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Welcome back to a special episode of the Corporate Escapee podcast. I'm your host, Brett Traynor.
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Today, we're doing something a little bit different as I'm exploring, uh, different content ideas, uh, to share on this podcast.
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And what you're gonna hear today is a mini workshop that I hosted within the, the Escapee Collective, and I had Diane Kennedy, who's a CPA, and come in and talk about, you know, how do you think about structuring your, your solo business, right?
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Is it just an LLC? Do you need an LLC? When do you... When should you think about an S corp? And really a lot of different ideas around taxes, tax savings, and how to structure.
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So she really did a nice job of breaking it down. Again, I am not a CPA or an attorney, so this was helpful, and I've been doing this for a while. So highly encourage you to listen. It'll give you some insights.
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We had questions from our live audience, which is Collective members, which are probably there as well. So anyway, I hope you enjoy.
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Drop me a note if you like this type of content, and I could start to share more of our workshops and, and training sessions that we have that you may find beneficial. Anyway, enough from me.
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Let's get on with the podcast. [upbeat music] We've got an audience. It is being recorded. If somebody isn't out there or wasn't able to, we'll make sure that the full recording is available to the community.
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Diane, welcome to the, the Collective. I know you're relatively new with, with working with Lettuce. It... I thought, man, this is a great time of the year to have you come in.
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Um, we got taxes, we got business structures.
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And the way I usually like to do these workshops is I'm gonna turn the floor over to you, and if you can just, you know, we got kind of outlined three or four things that you, you wanted to, to touch on.
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Let's walk through this. I may interrupt you on occasion just to ask some clarifying questions if we have to, but then we'll have some Q&A at the end. But, you know, really, the floor is yours.
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Educate us, tell us where we're wasting our money, how we should be thinking about these things in a, in a better way. And I know Lisa's out there.
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At the end, we've got some offers for some folks, too, that, uh, that stick with us till the end. So anyway, with that less than eloquent introduction, [laughs] Diane, welcome and- Thank you... the floor is yours. Okay.
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Well, I'm Diane Kennedy. I'm a CPA, and, um, it's kind of interesting because I know we talk about corporate escapees, and we talk about the importance of being a solopreneur and some of the advantages.
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And I kind of got... I, I am also a solopreneur, but I got here in an unusual way. I started off with a big bricks and mortar CPA firm that was my own.
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I founded it, and it was back in the day when everybody went to the office and worked from an office and as a CPA firm. And what I found was I was working really, really hard.
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It, it was time, and I didn't make as much money as I thought I should, and I spent more time managing people than I really did helping clients. So for me, that was a big issue.
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I ended up selling that practice and then growing it a different way, and this time I came back as a solopreneur. It's now been... I have to think for a second. It's been 18 years that I've been a solopreneur now.
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I do have other people I work with, but they're always on contract basis. They come in with special projects. And I work with just clients that I really like working with, and I've also built a business along with it.
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That's one of the things I wanted to touch on today is being a solopreneur doesn't mean that you're just necessarily working for a paycheck, only it's just that you're doing it for somebody else and you're not getting a W-2.
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It can mean you can actually build a business. And so wanted, I wanted to kind of go through all of those. Lisa had given me a heads up. Lisa's from Lettuce, and I, I think your audience knows her.
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And she said, "I bet you anything Brett's gonna ask the question, should people be an LLC or an S corporation?" And so let me just start there. And the answer is, that's the second question you need to ask.
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Oh, interesting. Okay. The first one is, when you're a corporate escapee, when you're leaving, are you going to build a business or are you replacing a paycheck?
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And neither one is right or wrong, it's just that's going to steer the rest of the conversation. And then let's answer that question, should you be an LLC or an S corporation? Well, an LLC is a state legal form.
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You might form a New York LLC if you live there, or a California LLC or Texas LLC. Those are state forms. But there's actually no such thing as an LLC tax return. It's a chameleon.
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It can elect to be a C corp, an S corp, or not make any election at all, and the IRS chooses for you. So it, that doesn't really have anything to do with taxes. An S corporation is an election that you make.
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So if somebody asks me, "Should I be an LLC or an S corporation? I'm a solopreneur. Which is best?" The answer is both. [laughs] You form an LLC, and then you elect to be taxed as an S corporation.
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In almost all cases, that's going to be the best answer. Um, the LLC is gonna give you special asset protection, and it gives you flexibility so that you can elect that S corp treatment. Interesting.
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The bottom line, though, is that I think it's important to set that up because that's the basics of what you need to do to get going with your business.
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And then take a look at that question, do I want to build a business or am I replacing a paycheck?
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If you're a freelancer, which is what I call somebody who's basically looking for paying the bills, and, you know, maybe they're taking that money and then they're investing it for their future in retirement funds or stock funds or maybe buying real estate.
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They're doing something else with it. But they're not really building a business that someday sustains them beyond them working. And like I said, either way works.
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If you want to have a business, though, right from the start, my recommendation is, is that you look at the different ways you can make money. And earned income is absolutely the first one we all think about.
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That's where you get paid for the work you're doing. And it also is if you don't show up, if you don't do the work, you don't get paid.Then look at the other, I call them buckets of income you can make.
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One is leveraged income, and leveraged could be where you do something like I do a Wednesday class that I teach, and I get...
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I do it once, I'm just there on Wednesdays, and yet I get paid by many people for being on that Wednesday class. So that's leveraging my time.
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I get paid more than if I sat and did a tax return, because I'm leveraging out the information. By the way, I also record that and package it and put it in things that I can later sell.
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So I'm always looking for, how can I leverage?
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So leveraged income, think about what it is you're doing, and as-- if you're, especially if you're just getting started, what is it that you have that is unique that you are providing for your customers or your clients?
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How can you package something that l- allows you to leverage your time? It could also be something as simple as having other people do some of the work for you. Think about it, you go in to see your doctor.
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Your doctor's not the one who takes your co-pay and who weighs and measures you and takes your blood pressure and does all that. There's other people that do those things.
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So that when the l- doctor sees you, they're focused just on why you happen to be there, and that's leveraging the doctor's time. So whatever your business is as a solopreneur, leverage that time as well.
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Unless you really wanna be a bookkeeper, find somebody else to help you with your bookkeeping. [chuckles] Unless you really wanna prepare tax returns, find somebody else to help you with your tax returns.
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And that's one of the reasons that I'm working with Lettuce, is because they create-- they have a very good turnkey program for doing those things so people can focus on what they do best.
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That's starting to leverage your time. And then finally, I mean, the holy grail of business is passive, where you do something once and then it provides income for years.
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And that could be with IP, it could be with SaaS, you know, software as a solution. It could be with books or home study courses that you've done. Look for those kinds of things.
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Once you put that question in your head, you'll start finding those solutions. The reason I stress that, because it's, you know, why isn't she talking about taxes?
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It's because each of those kinds of income have their own tax benefits.
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So depending on how you wanna set your business up, if it's all gonna be earned income, great, then we're gonna be looking for tax-free employee benefits.
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We're gonna be looking for timing on when you pay yourself and how much you pay yourself. And we're gonna be looking for ways of sheltering that income as much as you can, maybe with retirement accounts.
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But if we're looking at other forms of income, there's quite likely we're gonna be able to change the characterization of income, so it all doesn't have to be earned income, which is the highest tax rate there is.
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So you can actually lower your tax rate if you become a business. And that's where you always hear these stories that the tax bills come out and say, "Oh, they're just gonna help big business."
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And the fact is, it's not just for big business, it's for anybody who acts like a business. That's why we have those kinds of tax breaks. So I covered about four or five things [chuckles] there really quickly.
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Um, it-it, do-- should we go over any of that, or got follow up? Yeah, we, we did have a couple questions come up, but before we get there- Okay...
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because one of the things that's been interesting kind of evolving over the last 12 months with, with this group is it's kind of segmenting a little bit where some of the folks are, you know, I'll call them the 3K a, a month, right?
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Just I don't need to replace my corporate income. Just, you know, I, I think if it's, uh, you know, a new mom, right, that they need some income but doesn't need to go back to the office, so they're looking at 3K.
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Then the next kind of segment is the 10K. I wanna replace my corporate income. And then the 25K, I really wanna build something.
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And I think you kind of answered that with the different tax, depending on what, where the revenue's coming from, it, it's gonna make a difference.
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But is there a s- starting before, do you need an LLC, you know, with your first dollar? Or does it make sense once you decide that you're gonna do this ongoing? So...
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And I've heard different theories, and I always tell people, "I am not an accountant or a lawyer," so I figured let's put you on the spot with, you know, does-- when do you need the LLC? Maybe I can share a story.
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Um- Okay... a friend of mine who's an attorney was speaking in San Francisco. He, you know, being an attorney, was really stressing, "Don't start anything until you have asset protection." And a lady came up to him.
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She'd just started a retail store in San Francisco. She said she put every dime she had into that store, and she realized now she should probably have an LLC, but she didn't have the money to do it. Everything was there.
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A month later, she called him at his office, and he was happy. It's like, "Oh, good, she's ready to move forward." And she said, "I'm being sued. What can I do now?" And you know what the answer was? Nothing.
