How to Start a Business Even if You Already Have a Business Part 2

Leo and Claudine continue with the logistics on how start a business and cover liability and forms of business available for the owner to choose from.
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Speaker 1 00:12 Good morning, Modesto. You are listening to business legal talk with Leo and Claudine. Today is Saturday, April 27th hope you had a great Easter. Everyone. Absolutely. Hi Claudine. Hi. What’s happening? That was here was great. It was great. Got to spend time with the family, went to church and had a great time with everyone and just, just, uh, I feel refreshed.
Speaker 2 00: 35 It’s good because Easter is one of those holidays that I think universally, um, we take off. It’s, it’s really one of those days that we really take off.
Speaker 1 00:45 Yeah. So I hope you got some time, you know, to relax. I know, you know, your go, go, go. And with the horses, him playing with the horses, which is great. Um, so we have this topic, we, so this is part two today of how to start a business and maybe you already have a business.
Speaker 2 01:01 Yeah. Even if you already have a business, because there’s a lot of people who started quite by accident or you know, you just kind of fell into the next thing you know, I have a client who, who literally literally fell into a ragingly successful business. Um, making ’em hydraulic hoses and high pressure hoses and he had an account and the account was very large to start with and he was able to service it. And the next thing you know, he kind of became the game in town and one referral led to the next and he just really grew. Um, it was super organically but was super by surprise and, and was really taken off guard when he had to really stop and consider a lot of things that are normal everyday business things, but had nothing to do with what he did as a trade, which was, you know, make hydraulic hoses and high pressure hoses.
Speaker 2 01:48 So there is a lot of other aspects to being in business. It’s not just what you do. So if you brew beer or if you, you know, make leather goods or if you so, or you know, whatever it is you do, you do well understand there’s a lot of other aspects of being in business and some of them, you’re gonna take two and it’s going to come easy to, you and some of ’em are going to be difficult. Know where your resources are, know how to go get your resources. That’s what we’re here for. Um, I know, um, you know, we, we’re here working with clients on a day to day basis. Um, if you want to reach out to us, we’re at, um, That’s S H E R R O and area code (209) 427-2200. We’re here to help and I’m, I know, Leo, you’re, you’re also available on the web.
Speaker 1 02:35 Absolutely. Well, thank you for bringing that up. Um, you can find us. Um, I am all about profit. I’m the chief profit officer of Greenland [email protected] servicing clients all from LA to Sacramento and beyond. Um, call us five, five, nine two Oh seven three one four eight or look us up on the web, uh, our website. And we just love helping businesses get to where they need to be. Uh, be successful, be profitable. Whether you have an exit strategy or not, we can help you create one. And Claudine will help you just making sure that you are completely and totally protected and ready to grow. And I’m going to make sure that you are successful profits. You have plenty of cash in the bank to seize the market opportunities out there. Uh, but enough about mature businesses to go back to starting a business. We were yeah, baby businesses.
Speaker 1 03:32 So I was telling you on, um, you know, before they starting on the show today, um, that a lot of entrepreneurs get in it, get in business and not really fully understanding the metrics and, or how to really conduct business and create great example of that is um, um, was flipping channels. Uh, the other day usually don’t have time for that, but it was, it was late night and cheddar TV is one of those channels. I, you know, it just, it just came out of nowhere. I have multiple Hulu and Netflix and so I landed on this channel and this is the show by sprint sponsored by sprain and is you get one minute to pitch your show. Right? So what, I’m sorry, you get one minute to pitch your business idea. So these are all startups. These are all ideas. Uh, some of them had revenue, some have no revenue, um, but they want to raise capital from investors or you know, angel investors, kind of like the little little mini shark tank.
Speaker 1 04:23 Right, right, right. So it was interesting. And w how is this gonna play out in our show? Is that one of, um, the, one of the entrepreneurs that was there had this, uh, this consumer product that he wanted to take to Costco was a great, great product. Don’t remember the details, but he wanted to put it in Costco. And he had talked to one of the buyers at Costco and he was excited. So he came with this, um, notion this, this deal in the pipeline. Two pitches. So he was going up in the elevator, uh, and you get two. So you’re recorded actually talking about your pitch to the investors. So here I am, you know, I got this great blah, blah, blah concept. I’m going, I’m looking for half a million dollars against 10% of my company, blah, blah, blah. It was compelling enough that you get to the top floor and he was let in to talk to do a more of a, a bigger pitch to the investors or these angels.
