Loading summary
Transcript19 lines
- [00:07]
Robert
Robert's question is next in the queue. He says, I would love to hear the money guys talk about starting a business and what the boil point is to set up an official LLC and give some similar advice, foo advice for business financials, et cetera. So is there anything about starting a business that changes the foo and then what is that boiling point to when you're like setting up an LLC and really an official business? What do you think?
- [00:36]
Bo
Well, let me give you. Let me give you the appropriate compliance disclaimer here. We can't offer any sort of legal advice, so we can't speak to you about when it makes sense or doesn't make sense to have some sort of entity formation or even what type of entity you should establish. Because you mentioned setting up an llc. But in some places subchapter S corporation might make sense, or in some places it might make sense to just remain a sole proprietor. Here's what's really difficult about a question like this, Robert, is that every single business is kind of unique, and it's unique in terms of how it operates and the underpinnings of it and what's required and what the boiling point in that business is for that business to thrive. But there are some common threads, There are some commonalities across what we see to be successful business startups that turn into legitimate businesses, that turn into ongoing businesses. And I think we can probably speak to some of those commonalities, one of which is whenever we see someone start a business, think about starting a business. In our opinion, cash is king. It is your friend in terms of making sure that you've saved up enough operating capital to allow you to be able to sustain the business. Meaning if all of a sudden you. I think it was Jerry Maguire. And I mean, it's been so many years since the movie, but like he walked in and he just like had his epiphany and he quit on the spot and then went on his own.
- [02:04]
Brian
Right.
- [02:04]
Bo
Like in Jerry, he did not quite plan the way that I would suggest. You might want to plan for starting your own job. You might want to put some time to actually prepare what this is going to look like and begin to save up capital so that you have a cushion in case things don't go the exact way that you thought they would. Because you want to make sure not only do you have an appropriate emergency reserve to cover your standard living expenses over the course of three to six months, but you even have capital to carry you just in case the business itself takes longer to get off the ground than you thought it would.
- [02:38]
Brian
Yeah. I mean, Bo, you make a great point. I mean, I've walked this journey and I know, I always think about the visual I have in my head is if you don't know how far the diamonds are in the ground, and what if you dug 9ft into the ground and the diamonds were 10ft in the ground, but you didn't have enough cash to where you could go that one extra foot? You did 90% of the work and yet you were at the success point, but you just didn't have enough resources or capital to make it there. And I think that's what gets a lot of businesses. So that's why I always say put on your 3D glasses. That's the a down to earth plan. What you think will really happen. Write that business plan out, get the spreadsheet out and actually do the work. You know, there's of course the dream plan. This is where you're like, well, how fancy of a car am I going to be driving after this thing is rocking and rolling? And then there's the do do plan. This is like, if this thing goes bad, how am I going to recover and get my family back on track? Because I made this knuckleheaded decision. So without a doubt, do the 3D glasses plan. We, we talk about that with a lot of things. And then I wrote down a whole list here. The first thing I see people do when they're considering to do this, make sure you set up boundaries in separate accounts. The government's going to expect it, so go set up. And it doesn't have to be an entity account. You can just go set up a bank account that you're going to do anything with this account other than business transactions, it can be the same thing. You go set up a separate credit card that is only for business transactions. At some point we might turn this into where it's actually got the tax ID and all the other things that goes with the structure stuff. But go ahead and start creating the separation because that's going to help you from an accounting standpoint, that's going to help you from a liability standpoint, it's going to help you from a structure standpoint. So make sure you go ahead and start living that separate life with these assets because you don't want a bunch of co mingling. I see so many small business owners that are running ragged. Businesses, they don't respect it, they don't treat it right and it's setting them up for a lot of mistakes for the future, maybe me coming from an accounting background, that's just a pet peeve of mine. Also, then you get into minimizing liability. And this is where the structure stuff comes in. That's why the threshold might be very low. If you're doing something that has risk. And that doesn't have to mean like necessarily you falling off a ladder, it might mean risk of you're doing transactions, you're giving advice, you're doing something that somebody could sue you for because there's high value to whatever you're giving advice or thoughts on. And that's where typically you start getting into structure of like llcs s corps. And I will tell you that Bo said it in a quick statement, but I'll tell you that states are different. We come from the state of Georgia originally where everybody loves them. Some subchapter S, I mean, you typically go like single member llc. And then once your business starts cranking, you turn into a subchapter S and you pay yourself for what you're working in the business. But then you take the dividends or distributions out for being the owner of the business. So you do it in that legal structure, moved to Tennessee, and you realize they don't really like subchapter S's because they charge you a F, A and E, which is a franchise tax, or what is it?
- [05:54]
Bo
Franchise, Franchise and excise tax, Excise tax.