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So, I mean, in today's world, I think you need an LLC right from the get-go. Now, do you need to elect S corp treatment right away? Maybe not.
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But this is the, the beauty of an LLC, is once it's in place, you know, typically you have 75 days is what the code tells us that we need to elect the tax treatment.
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But really, there's this really easy way to elect later. In fact, the IRS even has a check the box on the form that you've got up to two and a half years later that you can elect S corp treatment.
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So we could be here December 2025 and thinking, "Boy, I should have been an S corp all this year because I made more money than I thought I was going to."
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And if you'd started an LLC back when you began, fine, we're just gonna make it a retroactive election. But if you ha- don't have that LLC yet, you're out of luck. You just need to start it now and get going.
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But I think if... forget the taxes. The asset protection alone in today's world I think is really important. The LLC is... I mean, you still need to run it like an LLC, and I do see this mistake.
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People will buy it and then think, "Okay, now I'm safe. I can do whatever I want." But you have to follow certain what we call corporate formalities.
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You keep your money separate, your personal and your business are separate.
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You need to disclose that whenever you sign any legal documents, that you're signing as a manager of the LLC or a member of the LLC, not in your personal name, because then it looks like you're personally guaranteeing it.
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You need to make that public disclosure. You need to keep your books separate. You need to have a separate credit card.Even to the point of, like I tell people, "Well, it's a new business, I can't get a c-card yet."
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Great. Make your Visa your personal and your Mastercards for the business. Just keep them separate so we're not, the term is co-mingling our money. That can really sink people when they don't have those kinds of things.
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Additionally, almost every state requires an annual meeting for S corporations. Not every state requires it for LLCs, but we recommend for our clients everybody has an annual meeting. It's an easy thing to do.
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And when you have that meeting, you prove that you're acting like a business.
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And included in that are things like we opened a bank account here, we got a loan here, we decided we were gonna buy a vehicle for there, we got a new cellphone plan.
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It's just major decisions, and you just list those in your minutes. Now, here's the beauty of that annual meeting, is it's a write-off. So you could have that annual meeting, even as a solopreneur.
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And people say, "How can I have a meeting with myself?" Well, just do it. [laughs] You're gonna need to do this. So you go to Hawaii, and you have your annual meeting.
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The day you spend on your annual meeting, that part of the trip is deductible. Okay. So you're picking up a deduction. Um, y- there, there's...
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It's gonna save you with asset protection, and it also, if the IRS audits you, one of the first things they're gonna ask for is the minutes for your meeting if you have a business. They're gonna ask for the minutes.
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'Cause they want to see that you have acted in a business-like manner, that if there's expenses, that the business has taken them on. You haven't just later on said, "Oh, we'll just throw these things on the tax return."
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They wanna see documentation and proof that you're moving forward properly. So it saves you, and you get a tax write-off. That's the best of all worlds. That's good.
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That's a great answer too, and probably the most complete answer that we've had or I've gotten from anybody on, on that process, which is, which is awesome.
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If you have a partner, if you're not a solopreneur, if there's two of you, you can still have an LLC, and you can still have an S corporation. There's a couple of things to think about when you have a partner.
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One is that any benefits that you're going to provide need to be for all employees equally.
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So if you're an S corporation, you have a partner, you're both employees of that, then it can't be, well, I need a really good medical insurance plan for whatever reason.
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Your partner has to have the same one, or it's not gonna be a deduction. Maybe your partner's older, and they're really concerned about a retirement plan. They wanna really fund it hard.
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Well, you're gonna have to get the same plan even if you don't really care. So it just needs to be equal in what you're doing for what we call in the code non-discriminatory benefits.
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So that's retirement plan, that's education assistance, that is the new, you might have heard of the Trump accounts, where a business can fund a child's account. And if the business does it, this is...
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We haven't got the rules yet on it, you know. We're supposed to get those July 2026. But it looks like, uh, you can fund it for 5,000, and 2,500 can come from the business.
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It's a deduction for the business, tax-free to you and the child. So it's a great little benefit, but it has to be done non-discriminatory. Right.
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So anybody who's got a child gets that same thing who works for the company. Those are just some general ideas of things you need to be aware of with a partner when you've got benefits you're talking about.
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Yeah, and, and, and maybe along those lines, I think we're gonna see more and more of this, where a lot of us are individual LLCs but come together, not a, maybe not a formal joint venture, but we work together under an umbrella, even if it's not legal.
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Uh-huh. Do we need to set up a separate structure for that, or can we continue to operate as two individual business just partnered together on certain opportunity? Yeah. Does that make sense? Yeah.
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Okay, under the code, we call that a joint venture. Yeah. And so you don't have to have a formal partnership between two LLCs. It can just be a document.
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But you need to act like it's a partnership, so anything that comes in, you're splitting according to whatever the joint venture is, 50/50 or whatever it is.
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And so you do need coordination when you're filing your tax return, obviously, in how you're splitting that up. But that's not uncommon to see joint ventures. Okay.
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And I think we're gonna see more and more of that, just, it just makes sense where we partner in and out with, with different people. All right. So Christine asked, "I had an S corp for a couple of decades but no LLC.
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Would you see it necessary for legal protection personally?" And I think you answered that, but maybe I'll let you answer it again.
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And so sh- is she thinking that continue or, or elect S corp treatment or continue the LLC? Not sure. Christine, if you're out there, maybe you can clarify for us. Okay. I don't... She says, "I don't have an LLC." Okay.
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Um, y- you know, I don't know what kind of business you have, and there's some that are just really bulletproof. You don't have to worry about being sued so much because it's always anonymous.
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But I've gotta tell you, if you're working with clients in any form, I personally think you need an LLC, just because you never know if something's gonna go wrong.
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And additionally, it could be something as simple as you're running an errand for the business, and you, you have a fender bender, and then all of a sudden somebody says, "Oh, they've got a business.
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Now I can sue them, and I can get their business and personal." So it's just, in today's world, I like the LLC. Okay. Makes sense. I think you've answered Jim's question. He said, "What happens if things change mid-year?
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Say I start with income but more to other earning types." So you said you can go back and change that based on that. Okay. Yeah.
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Uh, the, just in case anybody wants to know, the form is 2553, and you'll notice there is a box. I mean, get an expert to help you with this. Yeah. But it's not a difficult process anymore.
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You just need to make sure you're checking the right box. And they do ask you for w- a, a reason why are you late making this recommendation, and the one I always say is, "Well, there was a miscommunication.
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We didn't quite understand how much income was gonna be." You just kind of make it like the communication was garbled, and I've never had one denied- Okay. That's good... in a lot of years.
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Nate said, "I did a retroactive S corp election 2024. It was easy and saved me a ton of money." So that wasn't a question, but most- Good job... smart. Nate- Awesome. Thank you... always on top of things. Um,
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Al, "Can you create the LLC in any state, or does it have to be in your home state? And what if you have a pattern, a partner in a different state?"Okay. A couple of really good questions.
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The first thing I would ask is either, are either of you in California? Because California has their own rules for this type of thing. Yeah. And I'm gonna assume that neither of you are in California. No.
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So- They are actually, uh- Good. All right. [laughs] They, she said yeah, so- All right. So,
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uh, y- what you're gonna have to do is look at where the income's being earned, and it does, especially if you're online, it gets a little confusing because, you know, maybe you're in Arizona and your partner is in Colorado.
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And so, well, do we set up an Arizona LLC or a Colorado LLC? Personally, I'd go with what, whichever state is cheapest [laughs] to set it up and to run it.
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But then your partner is going to have to take whatever, let's say you live in Arizona and they live in Colorado.
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They're going to have to take that K-1, that's where it splits off and shows what the income or expenses are from the partnership.
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They're gonna have to show that on their return, and it will end up being Colorado income or loss as a result of that. It's actually fairly simple.
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I would just make sure that your LLC is being set up with somebody who's actually working in the business. You know, if you're in Arizona and Colorado, don't go set up one in Michigan.
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I mean, it's, it's like it's just kind of random. It doesn't... Y- if you don't have any tie there, why would you do that? Makes sense. Okay. And if anybody's listening from California, disregard all that.
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It's all different in California. [laughs] California wants a piece no matter what. If one of you's in California, it better be California LLC and everybody has to report in California.
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Yeah, that's what I'll just said, "I have done K-1 for another one in state many times in CA, so I get that." Oh, and it's expensive. Yeah, yeah. [laughs] Yep. Yep. Awesome. All right.
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So now we're caught up on questions. Where else were we gonna, where else did you wanna take us? What else do we need to know? Well, you know, I, I think the other question that I get a lot is what's deductible?
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And the answer, the accountant's answer is always, "It depends." So [laughs] that's, that's what it is.
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I mean, as a CPA, I'm gonna deduct different things than you are, Brett, because, you know, you're a podcaster, you're an educator. You've got different expenses than I'm gonna have.
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So it depends on what your business is, and an expense is deductible if it's something that's ordinary and necessary to the reduction of income. That's straight out of the code.
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And so it, it's something that is gonna vary.
