Business Bites Episode 90: Why You Need Both a CPA and a Lawyer for Business Formation

Why You Need Both a CPA and a Lawyer for Business Formation

Episode 90 on the Business Bites Podcast

The Gist Of This Episode:  CPAs and lawyers alike are important for your business.  However, we need to be careful about who we listen to when deciding on business formation. In this episode, Rachel explains why you shouldn’t blindly listen to one or the other when they are advising on topics they shouldn’t be. 

 

What you will learn:

  • The types of advice a CPA can give you and shouldn’t be giving you
  • How lawyers fill in the rest of the information you need before making a decision
  • How to know you have found a good CPA
  • What CPAs don’t tell you about being an LLC
  • and more!

Expand To Read Episode Transcripts

All right, guys. Episode 90 of the Business Bites Podcast. I am your host, Rachel Brenke. These episodes often come out of the top questions that we receive, and this is one of the top issues that I’m seeing in misinformation that’s being shared in community groups and on other podcasts, and as a business attorney, I just wanted to bring to you guys this information to the forefront.

A major question that many of you guys had is going to be about should I be an LLC or a corporation. For the purposes of this episode, so I’m not saying LLC or incorporation the whole time, I’m just going to say LLC, which is a limited liability company. I’m also going to link at rachelbrenke.com/epi90 all other related episodes to business formation stuff so you can learn more about the difference of an LLC and a corporation, sole proprietorship, and all of that.

I don’t want to inundate this episode with all that information, so please make sure you click over to the show notes because we will have all those episodes linked for you, and since they’re quick, you guys can get in, get out, and get the information you need.

One of the top things that I’m seeing, especially in Facebook groups since that’s where a lot of the discussion’s happening, but we also see this issue coming through the firm as well, is many of you will go to a CPA, a certified public accountant, which is fantastic. CPAs are gold if you can find a good one. They are especially diamonds if they can stick to just talking about the tax liabilities that you guys have.

When we’re talking about deciding or choosing a business entity structure, whether you should remain a sole proprietorship be a limited liability company, or be a corporation, so many entrepreneurs, and I’m not throwing shade on you guys, it’s simply because you don’t know what you don’t know and that’s what I’m here to fix, but so many entrepreneurs fall into the trap and they’re recommending this information and putting other people into the trap of, “Oh, you want to choose a business entity. You need to go and talk to a CPA.” Period, and then that ends the sentence. And I’m swooping in as much as I can to try to help fix this misinformation because like I said, CPA’s are fabulous for looking at your tax structure and determining what is best for you on tax liability.

One of the big issues is that many people, and you guys, you’re not alone, so don’t freak out if you’re listening to this, but many people blindly listen to the advice of their attorney (correction: CPA) because either they’re newer in business or they’re not profiting a lot. That CPA will say, “Eh, don’t worry about becoming an LLC or a corporation, but specifically an LLC because you should just be taxed as a sole proprietor, so I recommend that.” I’m over here as a lawyer going … I’m hyperventilating because, and if you guys are listening to other episodes, you understand that as a sole proprietor, there’s no division of liability.

If you get sued personally, say you’re in a car accident out there and you get sued personally or there’s an issue, they can touch your business assets because there’s no division, and in the inverse, if you have an issue in business and there’s a claim or dispute against you, that can also touch yourself personally, and this includes your income earning capacity. So even if you don’t own a house or a car or anything like that, the typical assets we think of personally, you still have income earning potential. Now, like I said, I’m not going to get into all the specifics on LLCs and division of stuff, but I throw that little nugget out here to show you that CPAs, know great on taxes.

I’ve said that multiple times and I keep reinforcing that because A, I don’t want hate mail, and B, because they really are. Me as a business lawyer cannot do my job without my counterpart of a CPA to provide you guys that tax information. I know enough to be dangerous and I have stayed at a Holiday Inn before, but it is so important when you guys get into business that you take the CPA’s advisement and the lawyer’s advisement here. Now here’s where I am going to pick on CPAs just a little bit, and again it’s not because I have personal issues, but it’s because I want to save you guys of these problems. So the typical trajectory for an entrepreneur is you just start being in business. You just start throwing your stuff out there, seeing if you can make a go at this entrepreneurial game, and you don’t take any steps until maybe you find the Business Bites® Podcast or you decide, “You know what? I should probably talk to someone.”