- [05:57]
Brian
That's the other part of it. So they charge these things. So you don't see many subchapter s here. So you do need to do your research, figure out what is kind of accepted or reasonable in your state. You probably have to go talk to an attorney. And it's not that expensive because you want to definitely measure twice, cut once on getting your structure right. And then once you start having success, you might even need to go talk to that attorney or accountant again because your structure might need to evolve with your additional success. And then I put on here Accounting Systems. You guys know, when we did our collab with Caleb Hammer, I picked on him pretty hard. And a lot of you guys, what's wrong with using a spreadsheet? And maybe this is coming from an accounting background. I'm just telling you from rolling the business forward. Because when you set up a business, it's perpetual. And you're going to have to file annual tax returns, you're going to have to reconcile bank statements. You're going to have to really. Because let me go ahead and save you the heartache. When you start out, you're not Going to be super busy from an accounting standpoint and keeping up with it, it will seem very simple. But success, like everything I've talked about on the show, comes at you fast and creates a lot of complexity. So the better you can set yourself up while you're simple, the better you'll be able to grow and scale as you get complicated. And an accounting system is the backbone of all of that, because you're going to add in. You know, you start off with just a checking account for your business, and then eventually you go add a credit card statement, and then eventually you go have employees that you go give them credit cards and they're going to all come into one account. And it just starts getting to be amazing. And then you got loans, you got retirement accounts, you've got funding, you've got obligations, all that stuff. If you can set up an accounting system to start tracking that, even while it's a simple business, it gets much, much easier as it gets complex. And that's why I do like those type of systems. And they've gotten easier. I mean, I saw QuickBooks is even adding an artificial intelligence function. And I get nothing for sharing this. It's not like Intuit is a sponsor of the show at this point, but it is one of those things where I love that I connect all of my accounts directly to my software and I can be at home and in between a commercial break on a TV show and just sync up the accounts, go through the transactions. It can be that simple. But you just have to begin with the end in mind. So start simple, but go through these things and find somebody Beau and I are part of. You call Mastermind or groups where we get around other business owners, because it is. It is kind of a unique thing. And it's in a journey that you go on when you start a company and you're trying to figure out how to navigate this stuff.
- [08:43]
Bo
The only other thing that I was going to throw out here is when it comes to starting a small business, don't major in the minors. I've got a bunch of, like, knuckleheaded buddies and they just come up with the ideas all day.
- [08:52]
Brian
Oh, this is.
- [08:53]
Bo
And the first thing they immediately start doing is to start working on logos and branding and thinking about the website and figuring out my guys, you don't have a business yet. Make sure that you actually have. Don't focus so much on the idea of having a business that you don't actually have something that another human being is going to be willing to pay for. Don't get lost spending all your time spinning up the website and thinking about the marketing and doing the brochure and doing all this stuff. If you don't actually have the minimum viable product to prove that this business will actually work. I feel like so many people get lost in that they end up spending a lot of money spinning their wheels. And turns out this was nothing more than a quick little hobby that was a flash in the pan.
- [09:30]
Brian
And then I'll add on because I remember I was in one of my mastermind groups and once a company starts doing well, meaning it cash flows consistently. I'm always amazed at how many entrepreneurs, because they have, they've taken this risk and it starts working, they're trying to figure out how they go and do the next thing or real estate or whatever. And I'm always, I'm always like, guys, you took a risk, a big risk. Because a lot of small businesses come out in failure as soon as one starts taking hold for you. Don't skip actually doing the financial order of operations. I always tell people you've got to make wealth and then to get to the where you can maintain or do all these crazy get rich behaviors that you hear people doing where they're using leverage, real estate and all these other things. I'm like, you need to get a foundation underneath you so you don't make crazy desperate decisions because you hit a lick and don't. I saw a saying, don't assume you'll get rich twice. I mean that is something that I want everybody who, if you, if you hit a lick, don't assume you'll get rich twice. Because I think a lot of people don't realize that lightning in a bottle. I get sentimental about memories that are lightning in a bottle. I get sentimental about business ideas that we've gone on journeys with that you're like, man, that was lightning in a bottle. And I can't believe that this all worked out well.
- [10:51]
Robert
Robert, that was a good conversation. Good food for thought.
- [10:53]
Brian
I didn't mean to go that long.
- [10:54]
Bo
We like talking about small business.
- [10:56]
Robert
Robert is probably grateful. Thank you for the question. If you would like a money guy tumblr, just email winneroneyguy.com since we asked your question on the show, we would love to send you one. Thank you. Lo has a question next. It says good morning. I was wondering if you have any advice on how to make RMDs with maximum tax savings. Also how to reinvest them. Love the book. Thanks from an old timer.