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I like to look at where are my clients currently spending money, because rather than going out and spending something, I bet you anything a lot of that stuff you already have.
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I mean, you already have a cell phone, you have a ISP, you have a computer, you probably have a desk and a chair.
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I mean, all of those things become deductible, and that's the best of all worlds, when you find those expenses that you already have and you turn them into deductions.
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So look at everywhere you spend money right now, or have in the last three months, and ask yourself, "How could this be a business deduction?" And maybe it isn't.
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Maybe not everything can be a deduction, but challenge yourself a little bit and think about that. Maybe there's a way that this does actually help your business and what you're doing. Yeah.
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And again, like I said, I'm, I tend to just- Another story. Another story if you got time for it. The client who did a lot of...
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What he did is public speaking, motivational speaking, and he traveled a lot, and his wife was with him, and she had kind of a shoe fetish. I mean, seriously, she took a suitcase just for her shoes.
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And he asked me the question, "How can we write off her shoes?" And it's like, well, we've gotta find a way that her shoes are part of her business. And she loved shoes. She loved talking about shoes.
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She loved showing pictures of her shoes. She put up a blog, and she talked about the shoes.
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She talked about where she bought them, how you would accessorize with those kind of shoes, when you would wear them, the pros and cons. I don't know. I don't have that many pairs of shoes, so I don't understand at all.
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But when it was done, and then she put links in her blog, it became a deduction. Right. Because she monetized it, and then she needed to buy those shoes in order to take the picture and to be able to talk about those.
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I'm not ever gonna be able to write off my shoes as a CPA, but if you've got something that you are really passionate about and you're spending a lot of money on, maybe you need to think about a little offshut, a, a little offshoot side business that's gonna allow you to get those write-offs.
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Yeah. Like I said, I look at where's the money going anyway, because often that's where the passion is. And so how do we bring that into the business? Yeah. And again, I think this is so timely.
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We may have to bring you back on a, just a quarterly basis to hit [laughs] with both. Yeah. [laughs] Because again, you're spending decades in corporate, right? You do your traditional.
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You have, you got an accountant, they file the tax for of all this.
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Man, when you start getting multiple revenue streams, you've got expenses that I didn't, you know, you made me think of a couple things that I know that I haven't been in- included in the past.
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And it get, it can get super complicated, super quick, and one of the things we want is to keep it, keep it simple, right? [laughs] That's what I know Letters- Yeah. You know-... General does is help to keep it simple.
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Um, yeah, there's, there's probably a lot more opportunity than we're, we're giving this credit for on the savings, on the tax saving side. It's a mindset difference as much as anything, because you're absolutely right.
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As a W2 employee, there's not a lot you can write off. You're used to just, okay, here's my mortgage interest or my property tax maybe, or I'm just, uh, taking a standard deduction.
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Maybe I've got some interest in dividends, and that's it, a W2 and we're done. But now all of a sudden we're looking at every part of your life and how can you turn those into deductions.
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I mean, even to the point of maybe you're helping support an elderly relative.
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Is there a way they can do something for your business legitimately, and you now either put them on the payroll or you're paying them as an independent contractor, and it becomes a deduction for you, most likely very little tax, if any, for them.
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Um, there, there's a whole lot of changes that can happen when you change how you look at things. Yeah. That's such good advice.
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Lisa had mentioned, "Love that you were saying at the beginning about thinking business of one is building a business. Can you talk more about why that makes an S corp a good idea?
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Functionally, maybe how it works to help you keep more of what you earn." What is that? The S corp, yeah, the S corp got a couple of things going for it.
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Um, one is, is that-You will take some in salary and some in distribution. And just round number, usually it's about, uh, what the IRS tells us to do, it has to be a reasonable salary.
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However, they do give you some leeway in the beginning because usually your profit isn't up that much, and they realize you're building a business.
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We've got great case law on that, that you probably don't even need to take a sa- a salary right at the beginning. But let's say one-third salary, two-thirds then just stays as profit in the company.
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Now, the salary is gonna have payroll tax, but that two-thirds that you're getting doesn't have that, and you're used to being paid where everything has payroll tax. So now you have two-thirds that doesn't.
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That's a savings. Plus, we have this thing called the... Now, I'm gonna get a little techy here for a second. 20% QBI, qualified business income, or you might have heard it called a 10 nine- uh, 199A.
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What that is is whatever that business flow through income is, you get to take a deduction for 20%.
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So let's say that that flow through amount is, let's say you make 100,000 net and you take out 30,000 as salary, you've got 70,000 flow through. 20%, you got a $14,000 deduction that you don't have to do anything for.
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There's nothing like that if you're a W2 employee or if you're an LLC that's just being taxed as a sole proprietor. Now, in the beginning, like I said, maybe that's the best bet, but once you hit the...
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I mean, once you hit about 50,000, you really do need to be an S corp because you can start making that division between salary and the distributions that aren't gonna be taxable, I mean, uh, don't have the payroll tax on it, and you get that QBI deduction as well.
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The other thing you can-- There's a couple other tricks you can do with S corps that you can't with others. For example, you can c- you can change your salary.
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If you've got a year where you really wanna hit the retirement account hard, you raise your salary. You can't do those kinds of things if you're just a regular straight LLC sole proprietorship.
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So the S corporation gives you flexibility that you don't normally have.
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In fact, with my clients, I always, always, always start them off with LLC S, and then as they grow, and I mean, I have clients who are making seven figures net, and they still have an LLC S.
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But then what we do is we add another structure on the back end of it or something else that allows them to pay less tax.
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But always lead with that S corp because it's got great flexibility, and there's no other structure like it. Nothing else gives you that flexibility. Interesting. No, that's good.
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And then Christine's got a question here that I think part of us, I think is, again, we monetize different streams, and it may be a completely different business.
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She said, "I've monetized a hobby that I was hiding in when I was uncertain about my core biz. I've been selling my peanut brittle in Illinois.
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Instead of an LLC, I was directed by the state to license a name, kind of like a DBA under my S corp." Yeah, the DBA, absolutely. I personally have some too. I understand exactly how that works.
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Sometimes it's easier to run things with a DBA rather than going and setting up a whole new entity.
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And when you do that, well, let's say you're starting off some side venture that maybe has a loss in the beginning, you can use that loss to offset other income.
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It, it, it can be a really brilliant strategy, so yeah, I understand. And I love peanut brittle. [laughs] Exact- But again, I think that's, again, consult with your professional if you wanna go through these process.
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But I mean, you know, part of my transition into with The Corporate Escapee now is it's gonna have multiple revenue streams that are very different than what it was when I was doing the f- solo consulting or the, the fractional leadership, and, uh, it gets confusing [chuckles] right on, on where it's still all coming from the same, but again, f- bit better accounting.
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So like I said, I know this is the year, and I've talked to Lisa about this, me, 2026 is the year I get my act together with finally taking advantages of all this, the tax saving that's, that's out there.
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Um, all right, so let's see. We've got more questions. Nate, "I set up f- a solo 401[k] this year," another cool thing you can do with the S corp. Then Christine said, "I only need one set of biz taxes."
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So maybe some other things coming off the S corp that are tools or, uh, advantages that you may not have just as a traditional LLC. I'm guessing the 401[k] is, is one of those.
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Yeah, the solo 401[k], there is a big difference between a solo 401[k] and a regular 401[k]. With the solo, you're able to invest in a l- other things. I mean, you can invest in real estate.
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There's a number of things you can do. And with a 401[k], you are restricted in what you can do, more or less.
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For the, the person who just said they had a solo 401[k], probably outside the scope of what we're talking about today, but just, you might wanna ask if you could add a clause in there to allow you to have a Roth solo 401[k] for part of that.
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A Roth solo 401[k] has different attributes than a Roth IRA, and down the line, it might be something that is really useful for investing.
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So it has to do with, you have to have the regular solo first, but then sometimes they'll let you carve out a discretionary amount that you wanna put into a solo Roth as well. That's just a question to ask.
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You don't get a deduction for it right away, but it does grow tax-free.
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Yeah, and that makes sense too, 'cause one of the things we're thinking about, um, along those lines, and I don't know if the S corp has the, the 529 plan, right, is we're starting to have grandkids- Yeah...
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we want to set aside. So I haven't looked into is there a path through the business to do that versus independently. Yeah, the 529 is most likely gonna be individual. Okay.
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Just to comment on that, make sure you check whatever state you're putting that in, like your grandkids are in a different state. And often, states have got really nice tax deductions you can take at the state level.
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But check on that as well. People forget about that one. Yeah, a number of states have got great deductions if you do a 529. Keep all your options.
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Just when you go solo, you didn't think that the tax would be one of the bigger opportunities for you, but it is.
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And like I said, I need to get more, um, again, having conversations with you, Lisa, helps me better articulate the t- the true value, right?
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'Cause I see the freedom in you, one of the OGs of going solopreneur 18 years ago, right? I think you may have set the record- Yeah... for going solo.
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Um-But there's just so many other advantages to it that, again, I, I keep getting folks fixated on, "Well, I've gotta make the money," right? Gotta make the money, but then they'll figure out everything after the fact.