Speaker 1 05:10 So you’re, you’re pitching in an elevator elevator for one minute by yourself. So right. You go up and the whole time you’re going up to the penthouse where they are. Right, right. And there are four of them sitting in their cameras everywhere and then you get to be, you know, so the whole experience is on tape and then you, they have a choice at the end. Once you get to the top, where are you supposed to go? They either will push a button that will let you in, okay. To pitch to them some more. Right. Or they will send you back down to the lobby. Most of them write down, they have a long ride down, but few make it in and this, this person, this guy actually makes it. And so within a couple of minutes of the pitch, he was asked to each, okay, so, ah, you know, I’m so excited about this product and you know, Costco is wanting to place an order.
Speaker 1 05:55 And I says, great, tell me. So he said, well, you know, they think they can order about a hundred thousand dollars a month. And they asked how much revenue yet it would basically triple the size of his business and 100,000 in revenue and this is going to be great. And the, the, the, the angel, the angel investor said, well, Oh, ask them, did you know that th th the policy, you know, the, the payment terms of Costco, I said, uh, I think so. Did you know that they can offer your net 90, um, in a supposedly, let’s say they place a a hundred thousand dollar order and it goes well, and then they want to know that $100,000 ordered the second month, and then they want to know that ordered next month. So all of a sudden you have $300,000 worth of invoices that Costco owns. When do you think you’re going to recoup your money?
Speaker 2 06:41 Yeah, this is it. This is a huge problem for business owners. And I’ll, I’ll tell you, this is the, the conundrum that you, you find yourself in. You’ve sold the account and you thinking that this is it, this is, this is the dog I am, I am finally sold. Yep. Or, or it’s my sweet spot where I can just sit here and I can just punch this out and it’s going to work great for me and what people don’t know and realize as the bigger they are, the longer they take to pay. Um, and I, I was telling you earlier, we, my husband and I had a similar experience and he sold an account when we are in the janitorial business and he, um, you know, it was a national food chain and he sold the account throughout the central Valley. I think there was 20 or so stores and you know, several hundred dollars a piece.
Speaker 2 07:24 So whatever the number was. And we thought, Oh, this is that we’ve, you know, this is gravy train. Now we’ve got these accounts and we do each one of these, um, you know, stores once a month and, you know, there’s 23 stores, whatever it is. And, and this is, this is gravy train. And little did we know that they were not only were they so incredibly slow and paying, we had gone three cycles of cleaning before we got even one invoice paid and then it was just, they knew they could do it and it was just a constant chasing of invoices and you know, they, Oh, this one didn’t get paid and this is when, you know, for four months ago that’s still hanging out in, you know, and it just became such a massive undertaking just to manage getting paid and managing the invoices that it became very clear to us very quickly that we could go do a residential customer, um, service arrested, residential company, customer get paid while we walked out the door, hit the bank on the way home and you know, be done. So there is a cost to all of that time and I think small business owners are particularly new businesses don’t always factor in. And I know you talk about AR all the time, all the time, but the piece about AR, it’s not just is do you have invoices out there that are going to get paid? It’s what’s it gonna take to get them paid? Well, how many hours do you spend on the phone making a phone call of
Speaker 1 08:44 this article that you found for this show? Rather than me saying, I’m just gonna read it because it encapsulates this whole thing about, you know, dealing with large, um, uh, vendors, large clients. Are you financing your clients or your vendors or you vendors ever noticed why massive companies tend to not pay faster than 45 or as much as 120 days. They are using their size and position in the industry that said their cash management terms pay attention. Unfortunately, for many small and medium sized businesses, entrepreneurs end up financing their clients who are 10 times their size. The problem only gets worse because in order to attract the vendors you need to deliver your product and usually end up paying fast as less than 30 days in ms. It makes logical sense as your ability to pay quickly puts out your requests on top of the most vendors you have engaged.
Speaker 1 09:32 So your vendors are happy. That’s crap because they’re getting paid quicker except that your clients are not paying you. What do you think is going to happen? There’s a huge gap. There is a huge gap in all of this, this address. So we’re going to go back to, we started last week talking about the whole idea. I think we spent an hour talking about the whole idea and um, I think we should tell our listeners a little bit more logistics. You know, why don’t we get to the meaning? Okay. Hey, we need to go on break. Gosh, Lizzy, do keep going. Let’s keep going. You’re listening to business and legal talk with me and Claudia and we’ll be right back.
Speaker 3 10:05
Speaker 1 10:29 so welcome back. My goodness. Last time I got reprimanded by our producer, he says, I can’t believe you almost went over the break. I apologize. This is such an exciting topic, guys. And if you’re listening to this show, it’s all, it’s real transparent, authentic, talk about business. We’re talking about AP and AR and starting a business of why do you care? Why does it matter, Claudine? So where were we?
