#615 Why One LLC Isn’t Enough for Most Entrepreneurs

0:00An entrepreneur never has one freaking business. They have multiple streams of income. If I've got ten different business type ideas running through my main S corporation and if something goes wrong in one of those little ten business lines, well, everything's exposed and at risk. We had a client and they had an airplane and they thought we're going to set up the subsidiary to own the plane. And if anything goes wrong with the plane, they can't touch the big multi-million dollar company, the plane crash. Come to find out, the main company had the pilot on the payroll. Welcome everyone to the Main Street Business Podcast. This is Matt Sonson joined by the incredible Mark J. Kohler. We're so excited to be with you talking about business entities. How many do you need? Yeah, this is, I'm excited about this topic. And some of you may be like, what do you mean? How many entities do I need? For example, an entrepreneur never has one freaking business. They have multiple streams of income. Bless them. Right.

1:00Think of it like a realtor that's doing property management or a restaurant owner that might be doing catering or what were you saying? Or yeah, the early realtor is doing a flip or some construction stuff or some interior design or some staging, you know. And there's a lot of issues here and I want to just say this to everybody so that you can see the where we're going to go with this is you might have multiple businesses and having them in one LLC call it Kohler Enterprises and all these DBAs or trademarks or whoever you or else will get into that a little. But you might want a separate entity for branding. You might want a separate entity because I'm going to exit that part of the business sooner or oh, I'm going to partner with someone on this part of the business. So that's going to maybe need its own entity. I might be shutting down this operation and I want to close out that liability or I do

2:01have liability exposure. I'm going to I don't know if I want to do bungee jumping in my flower shop business. You know, so all these different issues could play into it. And so it's not about rental properties and how many entities it's about a business. Yeah. Yeah. So I think the let's just kind of start with the framework here maybe for a second. I do like if you're someone that just does one thing and that's all you're doing. I just do consulting. That's all I do, Matt. I don't do anything else. It's just consulting. I have these type of clientele. That's all I do. Cool. I'm not telling you to go out and do multi plenty. But like Mark said, if you're that entrepreneur, you're going to have a decision to make that has lots of different things that you do. You serve different customers. You might have different branding. It's a different product or service that doesn't really fit to be delivered to the same customer, different partners, different exit reasons, all these different reasons. You may want to have multiple entities, but there's one foundational thing you might want to consider, which is having an LLC or an S corporation, which is an LLC taxes and S

3:04corp as the foundation. Oh, I was just going to go there. I love it. We got to start there. Now we've talked about the S corp before. We have lots of video. Mark has a chapter in his books on it. Multiple chapters in different books, tons of content on that on why you need an S corp. If you're making more than 50K net a year, you should have an S corporation or an LLC taxes and S corp. You can do certain business activities right in that, but I might want to have a separate LLC that S corp owns to do other activities. Yeah. By the way, we will not be able to do this justice in just a half hour for this show today. This is a whole class in our annual 360 conference, and I'd recommend any of you that are interested in coming to our event. It's in Dallas, the first week in June. You can go to mainstream360.com. We have over 22 classes, 17 different instructors, main stage parties, Matt and I are going to have the ban going. Oh, it's going to be awesome. It's going to be good.

4:05But this is a class that we would teach there for an hour. I don't know if it's on the agenda this year. But these are the types of things business owners are like, okay, I cannot do this on legal zoom. And so this is probably where our tax consultation or legal counsel at our law firm has the biggest impact. So again, as we dive into these issues, I just want to as a precursor say, there's a lot to learn here. Come to our event anyway, you will freaking love it. And number two, as you notice these issues, this is why a consult with a small business tax lawyer that could be extremely affordable should be on your radar every year because you're moving and shaking your business owner and you're going to have these changes happen. So Matt, I want to set the stage for you. You're exactly right. I love the S Corp at the foundation, no matter what you do, because you want to minimize self-employment tax people and that S Corp can be an LLC tax as an S Corp, but that's your foundation. Why would you set up a subsidiary to that? You know what funnels say, and we call them subsidiaries, but why won't it be the first