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But I think it, it just makes sense to set this up, and then it can grow with you. Keep it small. Yeah. Keep it small and keep it all. That's the s- that's the solopreneur thing.
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You will work less hard, you will make more money, you will pay less taxes, and you will have more free time. Keep it small and keep it all. Yeah. I just noted that.
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That's gonna be probably the, the podcast episode we'll lead with the title. Um, I, I think we had a couple more questions come in. Oh, Nate said yep, he did have a Roth with that 401[k]. Good. Um- Good, good...
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Christine, my best years, my S corp has offset any W-2 income earned. Yeah, again, thank you folks for chiming in for actual use cases of folks that are using it. Um, L did have a follow-up.
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Is using the Schedule C the wrong way for early? Uh, you book your income and you take your expense. Is that good if you're not making much? So the so- the Schedule C of sole proprietorship.
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Again, my two cents, just because I, I've been in the business long enough that I've seen what can go wrong, and I really do recommend people get an LLC right a- right away.
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And so if you have an LLC that hasn't elected how it's gonna be taxed, it's going to be on the sole proprietorship. The same form, it's just that you have some state asset protection that goes along with that.
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So yeah, y- you can do that, especially in the beginning. You are limited in your options with a sole proprietorship.
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Probably you won't be able to get a retirement account, for example, because it has to do with the taxable income and the sole proprietorship and the way it's calculated. But you still are...
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It's a place for you to record your income and your expenses. Okay, hopefully that made sense and made sense and that you're- Yeah. Let's see. Al did have one follow-up.
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Even in zero income years, filing my, for my S corp has had significant tax benefits, so. Yeah. Yeah, so interesting. Yeah.
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Yeah, because I think that, that they have a W-2 job as well, and so they're getting offset with that. Let me just throw this out. Yeah.
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As an S corp, statistically, you have a one-third chance of being audited that a sole proprietorship does. So- Okay. Yeah. Yeah.
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Uh, so it's three times as more likely to be audited if you have a sole prop versus, a sole proprietorship or Schedule C, versus an S corporation. The reason is really simple.
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It's because in order to audit an S corporation, you need to have somebody who's a trained accountant, because they have a balance sheet or y- you know, accounting things in there, whereas a sole proprietorship is just income minus expenses, and so they don't have to have trained accountants doing the audit.
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And right now, there's a huge shortage of accountants working at the IRS. Right. So they don't have the people to do it.
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If, when you first said that, I'm glad you provided the context and like, 'cause wow, well, one-third of all S corps get audited? That doesn't sound [chuckles]- No, no, no. Okay, yeah- No, I-...
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I said that kind of weird. I got it. Yeah. Absolutely. I was a little slow on- Yeah, yeah... today, but, um- I said it weird... makes sense. No, again, I'll- You know, let me throw another idea out here too- Yeah...
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as well, and is that when is it time to be an S corp?
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You know, as soon as you're an S corporation, businesses and especially banks take you more seriously, and it's much easier to start building your business credit and then apply for loans down the road.
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It used to be you couldn't even, uh, build business credit with a sole proprietorship, but you can now. But it still is a rocky road. I personally think it's better to start off with that.
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Maybe it's feels like that's a lot of structure right at the beginning, but the benefits there, you know, less chance of audit, you're set up for success as you move forward, and banks are gonna take you more seriously.
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Yeah. Again, might as well have the flexibility of the future. You never know where- Yep... right? Said some people- Exactly... wanna replace a few dollars, but yeah, I, I think it, it just makes way too much sense.
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So, all right. Time's flying by, and was there any other big topics, Diane, we didn't, um- You know, I, I had some notes, and I think we covered everything that I wanted to talk about. Thank you.
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And I, I kinda took us down a meandering path, but I think, again, super insights. That's, that's how tax is, so. Exactly.
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And we can't talk for more than an hour 'cause then my head hurts after doing it, but, uh- [laughs] But again, hopefully for the folks out there, and again, even if you're not on the live, to, um,
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think through this, right? I mean, 'cause there are some real advantages to do this. And, you know, Lettuce wouldn't have started a company if there wasn't value [chuckles] to doing what they do as well.
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Lisa, if you're still out there, I know you, um, had some year-end stuff, uh, offers. I'm gonna bring you in, um, or if you can pop back on. Hey, there she is. Am I off mute? Nope, you're good. You're good. Okay.
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Yeah, I just wanted to say, well, first of all, thank both of you. This is a really interesting conversation. Some really good tips.
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As I said to Diane, even for my own business, every time I talk to her, I walk away with a new tip.
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But I think what we didn't cover today is sometimes running an S corp can be a lot of work for a business of one, and I know most of us didn't take the step out into being on our own to be accountants.
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Unlike Diane, [chuckles] most of us did not follow that path.
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So Lettuce, as you said, Brett, we built a company specifically for solopreneurs and to help automate and make an efficient option for solos to take advantage of the S corp opportunity.
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I see Christine's note here that to hire and pay for professional accounting, but my personal story is I asked three accountants if I should become an S corp, and they all told me no for many different reasons.
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For things like it didn't fit their business, or they weren't trained in businesses of one, or they were more conservative than Diane or Lettuce will be on what a reasonable salary is.
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And so Lettuce was a real game changer for my business, and we know it can be for s- other solos as well. So if you're- Before I g- get too far with that, um, and Solo's built on, with solopreneurs, right?
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At least that- That's right... when I had the CEO on, he was, you know, the first 40 or 41 people were all either fractionals or contractors or non-employees.
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I know some people have transitioned to employees at this point. But he's building the business of the future. You guys are building the business of the future. And so that's what I, I liked is yourWhat's that?
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Drink your own wine, eat your own dog food, whatever saying [chuckles] that you wanna use. Is it, you know, you built it for your, your, your team, right? Which, which makes sense. So anyway. I appreciate that, Brett.
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In fact, I was a Lettuce customer and then became a consultant for them, and I'm actually still a consultant. I have other clients.
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But I believe so much in educating people about this opportunity, 'cause I know I was leaving money on the table, that this is such a passion place for me. I love doing this client work so much.
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So to that end, check us out. I put some links in the chat for our tax calculator, for the main page, for a free month.
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Um, and the other one I will leave everybody with is, we know everyone's not an S corp yet, or maybe you weren't ready. Maybe you've just escaped and, but you've been a good sole prop for this year.
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We do also have a tax prep service for sole props that we're gonna offer to your group rep for a discounted rate.
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The off-the-shelf rate'll be seven ninety-five, but we'll add a link where your team or your group can get it at just five hundred dollars. Awesome.
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And that'll be, you know, full tax prep and filing with a call with one of our experts and a business assessment. And, and send me those links. You can send me an email.
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I'll make sure I post it into the, uh, the chats as well, and also put it in the show notes for folks, if you're okay with me broadcasting those. Absolutely. Please do. And along those lines, is it that tax...
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Is that just if you're a sole prop, or do you... You guys aren't getting into the personal taxes yet, right? Or are you? It might be. Okay. [chuckles] Next time you come on, I'll, we'll, we'll ask that question.
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'Cause again, it makes- [laughs]... one-stop shop is- Yeah... is what I'm looking for, so all right. You know, that's funny. We were just talking about it, 'cause I know we did it last year for our S corp customers.
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Okay. Interesting. Yeah, no, like I said, I... Now if we, we got somebody tackling the tax space, now we need somebody to tackle the insurance space.
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So maybe when you guys are done conquering his, we'll get, uh, some folks coming after the insurance.
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Yeah, Brett, I don't know if you saw the news earlier this year that Lettuce actually acquired Be Solo, which was working on that challenge. So stay tuned.
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And no, that wasn't a planted question either because [both laugh] All right. Well, really appreciate the time from, from the both of you, and Diane, this was super informative.
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Um, anybody has any other questions, I'm assuming they can connect with you, uh, or Lettuce, right? I'll put contact information.
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I'll put them in the community, and then I'll also put it in the show notes so that anybody listening can reach out directly. Awesome. All right.
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Any last chan- any last questions from our, our live studio audience, which I've never said in my life before, so that's kinda cool. But- We're happy to be part of the first. Yeah. Love all the questions.
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I mean, it just lets me know where people are thinking and, you know, make sure that we cover all the points. Awesome. Awesome, awesome.
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Well, this was super helpful, and again, we'll make sure you guys aren't strangers, 'cause this is... Every time we get a new wave of folks, it'll just make sense to have, bring in experts to talk about this.
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And Diane, I don't know if you've ever read the book, "Who Not How," but that's exact. If you haven't read it, take a look at it because that's exactly what our model is.
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We wanna be the whos that we like to do, and we'll, you know, we'll figure out the how.
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But for everything that we'd like to, like I said, we probably don't wanna do our own tax returns, 100% right, but there is a who, like you, that loves to do it. [chuckles] Right? So it's all, it's more specialization.
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We get to focus on what we like to do and what we're good at. So awesome. All right. Well, thank you everybody for your time. Thank you for the patience of getting this up and running, and we'll talk to everybody soon.
