with them. It’s very important when we look at structures and choosing the right structure. The next structure we’re going to talk about is going to be corporations, I refer to them as C corporations, a lot of people don’t like C corporations because the C corporation normally provides, it doesn’t provide, you’re going to have what’s called a double taxation because you’re going to be an employee of a C corporation. The corporation itself is taxed as a legal entity. I’ve shared with you guys before what a legal entity is. I’m going to briefly say a legal entity is a human being. When we’re talking about a corporation, we’re talking about a human being. The only thing a corporation can’t do that you and I can do is think for itself. That’s where the board of directors come in.
I want you to understand that. It exists under the law and have the same rights that you and I have. It’s very important to understand. It’s a legal entity. It’s a human being. It has the same rights that you and I have. The only thing that we can do that that legal entity can’t do is as a natural human, we can think for ourselves. As an artificial human, that corporation needs a board of directors to think for it. That goes back to the previous things that I’ve spoken about, why it’s so important to handpick a board of directors who are skilled in various aspects, whether it’s the legal field, finance, marketing. We don’t go out and pick a board of directors, because it’s our family and friends. That’s the fastest way to make a business fail and to get in trouble.
Business Entities: The operating agreement is the Bible. It’s the law. It governs what you should be doing and what you can’t do within the company.
We pick a board of directors who can bring stuff to the table, who understand what a legal entity is, who understand how to move your business forward. We’ll talk about that. I like C corporations as I said. I like them because they’re easy to capitalize. They’re easy to fund. They’re easy to bring people into your vision and share the equity with them. I like sharing. If you like sharing, what we all learned in kindergarten. When in kindergarten, what did you learn? if I bring some candy for me, I need to bring enough for everyone. Same in business. If you want everyone to participate in your vision, you need to be willing to share the equity of that company so that they can participate and have some ownership, and not be so worried about whether or not someone will steal your company or do things like that.
That is very important. We’ll talk about the double taxation, what that looks like. We’ll also look at some of the risks. I like also a C corporation because as a legal entity, the corporation is liable. If someone sue, they’re suing that entity. They’re not suing me personally. What I like to refer to, and you’ll hear this a lot, I’m not taking the pain home. You don’t want to take the pain home. If you make a mistake in business, you don’t want to lose your home or your wife. For those of you are not married, you don’t want to lose your significant other. You want to be able to keep the things that you have accumulated. You don’t want all the extra added stress.
We’ll talk about the advantages there and the disadvantages as a C corporation. The last thing I want to talk about is a lot of attorneys, and a lot of people are out there pushing what we call limited liability companies. You probably know them as LLCs. LLCs are a good way to go sometime. You got to be careful when you’re looking at a limited liability company, it normally operates from what’s called an operating agreement. From that operating agreement, that’s the Bible. That’s the law. It governs what you should be doing, what you can’t do within that company. Even there, it could bring you some exposure, some risks. We’re going to talk about what that limited liability company is.
A corporation is a legal entity. It’s a human being. It exists under the law and have the same rights that you and I have.
Whether or not it’s a good vehicle for raising capital. Some people like it. I like it from time to time, depending on what it is that I’m doing. If I’m buying something, I like to have an LLC to place the assets in the LLC. I’m going to give you a simple scenario. If I buy a house, I would place the house in the LLC. I will create a brand-new LLC, place the house in, place the business in, whatever it is that I’m buying. I will place that in the LLC. If I made a mistake or did something wrong under the law, I have protection. The person will come after me and be able to sue me, but they wouldn’t be able to sue that LLC from my mistake.
If the LLC did something wrong, they can’t come after me. They have to go after the LLC. That is also provided in some of the other entities that we have mentioned early on, but that’s primarily what an LLC was designed for. Another nice thing about it is a quick way to pay out dividends. Let’s say we might buy a business. Ten of my friends, we joined together to buy a business. Each of them will have what we call membership interests, and we’re able to pay out whatever that pro-rata share is in dividends to each one of the members. You don’t have to worry about anyone cheating you or anything of that nature. It’s governed by its operating agreement and it’s a legal entity.
It provides a lot of protection in some ways, but it’s not the vehicle that you use all the time. It’s a vehicle that you have to be very shrewd when you’re setting up your strategies and how you’re going to use it. A lot of times, I might use them in conjunction with a holding company that may be a corporation that will buy an asset and then it will place that asset in an LLC. That’s how we use it in different ways. That’s what we wanted to cover. We wanted to get you ready and all excited. For those of you who are knowing that, “I want to go into business and business is what I want to do. I don’t want to work for someone else under the current conditions,” I don’t blame you because with COVID-19 people might not be going back to the brick and mortar and working from an office setting. With artificial intelligence out there, it’s going to be taken over a lot of jobs.
Most of the jobs out there is going to be independent contractors. You’re not going to want to be an independent contractor and giving out everybody your Social Security number and having all the rest in the exposure, coming directly to you and all that pain. You don’t want to bring the pain home. You’re going to want to be able to pick one of these particular vehicles that is going to suit you and meet the needs of you and your family. You’re going to want to protect your family. That’s what I’m trying to say. Knowing that if you’re serious about becoming an entrepreneur and that’s what you want to do, you’re watching the climate that we live in today and you understand that it’s changing. You’re knowing that, “I’m going to have to go out there and work.” You don’t want to go out there and work as your name or as Solomon Ali.
You want to be able to go out there and work under the proper legal entity. That means you have to educate yourself a little bit about which entity is the best entity for you, for the strategy and the things that you’re going to be trying to achieve. That’s very important and those are the things we’re going to go over. We’ll probably cover all the do’s and the don’ts and the risk and which ones will give you the greatest financing capability, the greatest capability for bringing in people who can help you and who want to grow your vision and your dream with you, and also which ones that are best based on what you’re trying to achieve to not bring the pain home to limit your exposure, your risk of liability.
I want to thank you again. One of the things I want you guys to keep in mind, if you haven’t gotten one of our smart home technology packages, go to our website, pull up the smart home technology, get it for your parents. With everything that’s going on now, crime is going to go up. You want to make sure your parents are protected. Their loved ones are protected. Your friends. You’ll be able to unlock the doors, go check on them, send a neighbor over if you can’t get to your parents or something of that nature. You’ll be able to see them and monitor them, know what’s going on. Go to our website and be able to pull up the smart technology, get it. The monitoring fees are very frugal. That’s one of the things that each and every one of you should do.
If you’re looking at the business that you’re going to have in a brick and mortar and have employees, it may be a great idea to go ahead and get one of our smart systems as well for that. We’re going to start talking about some of the different technologies and the things that we have, and we offer that will help keep you and your family safe. One of the things I like about our smart technology for offices is I know who’s in the office and when they’re in the office. That’s pretty cool. That’s pretty neat. The other thing is, you got colds, everybody got their own keys. That’s pretty cool too. Thank you all so much. I hope you found what we share to be of some value. The episodes that are coming next, talking about the various entities and the various structures will be a great value to you and your family and ensuring that you do not bring the pain home and that you protect them.