Episode 369: Show Notes
Today on the podcast we have Braden Drake, a California licensed attorney with a master’s degree in tax law, joining our conversation. He runs an education company that teaches other small business owners how to get the legal and tax stuff in order to ultimately unf*ck your business framework! He’s a pro at sorting out all the accounting and tax mess we make in our businesses, all those things that are totally befuddling to most of us!
You’ll be happy to hear that he dishes out a lot of great strategy regarding lawyer-y things, and towards the end of our talk, he also gives away an awesome resource. If you need to do some damage control or brush up on your know-how around the sticky issues like choosing the right entity, paying quarterly taxes and avoiding Frankenstein contracts, be sure to tune in!
What the Unf*ck Your Biz Framework is All About
Braden developed this framework after realizing that most of his clients only came to him after being in business for a number of years, and because a lot of people find accounting and tax boring, they often don’t pay enough attention to it. Braden and his company help those businesses to sort through the mess and start on a clean slate. The plan consists of three phases: First is rebuild, which involves demolishing what you’ve built and reforming your business. After that, systems and automations will be created and implemented and lastly, they will help you to execute any recurring compliance tasks. Many people avoid the problem and expect it not to cause any real problems, but the problems eventually accumulate into this huge beast, which is then even more difficult to deal with.
Don’t Mix Your Personal and Business Accounts!
The first big problem is when people co-mingle their personal and business money – a big no-no! What Braden likes to do is to explain to people what the legal requirements are and then to continue advising on what good practices involve. Once you have an LLC or another formal legal entity where you are required to file documents, you need a separate bank account. In order to maintain the protection that your LLC provides you need to keep yourself apart from your business. If you are a sole proprietor, on the other hand, you don’t technically need a separate account, but it’s going to make your bookkeeping much easier. And what about keeping receipts? It’s probably a good idea to keep them because if you were to be audited, you have some form of proof, particularly in the areas prone to be abused, for example, keep your meal and restaurant receipts, and write a brief description of the meeting at the back of the receipt for future reference.
All About Business Entities and Forming the Right One
A business entity describes whether you are a sole proprietor, a general partnership or an LLC. The most important thing to know is that LLCs do not affect your taxes at all, so if you form an LLC, your income tax return is going to look exactly the same, apart perhaps from an annual fee or franchise tax. The purpose of the LLC is to provide you with liability protection to shield your personal assets if you are ever sued. When it comes to an S-Corp, you have to make a certain amount of money, say over $100,000 to justify this entity. Once you form an S-Corp, you become both an employee of your own company and the sole shareholder. But when you go this route, you put yourself on a limited salary and can pay yourself distributions quarterly if you make a profit over and above that. Those distributions are not subject to self-employment tax, just income tax, and those savings add up really fast! You have to pay yourself a reasonable salary, however, which you will then be taxed on. And figuring out what “reasonable” means all depends on your geographic location and industry standards. What happens if someone accidentally selects S-Corp, can you change it back? Thankfully, you can only be an S-Corp upon application, so you must either select an LLC or C-Corp initially before you can get to the S-Corp. When you make $100,000 or more, you can form a C-Corp and then apply for the S-Corp treatment. We strongly advise you to hire people to help you make these decisions! Best to start off with an LLC and seek advice once you start making bigger profits.
Avoiding Frankenstein Contracts
Another common blunder is using ineffective contracts. This often happens when a number of contracts are combined, and pieces of different ones are put together – the Frankenstein contract. When you do that, you often have paragraphs with contradictory language in them, and if those contracts are brought to court, they may be discarded on this basis. While hiring a lawyer is advisable, there are also great template resources, also on Braden’s website over here https://www.bradendrake.com/cstore. If you do need to make small tweaks such as change a number, that’s fine, but should you want to add to the contract, it’s best to do a consultation with a lawyer. Also, be careful of provisions that are not applicable in your jurisdiction – you can’t include clauses in the contract that are against the regulations of your state. A partnership is one of the few situations for which you want to get a lawyer because it can be quite complex.
Other Nitty Gritty Mistakes People Make
The issue of quarterly tax is super important. Once you start making a profit, pay your quarterly tax because it’s going to make your life a lot easier and, also, you might end up having to pay penalties for failing to do so. Come tax season and you get that bill after not paying quarterly taxes, girlfriend, it’s a shock to the system! The good news, of course, is that if you are paying the government money, that’s because you’re making it. The bigger the bill, the more successful your business. This perspective makes paying it a lot easier. It is advisable to calculate the tax you owe based on your gross revenue and the tax bracket you fall into. If you are required to pay 22%, for example, it’s a good idea to save 22% of each dollar you earn in a savings account to pay your quarterly taxes. There are great apps that can help you with this.
What the Unf*ck Your Biz Framework is All About. [0:04:10.1]
Don’t Mix Your Personal and Business Accounts! [0:06:35.1]
All About Business Entities and Forming the Right One. [0:12:15.1]
Avoiding Frankenstein Contracts. [0:22:47.1]
Other Nitty Gritty Mistakes People Make. [0:30:33.1]
Download Braden’s free guide.
Get contracts and insurance.
Choose an LLC.
Pay your taxes.
Use trademarks if applicable.
Use common sense!