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Happy holidays, everybody. Cheers. [upbeat music]
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Welcome back to a special episode of the Corporate Escapee podcast. I'm your host, Brett Traynor.
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Today, we're doing something a little bit different as I'm exploring, uh, different content ideas, uh, to share on this podcast.
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And what you're gonna hear today is a mini workshop that I hosted within the, the Escapee Collective, and I had Diane Kennedy, who's a CPA, and come in and talk about, you know, how do you think about structuring your, your solo business, right?
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Is it just an LLC? Do you need an LLC? When do you... When should you think about an S corp? And really a lot of different ideas around taxes, tax savings, and how to structure.
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So she really did a nice job of breaking it down. Again, I am not a CPA or an attorney, so this was helpful, and I've been doing this for a while. So highly encourage you to listen. It'll give you some insights.
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We had questions from our live audience, which is Collective members, which are probably there as well. So anyway, I hope you enjoy.
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Drop me a note if you like this type of content, and I could start to share more of our workshops and, and training sessions that we have that you may find beneficial. Anyway, enough from me.
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Let's get on with the podcast. [upbeat music] We've got an audience. It is being recorded. If somebody isn't out there or wasn't able to, we'll make sure that the full recording is available to the community.
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Diane, welcome to the, the Collective. I know you're relatively new with, with working with Lettuce. It... I thought, man, this is a great time of the year to have you come in.
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Um, we got taxes, we got business structures.
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And the way I usually like to do these workshops is I'm gonna turn the floor over to you, and if you can just, you know, we got kind of outlined three or four things that you, you wanted to, to touch on.
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Let's walk through this. I may interrupt you on occasion just to ask some clarifying questions if we have to, but then we'll have some Q&A at the end. But, you know, really, the floor is yours.
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Educate us, tell us where we're wasting our money, how we should be thinking about these things in a, in a better way. And I know Lisa's out there.
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At the end, we've got some offers for some folks, too, that, uh, that stick with us till the end. So anyway, with that less than eloquent introduction, [laughs] Diane, welcome and- Thank you... the floor is yours. Okay.
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Well, I'm Diane Kennedy. I'm a CPA, and, um, it's kind of interesting because I know we talk about corporate escapees, and we talk about the importance of being a solopreneur and some of the advantages.
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And I kind of got... I, I am also a solopreneur, but I got here in an unusual way. I started off with a big bricks and mortar CPA firm that was my own.
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I founded it, and it was back in the day when everybody went to the office and worked from an office and as a CPA firm. And what I found was I was working really, really hard.
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It, it was time, and I didn't make as much money as I thought I should, and I spent more time managing people than I really did helping clients. So for me, that was a big issue.
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I ended up selling that practice and then growing it a different way, and this time I came back as a solopreneur. It's now been... I have to think for a second. It's been 18 years that I've been a solopreneur now.
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I do have other people I work with, but they're always on contract basis. They come in with special projects. And I work with just clients that I really like working with, and I've also built a business along with it.
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That's one of the things I wanted to touch on today is being a solopreneur doesn't mean that you're just necessarily working for a paycheck, only it's just that you're doing it for somebody else and you're not getting a W-2.
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It can mean you can actually build a business. And so wanted, I wanted to kind of go through all of those. Lisa had given me a heads up. Lisa's from Lettuce, and I, I think your audience knows her.
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And she said, "I bet you anything Brett's gonna ask the question, should people be an LLC or an S corporation?" And so let me just start there. And the answer is, that's the second question you need to ask.
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Oh, interesting. Okay. The first one is, when you're a corporate escapee, when you're leaving, are you going to build a business or are you replacing a paycheck?
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And neither one is right or wrong, it's just that's going to steer the rest of the conversation. And then let's answer that question, should you be an LLC or an S corporation? Well, an LLC is a state legal form.
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You might form a New York LLC if you live there, or a California LLC or Texas LLC. Those are state forms. But there's actually no such thing as an LLC tax return. It's a chameleon.
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It can elect to be a C corp, an S corp, or not make any election at all, and the IRS chooses for you. So it, that doesn't really have anything to do with taxes. An S corporation is an election that you make.
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So if somebody asks me, "Should I be an LLC or an S corporation? I'm a solopreneur. Which is best?" The answer is both. [laughs] You form an LLC, and then you elect to be taxed as an S corporation.
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In almost all cases, that's going to be the best answer. Um, the LLC is gonna give you special asset protection, and it gives you flexibility so that you can elect that S corp treatment. Interesting.
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The bottom line, though, is that I think it's important to set that up because that's the basics of what you need to do to get going with your business.
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And then take a look at that question, do I want to build a business or am I replacing a paycheck?
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If you're a freelancer, which is what I call somebody who's basically looking for paying the bills, and, you know, maybe they're taking that money and then they're investing it for their future in retirement funds or stock funds or maybe buying real estate.
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They're doing something else with it. But they're not really building a business that someday sustains them beyond them working. And like I said, either way works.
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If you want to have a business, though, right from the start, my recommendation is, is that you look at the different ways you can make money. And earned income is absolutely the first one we all think about.
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That's where you get paid for the work you're doing. And it also is if you don't show up, if you don't do the work, you don't get paid.Then look at the other, I call them buckets of income you can make.
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One is leveraged income, and leveraged could be where you do something like I do a Wednesday class that I teach, and I get...
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I do it once, I'm just there on Wednesdays, and yet I get paid by many people for being on that Wednesday class. So that's leveraging my time.
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I get paid more than if I sat and did a tax return, because I'm leveraging out the information. By the way, I also record that and package it and put it in things that I can later sell.
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So I'm always looking for, how can I leverage?
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So leveraged income, think about what it is you're doing, and as-- if you're, especially if you're just getting started, what is it that you have that is unique that you are providing for your customers or your clients?
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How can you package something that l- allows you to leverage your time? It could also be something as simple as having other people do some of the work for you. Think about it, you go in to see your doctor.
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Your doctor's not the one who takes your co-pay and who weighs and measures you and takes your blood pressure and does all that. There's other people that do those things.
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So that when the l- doctor sees you, they're focused just on why you happen to be there, and that's leveraging the doctor's time. So whatever your business is as a solopreneur, leverage that time as well.
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Unless you really wanna be a bookkeeper, find somebody else to help you with your bookkeeping. [chuckles] Unless you really wanna prepare tax returns, find somebody else to help you with your tax returns.
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And that's one of the reasons that I'm working with Lettuce, is because they create-- they have a very good turnkey program for doing those things so people can focus on what they do best.
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That's starting to leverage your time. And then finally, I mean, the holy grail of business is passive, where you do something once and then it provides income for years.
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And that could be with IP, it could be with SaaS, you know, software as a solution. It could be with books or home study courses that you've done. Look for those kinds of things.
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Once you put that question in your head, you'll start finding those solutions. The reason I stress that, because it's, you know, why isn't she talking about taxes?
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It's because each of those kinds of income have their own tax benefits.
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So depending on how you wanna set your business up, if it's all gonna be earned income, great, then we're gonna be looking for tax-free employee benefits.
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We're gonna be looking for timing on when you pay yourself and how much you pay yourself. And we're gonna be looking for ways of sheltering that income as much as you can, maybe with retirement accounts.
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But if we're looking at other forms of income, there's quite likely we're gonna be able to change the characterization of income, so it all doesn't have to be earned income, which is the highest tax rate there is.
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So you can actually lower your tax rate if you become a business. And that's where you always hear these stories that the tax bills come out and say, "Oh, they're just gonna help big business."
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And the fact is, it's not just for big business, it's for anybody who acts like a business. That's why we have those kinds of tax breaks. So I covered about four or five things [chuckles] there really quickly.
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Um, it-it, do-- should we go over any of that, or got follow up? Yeah, we, we did have a couple questions come up, but before we get there- Okay...
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because one of the things that's been interesting kind of evolving over the last 12 months with, with this group is it's kind of segmenting a little bit where some of the folks are, you know, I'll call them the 3K a, a month, right?
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Just I don't need to replace my corporate income. Just, you know, I, I think if it's, uh, you know, a new mom, right, that they need some income but doesn't need to go back to the office, so they're looking at 3K.
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Then the next kind of segment is the 10K. I wanna replace my corporate income. And then the 25K, I really wanna build something.
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And I think you kind of answered that with the different tax, depending on what, where the revenue's coming from, it, it's gonna make a difference.
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But is there a s- starting before, do you need an LLC, you know, with your first dollar? Or does it make sense once you decide that you're gonna do this ongoing? So...
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And I've heard different theories, and I always tell people, "I am not an accountant or a lawyer," so I figured let's put you on the spot with, you know, does-- when do you need the LLC? Maybe I can share a story.
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Um- Okay... a friend of mine who's an attorney was speaking in San Francisco. He, you know, being an attorney, was really stressing, "Don't start anything until you have asset protection." And a lady came up to him.
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She'd just started a retail store in San Francisco. She said she put every dime she had into that store, and she realized now she should probably have an LLC, but she didn't have the money to do it. Everything was there.
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A month later, she called him at his office, and he was happy. It's like, "Oh, good, she's ready to move forward." And she said, "I'm being sued. What can I do now?" And you know what the answer was? Nothing.