5:07reason why you might peel off a different entity? I think for liability protection, I might be doing something different in that entity where I want separate liability treatment. Maybe it's a little more high risk, maybe it's new, it's got different customers that might be a little more risky, whatever it may be, but I want liability protection. So I can isolate that liability in that new LLC. Let's say it's importing exporting business, I don't want to call it Vandalay Industries LLC. That's a very creative name. I like that. Yeah. Vandalay Industries LLC, I might have some issues with export import. I might have some disgruntled clients with tariffs going on. I don't know. But if something happens in that LLC, they can only sue that LLC. If I've got ten different business type ideas running through Sorns and Enterprises, my main S-Corp corporation, and something that goes wrong in one of those little ten business lines, well, everything's exposed and at risk.

6:11So if I got a separate little business or service product where I do have some different liability risks, it can make sense to isolate that into its own city. Well, I'm actually kind of surprised you went with this one first. I thought you were going to go with partners. That's going to be mine. I'll go there. Yes. The reason why you brought this one up first, I'm surprised, is because we have the most amazing story that it will be made for TV movies someday. And I don't want to make light of it because it is tragic. And I just want to hit the highlight because you can't just set up an entity and say I isolated it and think it's down. For example, and I know Matt, you can add, you'll add some bells and whistles to this, we had a client, they had a financial services company, and they had an airplane. And they thought, okay, we're going to fly around and do other things besides the financial services, and we don't want to expose the main company even though from time to time we might use it for that primary business.

7:11We're going to set up the subsidiary to own the plane and pay the pilot and all these things and the hangar and all that stuff. And if anything goes wrong with the plane, they can't touch the big multi-million dollar company, almost billion dollar company. And so they go charge away. Well, into the sunset and well, the plane crashed, people died. It was a project that was separate from the financial services and when they got into it and Matt was actually a lawyer on the case, I'll leave it at that, is come to find out the main company, he was still freaking had the pilot on the payroll, all the expenses were paid out of the main company. Yeah, they set up an LLC and the FAA had the plane number registered to it, but that was it. If you're going to set up this entity to run this other line of business, you have to have a bank account where it has to pay the employees, has to pay its own rent. You can't just say it's separate and not treat it separate.

8:14Anything to add to that. I mean, I just truncated a hell of a shit and I will say we represented some people that were on the plane that died, actually, we didn't represent this financial services company and very sad story and millions of dollars of liability, of course. But the issue when a plane crashes is there's either manufacturer defect or the pilot made a mistake. That's the only two outcomes of what happens in a plane crash and so there's going to be liability somewhere. And so when we got into that case, as Mark said, we discovered, and it was actually me asking the question, I've ticked a little credit as a genius, yeah, of asking of what payroll was the pilot on? Because I knew, I've worked with entrepreneurs, I know what you're doing, I know you're like, ah, that's all separate payroll is going to be a pain in the butt. And I could just, they answered the question and then right after the words came out of their mouth, they were like, oh, dang. So if you're employees in your main company where you're trying to protect kind of the

9:14big nest egg, whatever it is, if those people are doing the services and work in this other entity where you have risk, just know you're not getting separate liability treatment because that employee is the one that has agency on behalf of you and your company and you're going to still have some liability. So if you're going for liability protection and that's your purpose, make sure it is clearly separate, separate bank accounts, separate income, separate expenses, the money can funnel back down to the parent if employees are working on it or contractors have them separately employer contracted at that subsidiary. Well, love it. Okay. My first option of why you might need a separate entity folks is you got a partner. So let's say, I'll use a landscaping scenario. So you're a landscaper, you're moving a shake and you're doing all sorts of things. But you don't do sprinkler installs, you know, something you've stayed away from. You're just like moulands, yada yada, you're just a machine. You got your trailer set up, you're going, but sprinkler installation, yeah, not your forte,

10:17but your brother-in-law, the famous brother, I should call this the brother-in-law exception. We need to give him a name too. We need to get this brother-in-law name like Brad or something or Eddie, okay, there we go. Okay. I don't know. I mean, he was a brother-in-law. Yeah. Yeah. So I like it. Eddie. So Eddie comes along and says, oh my gosh, Mark, I know sprinkler installation, like the back of my hand, I've even got an RV. I can park on site when I'm working on the sprinklers. Yeah. Eddie says, I can do it. Let's partner. Well, do you want Eddie as a partner in your main landscaping business? Hell no. And so all the sudden, you've got another operation. You got to account for it separately. You're going to split up property, profit differently. You're going to have different assets. You're going to have to do a tax return for that partnership and you want separate liability if Eddie screws anything up. So boom, you need to separate any. But here's the trick. Your S Corp owns your half of that new project.

