5 - Interview With a CPA: Business Entities
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Get the Money Right: Episode 5 – START
[INTRO MUSIC FADES IN]
Joe RodriguezHello. My name is Joe Rodriguez. And you're listening to Get the Money Right with Todd Butzer. Todd has decades of experience in giving real estate agents the training and resources they need to get their finances on track. In this episode, Todd is going to be interviewing Maureen O'Rourke, CPA Professional, about business entities and the role they play in your business finances. The conversation going on here today is very high-level and you may hear some things you don't understand. I encourage you to Google and seek out information. There will also be a glossary in the description below with some definitions.
And now here's Todd.
[INTRO MUSIC FADES OUT]Todd Butzer
All right. Thanks, Joe. Hello again, everybody. Welcome to episode five. I can't believe it’s already episode five of Get the Money Right. We're excited to welcome on this episode our very first guest. And I can't think of anybody more fitting than this individual: Maureen has been so instrumental in a in a major force in a business that I'm involved in. She's a great friend, a very respected colleague, and she's going to lend some insights to us today from her vast experience regarding our businesses. So please join me, everybody, in welcoming Maureen O'Rourke. Hi, Maureen.
Maureen O’Rourke
Todd. Thank you so much. What an honor. What an honor to be invited to be on this great podcast.
Todd Butzer
Well, we're so excited to have you. Thanks for joining us.
Maureen O’Rourke
I had the opportunity to listen to the first four. And I have to say, wow, what a great service you're doing for agents and the industry itself. But I also need to let you know that this just doesn't relate to the real estate industry. This this carries over to a lot of other individuals. So, if they're listening, they need to know they can share this with their other colleagues because it's a great benefit.
Todd Butzer
Well, I really, coming from you, Maureen, that means so much. I really appreciate you saying that, because we've actually had different people as this podcast has started to get a few legs where they've said to me, look, “I'm not in real estate, but it applies to what I'm doing as an independent contractor or small businessperson” and so on. So, I really, really appreciate you sharing that. So, Maureen, tell us just a little bit about yourself.
Maureen O’Rourke
Absolutely. I was born and raised in New Orleans, so I'm a southern girl. Every now and then you'll pick that up in my accent. It comes across a little clear. I presently live on the North Shore, which is about 30 miles north of New Orleans. And I have been married to my long-term boyfriend, as I like to call him. We still call each other girlfriend and boyfriend, which is kind of nice. And we're also business partners, which is really nice. We have been in business together for about 30 plus years now and we've raised three children together through this great adventure that we've been on. And Brian and I currently have about 14 entities that we own, or we've invested in, or we've helped operate or all of the above. And listen, it's not always been easy, but it's been a fun ride. We've been successful at doing it, and we will continue doing it for a long, long time because we absolutely love what we do. I am a CPA and like I like to tell people that stands for Certified Pompous Ass. [Todd Laughs] So your Certified Public Accountant, I guess.
Todd Butzer
So, Maureen, you've had experience around the real estate industry. You've seen agents that were essentially not getting the money right and kind of got their arms around this. Can you talk about that?
Maureen O’Rourke
I'll be happy to. And I have to be perfectly honest with you here, Todd. I was not a fan of real estate agents up until probably about 20 years ago when my husband and I were in a situation where we needed to sell our home and move to another home. And so, our attorney at the time recommended an agent to us. And I said, okay, I'll give it a shot. Invited her over. And to give the lay of the land come up with maybe pricing time frame, that kind of thing. And I really had a sour taste in my mouth about agents to start off with. But I fell in love with this lady. She was just awesome. She brought it. She brought the whole game. She was organized. She was on time. She was responsive. She did. She checked all the boxes for me. And it wasn't just for that reason. Her personality was just super as well. And we became dear, dear friends. And probably about five years into our friendship, I noticed that she would get so stressed out every April like she couldn't. She couldn't go on vacation, she couldn't travel. She couldn't do certain things because it was tax time. Right? And so finally, I sat her down one day and said, look, you've got to tell me what's going on because you're a different person during this time of year, you know? And she explained that she'd been audited by the IRS. She was you know; she was behind in her tax payments. April 15th always loomed large in her mind. And she was never caught up. And it was just this, you know, mess. It was a mess. And so, I said, all right, well, look, I love you dearly and I hate to see you like this, so let's change some things. Can you open up your books to me? Can you let me see what you've got going on? And so, it took us probably about a year and it was painful. I won't lie to you, Todd. It was painful not only from a financial standpoint for her, but, you know, from a I've got to get this right mental standpoint as well. But now she's been on the right track for probably about 15 years. And she doesn't bat an eye and say, you know, I've set her up with an LLC. I set her up with a payroll. She pays herself a payroll. She's got federal withholding that happens every month. And she's got quarterly, quarterly estimates that she's got to make as well every month. She knows what that is upfront. She makes them on time. She never misses the beat. And then April 15th rolls around. We typically well, we've always had to file an extension for her because of K1’s that she needs from other entities to complete her tax return. But she's paid up. She is golden by April 15th, both on a federal level and a state level. And she goes on vacation in I think she just traveled over to Europe for three weeks and it happened to be during April 15th.