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So, I mean, in today's world, I think you need an LLC right from the get-go. Now, do you need to elect S corp treatment right away? Maybe not.
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But this is the, the beauty of an LLC, is once it's in place, you know, typically you have 75 days is what the code tells us that we need to elect the tax treatment.
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But really, there's this really easy way to elect later. In fact, the IRS even has a check the box on the form that you've got up to two and a half years later that you can elect S corp treatment.
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So we could be here December 2025 and thinking, "Boy, I should have been an S corp all this year because I made more money than I thought I was going to."
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And if you'd started an LLC back when you began, fine, we're just gonna make it a retroactive election. But if you ha- don't have that LLC yet, you're out of luck. You just need to start it now and get going.
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But I think if... forget the taxes. The asset protection alone in today's world I think is really important. The LLC is... I mean, you still need to run it like an LLC, and I do see this mistake.
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People will buy it and then think, "Okay, now I'm safe. I can do whatever I want." But you have to follow certain what we call corporate formalities.
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You keep your money separate, your personal and your business are separate.
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You need to disclose that whenever you sign any legal documents, that you're signing as a manager of the LLC or a member of the LLC, not in your personal name, because then it looks like you're personally guaranteeing it.
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You need to make that public disclosure. You need to keep your books separate. You need to have a separate credit card.Even to the point of, like I tell people, "Well, it's a new business, I can't get a c-card yet."
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Great. Make your Visa your personal and your Mastercards for the business. Just keep them separate so we're not, the term is co-mingling our money. That can really sink people when they don't have those kinds of things.
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Additionally, almost every state requires an annual meeting for S corporations. Not every state requires it for LLCs, but we recommend for our clients everybody has an annual meeting. It's an easy thing to do.
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And when you have that meeting, you prove that you're acting like a business.
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And included in that are things like we opened a bank account here, we got a loan here, we decided we were gonna buy a vehicle for there, we got a new cellphone plan.
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It's just major decisions, and you just list those in your minutes. Now, here's the beauty of that annual meeting, is it's a write-off. So you could have that annual meeting, even as a solopreneur.
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And people say, "How can I have a meeting with myself?" Well, just do it. [laughs] You're gonna need to do this. So you go to Hawaii, and you have your annual meeting.
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The day you spend on your annual meeting, that part of the trip is deductible. Okay. So you're picking up a deduction. Um, y- there, there's...
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It's gonna save you with asset protection, and it also, if the IRS audits you, one of the first things they're gonna ask for is the minutes for your meeting if you have a business. They're gonna ask for the minutes.
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'Cause they want to see that you have acted in a business-like manner, that if there's expenses, that the business has taken them on. You haven't just later on said, "Oh, we'll just throw these things on the tax return."
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They wanna see documentation and proof that you're moving forward properly. So it saves you, and you get a tax write-off. That's the best of all worlds. That's good.
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That's a great answer too, and probably the most complete answer that we've had or I've gotten from anybody on, on that process, which is, which is awesome.
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If you have a partner, if you're not a solopreneur, if there's two of you, you can still have an LLC, and you can still have an S corporation. There's a couple of things to think about when you have a partner.
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One is that any benefits that you're going to provide need to be for all employees equally.
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So if you're an S corporation, you have a partner, you're both employees of that, then it can't be, well, I need a really good medical insurance plan for whatever reason.
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Your partner has to have the same one, or it's not gonna be a deduction. Maybe your partner's older, and they're really concerned about a retirement plan. They wanna really fund it hard.
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Well, you're gonna have to get the same plan even if you don't really care. So it just needs to be equal in what you're doing for what we call in the code non-discriminatory benefits.
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So that's retirement plan, that's education assistance, that is the new, you might have heard of the Trump accounts, where a business can fund a child's account. And if the business does it, this is...
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We haven't got the rules yet on it, you know. We're supposed to get those July 2026. But it looks like, uh, you can fund it for 5,000, and 2,500 can come from the business.
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It's a deduction for the business, tax-free to you and the child. So it's a great little benefit, but it has to be done non-discriminatory. Right.
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So anybody who's got a child gets that same thing who works for the company. Those are just some general ideas of things you need to be aware of with a partner when you've got benefits you're talking about.
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Yeah, and, and, and maybe along those lines, I think we're gonna see more and more of this, where a lot of us are individual LLCs but come together, not a, maybe not a formal joint venture, but we work together under an umbrella, even if it's not legal.
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Uh-huh. Do we need to set up a separate structure for that, or can we continue to operate as two individual business just partnered together on certain opportunity? Yeah. Does that make sense? Yeah.
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Okay, under the code, we call that a joint venture. Yeah. And so you don't have to have a formal partnership between two LLCs. It can just be a document.
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But you need to act like it's a partnership, so anything that comes in, you're splitting according to whatever the joint venture is, 50/50 or whatever it is.
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And so you do need coordination when you're filing your tax return, obviously, in how you're splitting that up. But that's not uncommon to see joint ventures. Okay.
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And I think we're gonna see more and more of that, just, it just makes sense where we partner in and out with, with different people. All right. So Christine asked, "I had an S corp for a couple of decades but no LLC.
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Would you see it necessary for legal protection personally?" And I think you answered that, but maybe I'll let you answer it again.
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And so sh- is she thinking that continue or, or elect S corp treatment or continue the LLC? Not sure. Christine, if you're out there, maybe you can clarify for us. Okay. I don't... She says, "I don't have an LLC." Okay.
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Um, y- you know, I don't know what kind of business you have, and there's some that are just really bulletproof. You don't have to worry about being sued so much because it's always anonymous.
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But I've gotta tell you, if you're working with clients in any form, I personally think you need an LLC, just because you never know if something's gonna go wrong.
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And additionally, it could be something as simple as you're running an errand for the business, and you, you have a fender bender, and then all of a sudden somebody says, "Oh, they've got a business.
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Now I can sue them, and I can get their business and personal." So it's just, in today's world, I like the LLC. Okay. Makes sense. I think you've answered Jim's question. He said, "What happens if things change mid-year?
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Say I start with income but more to other earning types." So you said you can go back and change that based on that. Okay. Yeah.
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Uh, the, just in case anybody wants to know, the form is 2553, and you'll notice there is a box. I mean, get an expert to help you with this. Yeah. But it's not a difficult process anymore.
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You just need to make sure you're checking the right box. And they do ask you for w- a, a reason why are you late making this recommendation, and the one I always say is, "Well, there was a miscommunication.
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We didn't quite understand how much income was gonna be." You just kind of make it like the communication was garbled, and I've never had one denied- Okay. That's good... in a lot of years.
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Nate said, "I did a retroactive S corp election 2024. It was easy and saved me a ton of money." So that wasn't a question, but most- Good job... smart. Nate- Awesome. Thank you... always on top of things. Um,
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Al, "Can you create the LLC in any state, or does it have to be in your home state? And what if you have a pattern, a partner in a different state?"Okay. A couple of really good questions.
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The first thing I would ask is either, are either of you in California? Because California has their own rules for this type of thing. Yeah. And I'm gonna assume that neither of you are in California. No.
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So- They are actually, uh- Good. All right. [laughs] They, she said yeah, so- All right. So,
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uh, y- what you're gonna have to do is look at where the income's being earned, and it does, especially if you're online, it gets a little confusing because, you know, maybe you're in Arizona and your partner is in Colorado.
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And so, well, do we set up an Arizona LLC or a Colorado LLC? Personally, I'd go with what, whichever state is cheapest [laughs] to set it up and to run it.
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But then your partner is going to have to take whatever, let's say you live in Arizona and they live in Colorado.
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They're going to have to take that K-1, that's where it splits off and shows what the income or expenses are from the partnership.
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They're gonna have to show that on their return, and it will end up being Colorado income or loss as a result of that. It's actually fairly simple.
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I would just make sure that your LLC is being set up with somebody who's actually working in the business. You know, if you're in Arizona and Colorado, don't go set up one in Michigan.
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I mean, it's, it's like it's just kind of random. It doesn't... Y- if you don't have any tie there, why would you do that? Makes sense. Okay. And if anybody's listening from California, disregard all that.
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It's all different in California. [laughs] California wants a piece no matter what. If one of you's in California, it better be California LLC and everybody has to report in California.
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Yeah, that's what I'll just said, "I have done K-1 for another one in state many times in CA, so I get that." Oh, and it's expensive. Yeah, yeah. [laughs] Yep. Yep. Awesome. All right.
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So now we're caught up on questions. Where else were we gonna, where else did you wanna take us? What else do we need to know? Well, you know, I, I think the other question that I get a lot is what's deductible?
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And the answer, the accountant's answer is always, "It depends." So [laughs] that's, that's what it is.
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I mean, as a CPA, I'm gonna deduct different things than you are, Brett, because, you know, you're a podcaster, you're an educator. You've got different expenses than I'm gonna have.
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So it depends on what your business is, and an expense is deductible if it's something that's ordinary and necessary to the reduction of income. That's straight out of the code.
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And so it, it's something that is gonna vary.