11:23So the new LLC is half owned by your parent and half owned by Eddie, boom, but a bang. Yeah. And that's very common. And I think when we see any existing business owner that's getting into a new business with someone else that's a partnership, that's the first place to start is particularly if you have an S Corp, how can I use that S Corp and maybe just make it the partner, whether it's 50, 50 or one third, two third, whatever your profit partnership deal is to just add that in. Because I want that income, it's an operational business. We still wanted to come through and hit your S Corp. But let's get that separate entity, an operating and partnership agreement and operating agreement is a partnership agreement in an LLC that outlines, you know, who gets what, what's everyone's responsibility is. And then of course, we're getting the separate liability treatment there. So I mean, Mark and I have multiple partnerships between us, too, right? We're doing that. My S Corp is the partner in our partnerships, better operational businesses. Marks is in his. And so this is something we're actually doing ourselves in our own trifecta and strategies.

12:27And I, thousands of clients that have done that partnership structure where their S Corp is involved, separate partnership entity for a little separate enterprise with someone else. Yeah. Totally. Now, I'll say number three and I'll set it up for you because you are, I've learned so much from you on this topic. I think number three is exit. Tell me why you might have a separate entity for exit and you and yourself have mastered this for clients in and your own life. Yeah. I mean, this is another one, Mark and I have done. We've helped clients do this is you might have a business that, that, or a part of your business that you may want to sell, all right? And so you could say, well, I want to sell this piece of my business, but I want to keep this other part of it. Well, you can essentially spin out that service, whether this is an existing service you have or a new service you may be adding. And so that, Mark and I did that strategy ourselves, you know, we're coming called Main Street Business Services and that was a separate entity from our law firm, right?

13:27Separate entity and, and one of the reasons there's a couple of reasons we did that separate branding and, but then also a way that could exit is a separate entity from our law firm. So, and we've seen lots of clients do that over the years. I had a client that was a dermatologist do that with a med spa, okay? Didn't want to sell dermatology practice spun out the med spa into separate business. Those companies work together was able to sell the med spa, okay? And we go down a lot of lists here of how that could work, but that might be another reason whether you're starting up or whether it's an existing service you want to spin out to have a separate entity was you're thinking selling that business or the exit in mind. And that exit could also be maybe transitioning to a partner that's only involved in that service or product. That could be maybe a family member that takes it over. It doesn't, the exit doesn't have to be the sale of it. It could be a couple of other things. Yeah, that's a great point. And I would, now we've got other podcasts on how to sell your business, how to prepare to sell your business. Please check those out.

14:29But I would say this on this point and then it just briefly is you've got to start right away. If a buyer is going to look to buy that line of business from you, the sooner you can create separate financials, separate structures, separate employees, separate procedures, everything separate because people want to buy a nice little box. They want to make sure everything is in those four corners and you can't just one day say, oh, I'm going to sell this line of business set up an LLC in a month later. I think it's going to happen magically. You want the highest multiple. You want the highest valuation and you've got to think like a buyer and the sooner you can separate that business and start building up, massaging it as a separate ongoing concern, the better off you're going to be. I've got a number four. I don't know if you've got one that you're feeling all right. All right, go ahead. You want to hear it? Yeah, I want to hear it. That'll give me a second to think of something else. Okay, try to keep up with you.

15:30Well, we can't talk about the B-word. B-word, B is in branding maybe. But I like number four, a regulatory issue. Sometimes we have clients that they might do, might be a doctor and they've got medical billing under insurance, Medicare, this, that. They've got insurance billing. We've got clients that are contractors that want to go do a bid on a federal project. And they've got Kevin Baconwages to worry about. They've got, they want to do female owned business so they're going to put their spouses the owner because they've got this regulatory thing that is going to create this separate need for entity and put them in a new or better position. You've heard of Kevin Baconwages? I don't even know what that means. What? Okay, I'm going to, well, you're commenting on regulatory. I'm going to bring up a little, you know, okay. I mean, I do like me some footloose. Kevin Bacon's unirrated, you know. I miss him. He's not been anything big lately.