Todd Butzer
Yeah, well, that was a remarkable gift from you to her to just to essentially help her get the money. Right. That's awesome. And I appreciate hearing the story. And you touched on something just in your description of yours and Brian's relationship and business relationship together. And I'm hoping that people listening caught it because you said you're involved in approximately I think you said like 14 entities. And one of those challenges, Maureen, and that's why I wanted you on today, one of the challenges that we've had in this particular industry, and I think in a lot of other small businesses, is the idea that we actually do own a business. We are not employees for the most part of some company. And because we don't always look at it as a business, we tend to make some mistakes actually where we put money, where maybe we shouldn't go, or we don't allow for the accounting of certain deductions and things like that. So, you touched on the concept of an entity, and that's really what I'd like to focus on today. Now, before we go any further, folks, I'm going to say this and every single episode, Maureen is here to lend her insights and from her vast experience. She's not here giving you legal or tax advice, so please seek your own local legal tax, professional finance and so on. You get that. You get the picture. So, talk to us a little bit, Maureen, about this this idea of an entity.
Maureen O’Rourke
Sure. And if your listeners have not gone back and listened to the first four episodes, I highly recommend they do that. Episode number two in particular, where Todd speaks directly about busting money myths. One of the myths that he talks about is how much money you made. And what I'd like to add to that myth is it's really not about how much money you make. It's about how much you keep. How much do you get to keep in your pocket in the end? And so that truly is a function of the entity that you create as well as your bookkeeping skills. So, let's talk about the type of entities that are out there or available to each and every one of you. And I'll first start off with options that are available for single owners. And they're basically three options. Now, these can be broken down further, but we're going to we're going to stick to the basics here. Option number one is a sole proprietorship that is basically just as it sounds. It is a sole proprietorship. You basically will file a Schedule C, which is a pass through on your individual tax return. You don't need a separate ID, federal I.D. number. You don't need articles of incorporation. You don't need an operating agreement. You are a sole proprietor.
Todd Butzer
So, if I've never done it, pardon me for interrupting me, or if I've never done anything else and I've been operating my real estate business for six months or a year or five years or whatever. Essentially, I am one of these. Correct?
Maureen O’Rourke
That is correct. And any 1099’s you get, you will be picking that income up on your income as a sole proprietorship, on what's called your Schedule C, on your federal tax return. You can name it; you can have a separate name for it. You can call it Todd Butzer or real estate guru. Name it whatever you want. And it works. It works just fine. So, and there's not a whole lot of formalities that are required for you to be a sole proprietorship. The only thing I would say is that you may have to get a local business license. It just depends on the nature of your business in the state that you live in.
Todd Butzer
Okay. Now, beyond that. So, this is fairly simple to set up. What are what other advantages are there to a sole proprietor ship or disadvantages Maureen?
Maureen O’Rourke
I would say the advantages are you need to keep your funds and your expenses separate. So, at a bare minimum, you need to set up a separate bank account. You need to set up maybe a separate credit card under this business so that every expense that you that's business related goes on to that credit card or paid out of that bank account that will allow you to keep separate accounting records. So, you know exactly what your income, your sole proprietorship has made and how much expenditures have gone out. And when it comes time to file your tax return at the end of the year, all that information is there. I would set up a separate credit card as well. Now, I would recommend these two things for any entity that you're going to set up as a bare minimum. But I would also be prepared to pay off that credit card at the end of every month. I would not go into debt on that credit card. That’s a bare minimum recommendation. The downside of a sole proprietorship is that it exposes you to any kind of legal action that may happen. There's always that possibility. So, an entity that is a separate entity from a sole proprietorship will allow you to have more protection legally.