Speaker 2 10:51 We’re talking about how are we financing our vendors and you know, this is a subject that’s near and dear to my heart because, you know, we’ve been in construction industry for a long time and I really, I have such a heart for the folks that are out there in the trades and trying to make a living because they, you know, are prohibited by law from taking money up front. Um, you know, there, there’s some caveats and there’s some work arounds on that, but by and large, um, in the construction industry, our contractors have to, uh, supply all of the materials, all of the labor, get all the work done, and then they have to wait to get paid til after. And you know, you’re literally financing the customer’s job throughout, throughout the whole product process. Um, you know, if, if you are a contractor and you went to your residential client who wants to have a kitchen remodeled and you said, sure, you know, Mrs. Jones, it’s gonna require, you know, $50,000.
Speaker 2 11:41 You know, I need a check for $50,000 up front. Everybody would automatically think you’re a crook. I mean, cause that’s just not how we do business in the construction industry. But it, how do you overcome that? It is a challenge because can’t outprice yourself out of the industry. So yes, you could bank into your estimates, you could bank in the financing costs or the what we call also the carrying costs, um, but then then you out price yourself against your competition. So you really have to be strategic. We work very, very closely with clients who do this. We write contracts where they can get progress payments. We ensure that we use utilize estimating and calculating, um, on those progress payments. So we know an estimate of how much money is going to be put out at this particular stage of the job. And then we require this payment. Um, and a lot of the contractors, they’re pretty good at doing that. Um, but we really help you by getting solid contracts behind you so that you can ensure you’re going to collect. But I, I’m kind of digressing a little bit, but going back to the idea, are we financing our vendors? Are we financing the businesses? In many cases, the answer’s yes.
Speaker 1 12:51 Yes. So it’s, it’s, we live in the world of the difference it, okay. So we’re talking to business owners who actually have a Contra receivable. So this concept will be foreign if you deal on a cash basis, right? So if you’re, you know, if you’re a Cree bakery, a restaurant, anybody that you know that comes in in exchange for something, they pay you under spot, then you have different problems and they, an AR is not going to be your problem. Right? But it’s not like you’re, you’re, you’re, you’re, you’re, you’re home free. Um, so the whole, okay, so write a business plan. We’ve talked a lot about business plans. You’ve got to have a business plan. You can get templates out there on the internet. You, you, you, you got to have some, does he have to be perfect? No, no,
Speaker 2 13:36 no, no. And it’ll, it should be revised, um, regularly. Uh, I, and I know in the very beginning you really kind of rely on, as the years go by, you rely less and less on it, but it’s something that should be revisited. Um, it is your, your guidebook. It’s, it’s your game plan.
Speaker 1 13:55 Yeah. I mean, when you, wow, imagine playing a professional sport without a game plan and trying to understand how to outsmart your competition, you’re up the opposing team. It’s not different. Why shooting you take the time to basically you’re, I’m playing Russian roulette with your own life. You know, if you’re not taking the time to create a business plan,
Speaker 2 14:13 you are, and most people don’t, um, don’t do it. They frankly don’t do it. Uh, I don’t know if it’s, you don’t want to slow down long enough. I know we have this kind of phenomenon when people get into contracts that, that we are only looking at the desired results of the contract. So, you know, so for example, you and I are getting into a contract and you’re going to provide me widgets and I’m going to pay you X amount of dollars and, and we’re really excited. We’re getting into this and yes, we’re going to make money and you know, everything’s going to be, you know, rosy and everything. And we don’t, we don’t strategize the exit plan or what I call the what F plan. What if this doesn’t work? What if that doesn’t work? What if I want to not do business with you anymore?
Speaker 2 14:49 What if, you know, you, you, you know, eat tacos at lunch and I just can’t stay on taco. So we’re, you know, we’re just gonna be done with business. Um, and we don’t look at, um, all of the, what ifs. And I think that is a phenomenon because we just are looking at the bright side. The same thing happens when you start a business. You’re really only looking at how this idea is going to work. I know this is gonna work. This is going to be great, and we’re going to reach all of our goals. We’re gonna, you know, everything’s gonna be fantastic. The business plan to sit down and do it and do it correctly requires you to sit down and go through all of the what ifs, right? I’ll tell you a great point. It’s invaluable. It’s absolutely invaluable cause you’ve thought about it before it happens and then when it does happen, you kind of have an idea of how you’re going to handle it.