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I like to look at where are my clients currently spending money, because rather than going out and spending something, I bet you anything a lot of that stuff you already have.
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I mean, you already have a cell phone, you have a ISP, you have a computer, you probably have a desk and a chair.
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I mean, all of those things become deductible, and that's the best of all worlds, when you find those expenses that you already have and you turn them into deductions.
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So look at everywhere you spend money right now, or have in the last three months, and ask yourself, "How could this be a business deduction?" And maybe it isn't.
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Maybe not everything can be a deduction, but challenge yourself a little bit and think about that. Maybe there's a way that this does actually help your business and what you're doing. Yeah.
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And again, like I said, I'm, I tend to just- Another story. Another story if you got time for it. The client who did a lot of...
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What he did is public speaking, motivational speaking, and he traveled a lot, and his wife was with him, and she had kind of a shoe fetish. I mean, seriously, she took a suitcase just for her shoes.
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And he asked me the question, "How can we write off her shoes?" And it's like, well, we've gotta find a way that her shoes are part of her business. And she loved shoes. She loved talking about shoes.
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She loved showing pictures of her shoes. She put up a blog, and she talked about the shoes.
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She talked about where she bought them, how you would accessorize with those kind of shoes, when you would wear them, the pros and cons. I don't know. I don't have that many pairs of shoes, so I don't understand at all.
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But when it was done, and then she put links in her blog, it became a deduction. Right. Because she monetized it, and then she needed to buy those shoes in order to take the picture and to be able to talk about those.
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I'm not ever gonna be able to write off my shoes as a CPA, but if you've got something that you are really passionate about and you're spending a lot of money on, maybe you need to think about a little offshut, a, a little offshoot side business that's gonna allow you to get those write-offs.
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Yeah. Like I said, I look at where's the money going anyway, because often that's where the passion is. And so how do we bring that into the business? Yeah. And again, I think this is so timely.
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We may have to bring you back on a, just a quarterly basis to hit [laughs] with both. Yeah. [laughs] Because again, you're spending decades in corporate, right? You do your traditional.
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You have, you got an accountant, they file the tax for of all this.
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Man, when you start getting multiple revenue streams, you've got expenses that I didn't, you know, you made me think of a couple things that I know that I haven't been in- included in the past.
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And it get, it can get super complicated, super quick, and one of the things we want is to keep it, keep it simple, right? [laughs] That's what I know Letters- Yeah. You know-... General does is help to keep it simple.
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Um, yeah, there's, there's probably a lot more opportunity than we're, we're giving this credit for on the savings, on the tax saving side. It's a mindset difference as much as anything, because you're absolutely right.
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As a W2 employee, there's not a lot you can write off. You're used to just, okay, here's my mortgage interest or my property tax maybe, or I'm just, uh, taking a standard deduction.
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Maybe I've got some interest in dividends, and that's it, a W2 and we're done. But now all of a sudden we're looking at every part of your life and how can you turn those into deductions.
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I mean, even to the point of maybe you're helping support an elderly relative.
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Is there a way they can do something for your business legitimately, and you now either put them on the payroll or you're paying them as an independent contractor, and it becomes a deduction for you, most likely very little tax, if any, for them.
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Um, there, there's a whole lot of changes that can happen when you change how you look at things. Yeah. That's such good advice.
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Lisa had mentioned, "Love that you were saying at the beginning about thinking business of one is building a business. Can you talk more about why that makes an S corp a good idea?
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Functionally, maybe how it works to help you keep more of what you earn." What is that? The S corp, yeah, the S corp got a couple of things going for it.
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Um, one is, is that-You will take some in salary and some in distribution. And just round number, usually it's about, uh, what the IRS tells us to do, it has to be a reasonable salary.
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However, they do give you some leeway in the beginning because usually your profit isn't up that much, and they realize you're building a business.
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We've got great case law on that, that you probably don't even need to take a sa- a salary right at the beginning. But let's say one-third salary, two-thirds then just stays as profit in the company.
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Now, the salary is gonna have payroll tax, but that two-thirds that you're getting doesn't have that, and you're used to being paid where everything has payroll tax. So now you have two-thirds that doesn't.
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That's a savings. Plus, we have this thing called the... Now, I'm gonna get a little techy here for a second. 20% QBI, qualified business income, or you might have heard it called a 10 nine- uh, 199A.
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What that is is whatever that business flow through income is, you get to take a deduction for 20%.
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So let's say that that flow through amount is, let's say you make 100,000 net and you take out 30,000 as salary, you've got 70,000 flow through. 20%, you got a $14,000 deduction that you don't have to do anything for.
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There's nothing like that if you're a W2 employee or if you're an LLC that's just being taxed as a sole proprietor. Now, in the beginning, like I said, maybe that's the best bet, but once you hit the...
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I mean, once you hit about 50,000, you really do need to be an S corp because you can start making that division between salary and the distributions that aren't gonna be taxable, I mean, uh, don't have the payroll tax on it, and you get that QBI deduction as well.
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The other thing you can-- There's a couple other tricks you can do with S corps that you can't with others. For example, you can c- you can change your salary.
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If you've got a year where you really wanna hit the retirement account hard, you raise your salary. You can't do those kinds of things if you're just a regular straight LLC sole proprietorship.
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So the S corporation gives you flexibility that you don't normally have.
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In fact, with my clients, I always, always, always start them off with LLC S, and then as they grow, and I mean, I have clients who are making seven figures net, and they still have an LLC S.
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But then what we do is we add another structure on the back end of it or something else that allows them to pay less tax.
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But always lead with that S corp because it's got great flexibility, and there's no other structure like it. Nothing else gives you that flexibility. Interesting. No, that's good.
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And then Christine's got a question here that I think part of us, I think is, again, we monetize different streams, and it may be a completely different business.
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She said, "I've monetized a hobby that I was hiding in when I was uncertain about my core biz. I've been selling my peanut brittle in Illinois.
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Instead of an LLC, I was directed by the state to license a name, kind of like a DBA under my S corp." Yeah, the DBA, absolutely. I personally have some too. I understand exactly how that works.
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Sometimes it's easier to run things with a DBA rather than going and setting up a whole new entity.
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And when you do that, well, let's say you're starting off some side venture that maybe has a loss in the beginning, you can use that loss to offset other income.
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It, it, it can be a really brilliant strategy, so yeah, I understand. And I love peanut brittle. [laughs] Exact- But again, I think that's, again, consult with your professional if you wanna go through these process.
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But I mean, you know, part of my transition into with The Corporate Escapee now is it's gonna have multiple revenue streams that are very different than what it was when I was doing the f- solo consulting or the, the fractional leadership, and, uh, it gets confusing [chuckles] right on, on where it's still all coming from the same, but again, f- bit better accounting.
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So like I said, I know this is the year, and I've talked to Lisa about this, me, 2026 is the year I get my act together with finally taking advantages of all this, the tax saving that's, that's out there.
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Um, all right, so let's see. We've got more questions. Nate, "I set up f- a solo 401[k] this year," another cool thing you can do with the S corp. Then Christine said, "I only need one set of biz taxes."
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So maybe some other things coming off the S corp that are tools or, uh, advantages that you may not have just as a traditional LLC. I'm guessing the 401[k] is, is one of those.
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Yeah, the solo 401[k], there is a big difference between a solo 401[k] and a regular 401[k]. With the solo, you're able to invest in a l- other things. I mean, you can invest in real estate.
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There's a number of things you can do. And with a 401[k], you are restricted in what you can do, more or less.
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For the, the person who just said they had a solo 401[k], probably outside the scope of what we're talking about today, but just, you might wanna ask if you could add a clause in there to allow you to have a Roth solo 401[k] for part of that.
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A Roth solo 401[k] has different attributes than a Roth IRA, and down the line, it might be something that is really useful for investing.
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So it has to do with, you have to have the regular solo first, but then sometimes they'll let you carve out a discretionary amount that you wanna put into a solo Roth as well. That's just a question to ask.
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You don't get a deduction for it right away, but it does grow tax-free.
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Yeah, and that makes sense too, 'cause one of the things we're thinking about, um, along those lines, and I don't know if the S corp has the, the 529 plan, right, is we're starting to have grandkids- Yeah...
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we want to set aside. So I haven't looked into is there a path through the business to do that versus independently. Yeah, the 529 is most likely gonna be individual. Okay.
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Just to comment on that, make sure you check whatever state you're putting that in, like your grandkids are in a different state. And often, states have got really nice tax deductions you can take at the state level.
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But check on that as well. People forget about that one. Yeah, a number of states have got great deductions if you do a 529. Keep all your options.
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Just when you go solo, you didn't think that the tax would be one of the bigger opportunities for you, but it is.
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And like I said, I need to get more, um, again, having conversations with you, Lisa, helps me better articulate the t- the true value, right?
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'Cause I see the freedom in you, one of the OGs of going solopreneur 18 years ago, right? I think you may have set the record- Yeah... for going solo.
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Um-But there's just so many other advantages to it that, again, I, I keep getting folks fixated on, "Well, I've gotta make the money," right? Gotta make the money, but then they'll figure out everything after the fact.