Todd Butzer
Absolutely. That that helps. So, if I've been told as a small business owner that I should consider an LLC. Can you talk about those?
Maureen O’Rourke
Sure. So, the other two options for a single owner or a corporation, because you can be a single owner in a corporation or an LLC which stands for Limited Liability Company, and you can be a single owner under an LLC as well. You, you, you know, you need to have you need to set up articles of organization in the state that you're going to reside in. And then you need to file for a separate federal I.D. number with the IRS for those entities as options for multi owners. That means if you and your husband are in business together or you've got a friend. Or a business affiliate. You can set up a partnership because you need to have more than one person, of course, to be in a partnership. And a Corp, of course. And then the third is an LLC. So, under an LLC you can file is either a C-Corp or a partnership, but we're not going to go into too much detail there.
Todd Butzer
Okay. So, you talked about on the LLC that I've got to do a little bit of paperwork and things like that. Do I have to pay people to do this for me?
Maureen O’Rourke
Very good question. In today's world, Google is such a beautiful tool. I used to use the old Encyclopedia Britannica or whatever it is, you know. But today's world. Look, if this is so easy, the first thing I'm going to tell you is that there's so much software out there available and a lot of it's for free. A lot of these will give you 30 days for free. I recommend rocketlawyer.comor legalzoom.com. I've used both of those services before and end up with a 30-day free. And if you want to pay the 995 a month after that, go right ahead or cancel your subscription right after that. Those two those two legal entities will help you file articles of incorporation, articles of organization and or an operating agreement should you need that for the entity that you have decided you need to go with. The other thing I'm going to say is that please, please, please scroll past the first four pages and Google where all these companies have set up to file and get you a federal ID number and are going to charge you a couple of hundred bucks to do it. IRS does this for free. Go to the IRS dot gov website and file for your federal ID number for free and you get it right there online. You get it within. You know, 30 seconds of filling out all the all the all the online paperwork. But there are so many entities out there that are making money off or people who don't know any better. And I get angry when I see people paying a couple hundred bucks for something that should have been for free
Todd Butzer
And that's why you're so good at what you do. But thank you for that. That's a that's a great insight. I know that I've fallen into that trap in the past where, you know, my wife will come to me and say, hey, I, you know, we filed our LLC paperwork, and we took care of that, and it was only 90 bucks or whatever. I'll say, well, that, you know, it's free. So that's it's a common a common occurrence. I know that. So, to kind of get our arms around this LLC or corporation side of things, what are some of the advantages of forming an LLC or for that matter, a corporation?
Maureen O’Rourke
Well, you know, I'm going to tell you, and this is really this is really up to an individual in what they need. And they've got to do some homework on their end first to decide what is best for them personally. And I will say this, the liability of the owners is probably the number one thing to consider. When forming an entity. If, if it's an LLC, the liability of the owners is such. Every member retains a limited liability and sets the name limited liability, regardless of whether they actively participate in the management of the company or not. And then for a corporation, the shareholders retain limited liability in the absence of special things, so the directors can be personally liable for certain breaches or duties as it relates to a corporation. For a corporation, the management and control is normally vested in the board of directors who are elected by the shareholders. So, corporations a little different, of course, and an LLC. So, the LLC, the right to manage is vested in all the members unless provided otherwise in your articles of organization. So, if you really want to run your business and you want to be in charge, you better spell that out in your articles of organization. There’re so many times, you know, my husband and I have gotten into an entity. And, you know, the first question is, can we see your articles of organization? And people are like, what are you talking about? Well, that's going to dictate, you know, can you sell the company? Can you borrow money in the name of the company? There's just a long list. There's a laundry list of the stuff that you better have spelled out who has the ability to do this. So, it is important that you spend time in the beginning thinking these things through and knowing what you want and knowing, you know, look, do I want to have do I want to be in control? Do I want to own 51% and then let my limited liability members own the other 49%? But I have control over borrowing money, firing people, firing people, giving raises. There's all this beautiful software out there that you don't have to manually fill out there, you know, W-2 form or the quarterly payroll forms. There's ADP, there's Netchecks, there's all these local wonderful that I would just pay the minimum payment every month to hire these employees and do all your payroll for you.
Todd Butzer
We've talked about that. We've touched on that in the idea that there's some critical support as we go about running our businesses, that we can go higher. It's not expensive. They are professionals and it allows us Maureen to go do what we do best.