- [11:24]
Bo
So yeah, so okay for Those of you that don't know, we get so excited about saving for retirement and we have a lot of accounts where the government says, hey, if you save into this retirement account, we'll give you a break on your taxes. And so we max out our 401ks and we put money in IRAs. And we love seeing the tax deferred growth happen. And that's amazing until we get into our 70s. And then at some point, depending on your age, between age 73 and 75, the government says, okay, you've ridden this ride long enough. It's time for you to start taking money out of these accounts. And so you begin to get hit with required minimum distributions. The government says, hey, based on the value of your pre tax accounts at the end of last year and applying an appropriate mortality factor related to how old you are this year, we're going to make sure you pull out a minimum amount out of your accounts in this following year. Well, what ends up happening is maybe you're someone who's living off of Social Security and you have a pension and you've done good saving. You're like, I don't need to pull money out of my 401k, I don't want to pull money out of my IRA. Well, you don't get a choice. And so what ends up happening is you kind of have this, I say tax bomb. You have this tax bomb that happens. All of a sudden your income shoots way high up and you lose some control over it. So the question Low is asking is, hey, are there things, are there strategies that I can begin to employ that I can begin to deploy that would help drive down the taxes of the RMDs. I'll speak to one that's just a great opportunity a lot of people don't know about. And then I think, Brian, it'd be interesting to talk too about maybe some preemptive planning you could do. But the one that I came up with when it comes to RMDs, one of the great things that you can do, you know, if you are someone who is charitably minded, we know that with the, the Tax Cuts and Jobs act from a few years ago, standard deduction increased. And so a lot of people aren't able to deduct charitable giving anymore because the standard deduction is so high. Well, if you're someone who is in the RMD phase, one of the things you can do is you can do a qualified charitable distribution where instead of you receiving your rmd, you can actually opt to give it directly to a charity of your choice. So if you have an RMD happening this year and it's going to be $20,000, but you want to choose for 5,000 of that to go to your church or go to a charity, go to an organization you support, you can give that money directly from your IRA to the charitable organization. And then on your tax return, you would only show $15,000 of income from your total RMD of 20. So it's an amazing way to remove income from your tax return and not get taxed on that. That's the one that I came up with.
- [14:08]
Brian
Yeah. And the reason a lot of you, like, why would you do that if you don't get a tax deduction because the standard deduction is so high, is because you guys, once you're retired, you'll quickly realize Social Security taxability does matter because maybe you're right on that threshold of where 50% or maybe none of it's taxable. And now you're trying to keep from being 85% taxable. And that might even be changing with tax code that's coming in 2025. Also, Irma, Medicare premiums, your income does impact what your Medicare premiums are. So a lot of people use the QCDs to help that. And there is even a weird, quirky thing in the tax code right now is because a lot of RMD age is now 75, but QCDs can start at 70, 70 and a half. So 70 and a half. So, you know, because that's the old RMD date. So there's a little arbitrage situation there. What BO was, he added something there that I think is an important thing because there are a lot of people who are probably maybe yearing your. You've left the earned income workforce, meaning you're not in your peak earning years anymore. So your earned income on your tax returns is going way down. Whereas when you were working, you were in the highest of tax brackets. But now that you've retired, you're in a much lower tax bracket. Don't sleep on Roth conversions, because we find all the time, if you retire at 60 and RMDs don't kick in for you until you're 75, you've got 15 years to see if there's a tax arbitrage opportunity to where maybe now you're in this super low tax bracket, should you be maximizing that 12% tax bracket or maybe even should be maximizing the 22% tax bracket, you really need to go forecast how big are those RMDs and for some of you, you have multiple seven figures in these retirement accounts and once they fire up, you're gonna be like, man, it's great. I'm paying no taxes. It's awesome. And all of a sudden, whoa, I have a $200,000, 250,000 DOL required distribution. That's going to be pretty taxable. So don't sleep on that 15 years. Make sure you're taking a proactive stance on looking at tax policy, looking at tax rates and seeing if there's an arbitrage for you. But do be aware, this is where I tell you complexity will find you. I tell you to do this, but then what you're going to, you're going to do your tax. You're going to do this based upon tax rates only. And then you go do your taxes and you'll be like, oh my gosh, I just screwed up my Social Security. Oh my gosh, I just screwed up my Medicare premiums. This is why I think as financial advisors, people love us, is because we help you herd the cats. We kind of think about all the things you don't realize. Even though I just gave you the list of a lot of things to think about, you still go realize there's a lot of wrangling that goes into making sure we're planning this. Well, then you had asked, and I'll close out the loop on this, you said, how do I grow these distributions or reinvest? It's not uncommon for when you're reinvesting that you just link your taxable account to these. You have to pay the man his portion for taxes. And don't forget to take into account where you live. Statewise matters. Some states don't tax retirement assets that heavily. They actually give you huge exemptions. Like, I know Georgia. I was working on something for another state last week and I was like, man, they don't tax Social Security or retirement contributions or retirement distribution. So pay attention to your state taxes as well when you're thinking about the reinvesting. But then you just let it kind of grow up in that after tax account and just try to be proactive, let it just sit in cash. Actually think about it in conjunction with your whole plan to make sure you know what the why is for those new assets after you distribute them out.
- [17:42]
Bo
That's great.
- [17:44]
Robert
Awesome. Well, low. Thank you for your question. Since we answered it on the show, we'd love to send you a Money Guy Tumblr as a thank you. Just email winneroneyguy.com the Money Guy show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.