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But I think it, it just makes sense to set this up, and then it can grow with you. Keep it small. Yeah. Keep it small and keep it all. That's the s- that's the solopreneur thing.
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You will work less hard, you will make more money, you will pay less taxes, and you will have more free time. Keep it small and keep it all. Yeah. I just noted that.
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That's gonna be probably the, the podcast episode we'll lead with the title. Um, I, I think we had a couple more questions come in. Oh, Nate said yep, he did have a Roth with that 401[k]. Good. Um- Good, good...
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Christine, my best years, my S corp has offset any W-2 income earned. Yeah, again, thank you folks for chiming in for actual use cases of folks that are using it. Um, L did have a follow-up.
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Is using the Schedule C the wrong way for early? Uh, you book your income and you take your expense. Is that good if you're not making much? So the so- the Schedule C of sole proprietorship.
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Again, my two cents, just because I, I've been in the business long enough that I've seen what can go wrong, and I really do recommend people get an LLC right a- right away.
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And so if you have an LLC that hasn't elected how it's gonna be taxed, it's going to be on the sole proprietorship. The same form, it's just that you have some state asset protection that goes along with that.
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So yeah, y- you can do that, especially in the beginning. You are limited in your options with a sole proprietorship.
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Probably you won't be able to get a retirement account, for example, because it has to do with the taxable income and the sole proprietorship and the way it's calculated. But you still are...
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It's a place for you to record your income and your expenses. Okay, hopefully that made sense and made sense and that you're- Yeah. Let's see. Al did have one follow-up.
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Even in zero income years, filing my, for my S corp has had significant tax benefits, so. Yeah. Yeah, so interesting. Yeah.
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Yeah, because I think that, that they have a W-2 job as well, and so they're getting offset with that. Let me just throw this out. Yeah.
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As an S corp, statistically, you have a one-third chance of being audited that a sole proprietorship does. So- Okay. Yeah. Yeah.
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Uh, so it's three times as more likely to be audited if you have a sole prop versus, a sole proprietorship or Schedule C, versus an S corporation. The reason is really simple.
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It's because in order to audit an S corporation, you need to have somebody who's a trained accountant, because they have a balance sheet or y- you know, accounting things in there, whereas a sole proprietorship is just income minus expenses, and so they don't have to have trained accountants doing the audit.
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And right now, there's a huge shortage of accountants working at the IRS. Right. So they don't have the people to do it.
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If, when you first said that, I'm glad you provided the context and like, 'cause wow, well, one-third of all S corps get audited? That doesn't sound [chuckles]- No, no, no. Okay, yeah- No, I-...
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I said that kind of weird. I got it. Yeah. Absolutely. I was a little slow on- Yeah, yeah... today, but, um- I said it weird... makes sense. No, again, I'll- You know, let me throw another idea out here too- Yeah...
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as well, and is that when is it time to be an S corp?
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You know, as soon as you're an S corporation, businesses and especially banks take you more seriously, and it's much easier to start building your business credit and then apply for loans down the road.
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It used to be you couldn't even, uh, build business credit with a sole proprietorship, but you can now. But it still is a rocky road. I personally think it's better to start off with that.
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Maybe it's feels like that's a lot of structure right at the beginning, but the benefits there, you know, less chance of audit, you're set up for success as you move forward, and banks are gonna take you more seriously.
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Yeah. Again, might as well have the flexibility of the future. You never know where- Yep... right? Said some people- Exactly... wanna replace a few dollars, but yeah, I, I think it, it just makes way too much sense.
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So, all right. Time's flying by, and was there any other big topics, Diane, we didn't, um- You know, I, I had some notes, and I think we covered everything that I wanted to talk about. Thank you.
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And I, I kinda took us down a meandering path, but I think, again, super insights. That's, that's how tax is, so. Exactly.
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And we can't talk for more than an hour 'cause then my head hurts after doing it, but, uh- [laughs] But again, hopefully for the folks out there, and again, even if you're not on the live, to, um,
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think through this, right? I mean, 'cause there are some real advantages to do this. And, you know, Lettuce wouldn't have started a company if there wasn't value [chuckles] to doing what they do as well.
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Lisa, if you're still out there, I know you, um, had some year-end stuff, uh, offers. I'm gonna bring you in, um, or if you can pop back on. Hey, there she is. Am I off mute? Nope, you're good. You're good. Okay.
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Yeah, I just wanted to say, well, first of all, thank both of you. This is a really interesting conversation. Some really good tips.
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As I said to Diane, even for my own business, every time I talk to her, I walk away with a new tip.
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But I think what we didn't cover today is sometimes running an S corp can be a lot of work for a business of one, and I know most of us didn't take the step out into being on our own to be accountants.
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Unlike Diane, [chuckles] most of us did not follow that path.
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So Lettuce, as you said, Brett, we built a company specifically for solopreneurs and to help automate and make an efficient option for solos to take advantage of the S corp opportunity.
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I see Christine's note here that to hire and pay for professional accounting, but my personal story is I asked three accountants if I should become an S corp, and they all told me no for many different reasons.
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For things like it didn't fit their business, or they weren't trained in businesses of one, or they were more conservative than Diane or Lettuce will be on what a reasonable salary is.
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And so Lettuce was a real game changer for my business, and we know it can be for s- other solos as well. So if you're- Before I g- get too far with that, um, and Solo's built on, with solopreneurs, right?
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At least that- That's right... when I had the CEO on, he was, you know, the first 40 or 41 people were all either fractionals or contractors or non-employees.
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I know some people have transitioned to employees at this point. But he's building the business of the future. You guys are building the business of the future. And so that's what I, I liked is yourWhat's that?
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Drink your own wine, eat your own dog food, whatever saying [chuckles] that you wanna use. Is it, you know, you built it for your, your, your team, right? Which, which makes sense. So anyway. I appreciate that, Brett.
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In fact, I was a Lettuce customer and then became a consultant for them, and I'm actually still a consultant. I have other clients.
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But I believe so much in educating people about this opportunity, 'cause I know I was leaving money on the table, that this is such a passion place for me. I love doing this client work so much.
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So to that end, check us out. I put some links in the chat for our tax calculator, for the main page, for a free month.
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Um, and the other one I will leave everybody with is, we know everyone's not an S corp yet, or maybe you weren't ready. Maybe you've just escaped and, but you've been a good sole prop for this year.
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We do also have a tax prep service for sole props that we're gonna offer to your group rep for a discounted rate.
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The off-the-shelf rate'll be seven ninety-five, but we'll add a link where your team or your group can get it at just five hundred dollars. Awesome.
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And that'll be, you know, full tax prep and filing with a call with one of our experts and a business assessment. And, and send me those links. You can send me an email.
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I'll make sure I post it into the, uh, the chats as well, and also put it in the show notes for folks, if you're okay with me broadcasting those. Absolutely. Please do. And along those lines, is it that tax...
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Is that just if you're a sole prop, or do you... You guys aren't getting into the personal taxes yet, right? Or are you? It might be. Okay. [chuckles] Next time you come on, I'll, we'll, we'll ask that question.
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'Cause again, it makes- [laughs]... one-stop shop is- Yeah... is what I'm looking for, so all right. You know, that's funny. We were just talking about it, 'cause I know we did it last year for our S corp customers.
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Okay. Interesting. Yeah, no, like I said, I... Now if we, we got somebody tackling the tax space, now we need somebody to tackle the insurance space.
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So maybe when you guys are done conquering his, we'll get, uh, some folks coming after the insurance.
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Yeah, Brett, I don't know if you saw the news earlier this year that Lettuce actually acquired Be Solo, which was working on that challenge. So stay tuned.
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And no, that wasn't a planted question either because [both laugh] All right. Well, really appreciate the time from, from the both of you, and Diane, this was super informative.
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Um, anybody has any other questions, I'm assuming they can connect with you, uh, or Lettuce, right? I'll put contact information.
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I'll put them in the community, and then I'll also put it in the show notes so that anybody listening can reach out directly. Awesome. All right.
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Any last chan- any last questions from our, our live studio audience, which I've never said in my life before, so that's kinda cool. But- We're happy to be part of the first. Yeah. Love all the questions.
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I mean, it just lets me know where people are thinking and, you know, make sure that we cover all the points. Awesome. Awesome, awesome.
250
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Well, this was super helpful, and again, we'll make sure you guys aren't strangers, 'cause this is... Every time we get a new wave of folks, it'll just make sense to have, bring in experts to talk about this.
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And Diane, I don't know if you've ever read the book, "Who Not How," but that's exact. If you haven't read it, take a look at it because that's exactly what our model is.
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We wanna be the whos that we like to do, and we'll, you know, we'll figure out the how.
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But for everything that we'd like to, like I said, we probably don't wanna do our own tax returns, 100% right, but there is a who, like you, that loves to do it. [chuckles] Right? So it's all, it's more specialization.
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We get to focus on what we like to do and what we're good at. So awesome. All right. Well, thank you everybody for your time. Thank you for the patience of getting this up and running, and we'll talk to everybody soon.
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Happy holidays, everybody. Cheers. [upbeat music]