Maureen O’Rourke
I tell people all the time, why are you doing payroll? Why are you spending the time and stress and over getting the deposits in on time and filing the quarterly reports in the year end, all these services are available out there.
Todd Butzer
Maureen, I've also heard that sometimes as a sole owner or individual owner, that I could be a corporation, but it would be classified as a sub S-corporation. Can you touch on that?
Maureen O’Rourke
I don't know about you. So, you can be a corporation as a sole owner, and then you file what's called for subchapter S status. And so, you have so many days after filing to be a corporation, I think it's 60 or maybe it's 90. Don't quote me on that, to be a sub–S Corp and it's been a while since I've, I've really delved into that, but you can be a single owner so there's Corp, but you'll have to file of course your corporate tax return which will issue a K1 to you as the sole owner, which you have to then in turn pick up that information from that K1 want on your personal tax return. And it works the same for an LLC as well.
Todd Butzer
And I've been told that you can as an LLC elect to be taxed as a sub-S.
Maureen O’Rourke
Well because it could flow through to you personally. Right. Yeah.
Todd Butzer
So, and you've brought up something here that I want to make sure our listeners are hearing, and that is in each of these circumstances, we're not talking about a C corporation, but in each of these circumstances, you've alluded to the idea that the tax liability flows through to me as the owner. In other words, the corporate isn't paying a tax, the individuals paying the tax. Am I correct on that?
Maureen O’Rourke
Well, if you're a C Corp, you will pay tax at the C Corp level if that's the entity that you decide to go with. But if you become a subchapter S corporation or you're an LLC, then the information that is what they call those tax returns. They call those information returns because the information flows through to the owners or the partners on a K-1 and they have to pick up that income from that K one on their personal return. And there is a special place on your 1040 for all that information to flow into, and you are bound to pick that up because let me tell you, the IRS is getting copies of that information returned with that K1 information, and they're going to be looking for those two things to match up. So, you need to be it's just like getting a 1099, a company is going to file those 1099 with the IRS and they're going to match that up with your Social Security number. So, when you file your personal returns that better show up somewhere on your personal return, they're going to be looking for it.
Todd Butzer
Got it. So, as you're listening to this, folks, you're going to hear W-2 and 1099 and federal IDs and different vernacular centered around the accounting side and legal sides of our business. Google just used the so a friend of mine says, use the Google, get on Google and look them up rather than us. Take a lot of time in here to actually explain what a lot of the a K1 and so on. Just get on Google and check it out. Well, Maureen, you've been a big, big help for us. A lot to think about. We're probably going to invite you back for a later episode to dig deeper into these into these concepts. But overall, folks, here's what we're saying. This is important and we just can't co-mingle all of our money and call it a kind of a hobby. We do operate a business and these businesses are entities of some sort. So, check in with your local providers, your local expertise, your local advisors on legal, tax and finance. And let's get going on an entity.
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Joe Rodriguez
That includes this episode of Get The Money Right. To stay up to date in the latest and Get The Money Right, follow us on social media and be sure to subscribe on your podcast platform of choice. If you want to support the show, please leave a five-star review and share with your friends. If you're a real estate agent who is getting their money right and want to be a guest on the show. Please submit all inquiries to getthemoneyright.podcast@gmail.com. Links to everything we discussed today in the episode description.
Thank you for listening and have a wonderful day.
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Get the Money Right: Episode 5 – END
In this episode of Get The Money Right, Todd will be interviewing his CPA, Maureen O'Rourke, about various business entities and their respective advantages/limitations.
Glossary:
Sole-Proprietor: A sole proprietor is someone who owns an unincorporated business by himself or herself.
LLC: A Limited Liability Company (LLC) is a business structure allowed by state statute.
Corporation (C-Corp/S-Corp): In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income.
Schedule C: Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor.
Schedule K-1: Schedule K-1 is a federal tax document used to report the income, losses, and dividends of a business' or financial entity's partners or an S corporation's shareholders. The Schedule K-1 document is prepared for each individual partner and is included with the partner's personal tax return.
1099 Form: The IRS 1099 Form is a collection of tax forms documenting different types of payments made by an individual or a business that typically isn't your employer.
All descriptions/definitions taken from irs.gov
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Credits:
Hosted by: Todd Butzer
Special Guest: Maureen O'Rourke
Produced by: Joe Rodriguez