And often that time, that first interaction’s with a CPA. A CPA will look and go, “Oh, you’re not profiting a lot. You’re not making a lot. Let’s just keep you as a sole proprietor and not worry about anything else.” They don’t talk about liability A, because they’re not supposed to advise on that anyways. That can be unauthorized practice of law, which could be a whole other episode, but also because they’re not really looking at it from the liability plus tax and location standpoint. And where am I going to nitpick here a little bit is a good CPA will recognize that A, you need limited liability protection, whether it’s through LLC or corporation, but the trajectory typically goes from sole proprietorship to LLC. When I hear the advisement of a CPA telling people, “No, no, stay as a sole proprietor because it doesn’t make a difference anyways or you’re not making enough, so you should just be taxed as a sole prop.”

Here I’m picking on y’all. I’m doing it. I’m going there. An LLC without any tax selections or other unique circumstances is taxed like a sole proprietorship at the federal level here in the United States. So what does that mean? The IRS doesn’t see LLCs. It’s what’s called a disregarded entity. So if you have been into business, you follow your LLC documents because you’ve listened to Business Bites Podcast, you know that’s probably the formation you need or you’ve talked to your business attorney, guess what? Your tax situation doesn’t change. Again, the disclaimer here that I talked about a second go, I threw it in there. Unless you take specific tax selections or if you have specific circumstances, you’re going to be taxed like a sole proprietorship, so it kills me when I hear that CPAs have advice for people to stay a sole proprietorship and say, “Oh, because your tax situation doesn’t demand it.”

All right, but guess what? When you guys file as an LLC, you’re a disregarded entity. Your tax situation does not change anyways. Period. Again, this is generally speaking. There may be differences when it comes to your licenses and all that, but for the most part there’s not. Guys, there’s not a difference. What happens, these CPAs are putting you guys into these positions where you don’t have any limited liability. You’re personally on the line or your business assets are on the line for something that happens in your personal life, and we cannot put the cat back in the bag once it’s out. It’s kind of like when you don’t go and get car insurance. Maybe you’re talking to someone and they go, “Oh, well, you’re a good driver and having car insurance isn’t going to keep you any safer,” and then you have a car accident and then you try to call up the car insurance company and say, “Hey, will you insure me now?”

That’s what happens with LLC stuff. Once you have an issue, you can’t go back and retroactively set up an LLC to protect you for that. You have to file, you have to earn it, and here’s the thing, and you guys have heard me talk in other episodes, LLCs and corporations, but primarily LLCs are really low cost. They’re really low administrative oversight and they are fairly straight forward once you learn the steps to it, and I do share those in my episodes. Again, I’m going to link these at rachelbrenke.com/epi90. That’s Episode 90.

So I want to leave you guys with this. This is a pretty quick episode for today because just understand, I’m asking you to examine your own situation and see if you’ve gotten bad advisement from a CPA or maybe you coached yourself into thinking you didn’t need a LLC, but I also want to encourage you that if you hear or see people talking about this in groups, share this episode. Talk about this information and say, “Guess what? Your CPA is doing you a disservice and they are keeping you from the liability protections that you can have based on misinformation, based on the fact that they’re saying that your tax situation does not demand an LLC, but guess what? Your tax situation relatively doesn’t change.”

I say relatively. We should always be partnering this advice with the review of a CPA, but bring these questions up. Ask these CPAs these questions because good ones will know exactly what I’m talking about and they will agree with me, and they will understand that I’m zealously preaching this here because I care about you guys and I want you guys to be protected, and they’re also going to be able to provide you the next steps on the tax side of this.

All right, so just understand. Do not blindly listen to a CPA who says, “Eh, you don’t need to be an LLC. Your tax situation doesn’t demand it.” Guess what? The world is the world. Humans are humans. People be crazy, so you want to be protected as much as possible, even if you don’t intentionally do something, you want to have that liability protection for yourself, whether by an LLC or a corporation. But specifically to this episode, going from sole proprietorship to LLC has relatively no bearing on your tax situation, generally speaking, and it’s low cost investment, great way to divide and protect your assets and keep you guys protected.

All right, so please go forward, share the information. Let’s see if we can do this the right thing, and don’t forget if you’re just coming in on this episode or maybe you’re thinking, “Oh, my gosh. I’m overwhelmed.” Jump onto rachelbrenke.com. I have a free legal checklist, and you guys can download it and walk through all these steps. The very first step that I walk you through is talking about the business entity, the creation of your business, sole proprietorship, LLC, incorporation. There’s also the other episodes at rachelbrenke.com/epi90. Go on, get protected, and I will see you guys on the other side.

About the author

Hi, I’m Rachel Brenke

Rachel Brenke

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