Tax Law, Business Structures and Entities 101 with Business Attorney Dan Granquist

Summary

If you’re curious about your business structure or entity type, this is the episode for you and you should be curious. Your business structure can save or cost you thousands in tax costs. Dan is the owner of Granquist Law Firm and joins us to share his wealth of legal knowledge for entrepreneurs and small business owners. Dan helps to walk us through some of the key mistakes that small business owners make when setting up their new ventures while unpacking some fundamental differences in how businesses are structured. Learn more about Dan at https://www.linkedin.com/in/danielgranquist/

What Dan addresses at Grand Quest Law

  • Business attorney
  • Real estate planning attorney 
  • Help with transactional work
  • Representing clients to start, and operate businesses 
  • Buy and sell real estate for personal or investment
  • Contract issues in real estate
  • Business tax strategy planning 
  • Help to decide about business entity and business structure
  • Representing clients with the IRS and audits and collection activities 

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If you are a business owner and you just got started, here’s some insights to learn:

As a business owner, you should consult with your own attorney (or CPA tax planner) about the business you are about to start. Get legal advice ahead of time to avoid misunderstanding and groping in the dark trying to do things on your own. 

An attorney could provide business aspects, it’s very important to that information. For instance, for a business entity, this doesn’t mean that they always have the right answers but they give you choice. And you can look ahead to see who would be involved in your business and this is the scope of the conversation for new entrepreneurs. 

Simple things are going to matter, such as electing the owner of the business. You would learn the terminology for each type of business entity. And you will also get an idea of which is best for you. 

Business entity 101

3 primary structures and entities for people starting business: 

Owner of corporation: shareholders 

Owner of limited liability company: members

Owner of sole proprietorship company: owner of company

The simplest business entity is the sole proprietor, which is a good place to start. You will need to keep books and records for your tax purposes. Depending on the nature of the business, you may need to seek different professional services, such as an accountant. Navigator Bookkeeping can help with bookkeeping, taxes, and other financial matters.

High level view of business entities and structures for tax filing 

Two main entities are corporations and limited liability companies.These are specific state regulated state statutory entities. They have different and separate legal existence. 

A corporation is formed by filing articles of incorporation with the Secretary of State. A limited liability company is formed by filing articles of organization with the Secretary of State. 

Once you file the articles, you can find out about IRS tax code designations as how a corporation or a limited liability company would be taxed.  

Technically, at this point, you are not setting up an S-corporation or C-corporation, you are setting up a corporation. 

Tax Strategies 

Depending on the form of the business, you may choose a different tax strategy. 

There are two main types of corporate taxation: S-Corporation and C-Corporation. 

For a limited liability company, if there is only one member, you can choose to be taxed as a sole proprietorship, which is called “Schedule C” on your tax return. However, if your LLC has more than one member, it will be taxed as a corporation.

For example, if the LLC is going to be used for real estate investing, it’s usually best to elect partnership tax treatment. This is because the internal revenue code provides a number of deductions and flexibility options that are beneficial for real estate investors.

If you’re running a manufacturing or other kind of business, you have a few tax treatment options available. You could elect partnership tax treatment, or opt for C/S-Corporation tax treatment. Additionally, you can set up different entities for each member of the business. For example, one member could have an S-Corporation, while another could have a C-corporation. Depending on your level of planning and sophistication, you can mix and match different entities to suit your needs.

Learning from internet and DIY might be a mistake for you

The internet has made it easier than ever to access legal services online. However, when it comes to setting up a business or any other type of complex legal arrangement, it’s important to remember that it’s not always as straightforward as it seems. We have had clients, where they thought they had all their bases covered, only to find out that they were missing some key pieces. The best way to ensure that everything is in order is to speak to an experienced attorney who can help you get all the questions ironed out right away. With the different legal services available, there are varying levels of complexity and liability protection, so it’s important to understand your options.

Hiring an accountant, like Navigator Bookkeeping, would be the best bet to not get confused!  

It is recommended to contact a bookkeeper (like us) to keep track of your business expenses, income and records, like financial transactions. And when it’s more complex (like corporation or LLC), you will need to look at the capital contributions, distributions and which is taxable and so forth. If you own a C-Corporation and distribution is taxable to the shareholders. However, if you are an S-Corporation with several members, you need to distribute equally according to the percentage of ownership of each shareholder. 

For an LLC partnership or S-Corporation tax treatment, this will be adding more layers of recordkeeping and complexity for tax purposes. 

Separating business and personal finances

If you commingle all your funds and use the fancy term “commixture” (used in the finance and legal professions), you’re essentially pooling all of your money into one account. This means you could use your business funds to pay for personal expenses—like a house mortgage, gas, home utility bills, groceries, etc.—or your personal funds to pay for business expenses, without keeping proper records of the transactions. Not only does this put you at risk for legal and financial issues, it can make it harder to properly track your finances and plan for the future.

What is a smart choice for keeping business and personal separated for business entities?

If you own a corporation or LLC (Limited Liability Company), you are likely aware of the risk that creditors or other parties could challenge your liability protection in court and potentially strip away the protection these entities are designed to provide. Protect yourself and your business by ensuring you have a comprehensive legal strategy in place to preserve your liability protection and limit your exposure to risk.

One of the main reasons for using a corporation or LLC is that they provide limited liability protection to the owners, be they corporations, shareholders or members of the LLC. This means that if someone sues the business, the owners are not personally liable for any claims against the business. However, if the business owner is commingling assets or has a jumbled mass of accounting, known as an “alter ego” in the legal profession, the court may look through the company and hold the owner personally liable for any claims against the business. Therefore, it is important that the owner adheres to the proper business practices to ensure that the limited liability protection of the business entity is maintained.

QOUTE: “A good bookkeeper like you Navigator bookkeeping and help organize the books and records financially”

What Grand Quest Law does with our clients to protect their personal side

At [Grand Quest Law], we help our clients with all the corporate records they need, such as writing up minutes, bylaws, operating agreements, and limited liability company certificates. We also craft contracts for vendors, making sure to keep the personal and the business separate, so that individuals can have the legal protection they need. These are important concepts to keep in mind, and it’s why we strive to provide proper structure, legal documents, and bookkeeping records. This way, we can ensure that our clients have the best protection possible.

Piece of advice for entrepreneurship journey

Cash is key to any successful business – it’s not just a legal issue, but a crucial element for a business to survive. 

Unfortunately, many businesses focus more on their marketing, operations and other aspects of their business, while neglecting the administrative part. This can include keeping their finances in order, filing their taxes, and maintaining the necessary documents for their entity. 

For example, if you’re a corporation or LLC, having a set of bylaws or an operating agreement is essential. Additionally, it’s important to keep records of minutes and other important documents. Failing to do so can mean legal liabilities, and worse, can lead to the eventual failure of the business. 

Your business’s success relies on more than just its operations and marketing – it’s essential to keep accurate records of your finances, taxes, and entity documents to ensure the success of your business in the long term.

Many people often confuse the daily operations of a corporation or limited liability company with annual meetings of the shareholders or members. While it is true that minutes are taken in these meetings, they are not the same as a detailed record of all business decisions. These annual meetings are where the board of directors makes key decisions that will guide the overall direction of the company.

It is important to remember that even if the business is no longer actively operating or sales are slow, the fees for keeping the company in good standing with the Secretary of State must still be paid. Failing to do so could lead to serious legal and financial issues down the line.

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