16:32So, well, yeah, I think that regulatory thing, I think particularly licensed people that can make sense. It could be even a product that you have that might be right. The product is regulated. You might want to have a separate entity for that. So, what is the Kevin Baconwages? Well, I, I use it as a term. I joke about it and I, that's why I sometimes get some laughs. I couldn't remember the first word. People listening to this are like, hold it. You guys call yourself real business lawyers. Okay, it's called Davis Bacon. Davis-Bacon, federal wage law, that if you're going to have over $2,000 in wages, they get sucked into federal wage rules and all these different things. And for paying laborers. And it's to prevent easily confused with Kevin Bacon. Yeah, I mean, nine degrees of Kevin Bacon, you know, you've got to know that. So, hopefully someone was laughing there. But yeah, Davis Baconwages, wage law. But no, I think regulatory, can be a really smart move.

17:33I have had countless clients that will say, well, I'm going to set up this subsidiary owned by my wife because I want to have a female owned business opportunity for bids, or something like that. And they go down that path. So, yeah. Okay, let me hit the other one here. We close this out, which is, as Mark said, the B word, you know, and branding. So, you might have a brand you're trying to build around the business name. And whether this is subsidiary or it's just entirely separate, building a brand is obviously very important for the business. This could be a nationwide type business. You're trying to get trademarks. And building a brand around that separate entity can be really important. And I've seen lots of companies that, as they get bigger, they actually have lots of subsidiaries that actually provide a different service and they provide different branding to. And, you know, think of like the food makers or restaurant chains.

18:34I mean, they have one holding group, but they have a separate brand for the restaurant, right? I know the same company that owns Taco Bell owns KFC. But those are different concepts and brands. Yeah, they're all in the food business. But they've kind of branded things separately. And it doesn't have to be, of course, on that scale. It could be much smaller. So, just think about, are I trying to build a separate brand for this business and operation? Yeah, I think sometimes that leads into the early one we talked about exit. Sometimes a company with a separate brand is easier to sell or exit transfer on to other employees or people in that specific brand. Then you've got multiple things on tourney we're going on. And I don't want all those things tied up in the one entity. And I think the reverse could be just as important. You may want to brand your parent company name and protect it and preserve it. And the subsidiary is going to have a different name so that you can protect your main brand. So the brand value could be in the parent versus a subsidiary or vice versa.

19:40But nowadays, especially with an established company that has a brand and you're trying something new, that's going to have separate branding, a separate kind of target. You might want to, there could be a lot of reasons to have a separate brand and keep that separate and distinct from just a customer interfacing and reputation as well. Yeah, totally, totally. Good stuff. Well, I think these are, now there could obviously be other reasons. Sometimes there's a state reason. Someone passes away this day. You've got spin-offs and this at and another. But I think these are the main five and I just want to encourage all of you again that if you're up against these challenges and you're trying to scale and build, having a small business lawyer that has a tax background because taxes are going to permeate all this and you don't have one you can rely on. Please make an appointment with one of our lawyers at KKOS lawyers. This is a perfect opportunity to have an annual review

20:43and get it on a picture, a diagram. Maybe something called the trifecta and you would love that. I think if you're listening because when you can see it and then you can show your insurance agent. You can show your family. You can show different providers in your professional world that, okay, I get it. You've got a separate entity for this and the little bubbles show everything. So I think it's really powerful, but I hope this has been helpful to many of you that are entrepreneurs. Yeah, take us up on that. KKOS lawyers, we'd love to work with you. We're helping clients across the country have an incredible team behind us. So thanks everyone for listening to the Main Street Business Podcast. Like, share, subscribe, kudos. I don't know what else you can do. Comment if it's positive. You know, we want to help get the good word out on the podcast here and all the content we're trying to get you to help you better live the American Dream. We'll see you next time.