Speaker 1 15:36 So don’t, so we have a business plan and you’re going to flesh it out with how much capital you know the lifeblood of your business you’re going to need in, not just for the start of face. You have to assume that you’re not going to get any type of bank financing for the first couple of years. So how are you going to finance it a year from now if things go South, you have to understand that and one next. What’s next on our agenda is who’s going to be on your team? If you’re a sole proprietor and you starting solo, you know that it’s you. You are the CEO and the janitor. You’re the precedent and the secretary and everything else. But as you grow, you gotta have to thinking about adding to your team. Um, and uh, you know, it’s so what do you think, what are you, what, what are some people they should be on your team?
Speaker 2 16:22 Well, I am, you know, another phenomenon that we see a lot with business owners and, and I experienced it with myself. You run your business according to your personality and so your personality really is going to have a lot more to do with your, how your businesses run than you really think about it. And that’s the business plan stage is when you really need to consider that. Are you the type of person who is just go, go, go, go, go. Everything needs to be done, needs to be done now. Then you need to be able to hire people who are going to assimilate with that, that type of personality. And that’s going to be kind of the personality of your business. Are you the type of person who really, really wants to be liked? Then you’re going to have a hard time firing people. You know, you’re, you’re going to be that person who just wants to work it out and very charitable and things like that.
Speaker 2 17:12 So the, the, so that person has a whole nother set of circumstances and obstacles that they need to learn how to avoid. Um, but as part of the business, business plans have certain sections, um, and, and you know, there’s the market analysis, there’s the company description and this is really your management and organization. And it starts with establishing are we gonna have one manager per shift? Are we going to have a service industry service business or we’re going to have a manager in each vehicle that’s out on the road. You know, it’s really unique, but you need to stop and sit down and think how you’re going to structure how many managers versus how many employees. And maybe you’re only going to have one employee. Perfect. Great. Um, but that, that is a structure that needs to be outlined.
Speaker 1 17:59 So I was writing this down as you were talking and, um, I think who is on your team? It’s critical. Now, did they have to be employees? No. Uh, I think I am a big proponent or having a board of advisors almost from the GetGo. Um, you know, there would not have been a Steve jobs without a Steve Wasson the arc. That’s correct. They wouldn’t have been a bill Gates without Paul Allen. There is something about, you know, Scotty Pippin and Michael Jordan. There’s something about the chemistry of the founders. Um, do what you do best and hire the rest. That’s what I always say. So if you’re good at division and pitching the services and selling and closing deals, be the VP of sales be at the forefront. I think every business owner should be good at sales, whether they do it or not, but there is, everything else was gonna do the operations.
Speaker 1 18:54 Who is, if you are, if you’re building something, if you’re building software, it’s good to have a good shift technology officer who is a cofounder, who cares, who, who may not be good pitching the idea, talking to investors, but it’s great at producing product. And then, um, if you are a great builder, right? If you have this concept, they know if you’re in the construction business and you understand construction well that’s great. Who’s going to mind the money part, right in how to pay the vendors, how to administer. You know that there’s this whole thing about the real estate in the construction industry that is cash management, the volatility and in the end it in the, in the difference between, you know, uh, people getting paid and you paying your vendors and meeting payroll and certify wages and, and all that kind of stuff. Either you’re good at it or you’re not, I mean, not good at it. You’re going to hire the right people.
Speaker 2 19:43 That’s right. And you, you, you really need to look at each section of your business individually. And, and what does it take to be good in that particular section? I have a client who is a painting contractor and really, really great guy. I mean, he is just one of the nicest guys that you ever, ever meet. And he, people want to give him work. He’s just that kind of guy. You can’t help it. Yeah. And, and he’s just that guy. So he is the head of estimation and um, you know, job sales. He, he’s that quintessential person that people just want to give them work. Um, and has been, you know, very, very successful and, and seeing, seeing some really amazing success in a difficult industry. If you’re not that person, then maybe your job needs to be, you know, managing logistics. I um, look at people when I work with clients, I say ask them typically, are you a people manager or a project manager?
Speaker 2 20:40 there’s two different types of people there. And I, I know myself, I can manage people but a much better project manager, um, as just me knowing myself. There are people out there who love managing people. They love coaching and they love, they love bringing them along and develop the skills and all the people. Yeah, motivational and, and those people are great people managers and they may be really, really super bored doing project management. So really kind of assessing the personalities and you can really even get really crazy and, and work with your oncoming employees with personality tests. They’re out there, they’re on the internet. They’re easy to access and you can give, um, employees, personality tests that kind of assess where their skill levels are, what they like to do.
Speaker 1 21:27 So, okay, so let’s, let’s dive a little deeper. Okay? So there are some key people that you need to have on your team and there are, you know, you need to have somebody advising you on the tax side. This is not an employee. No, don’t take on doing your own taxes, no even CPAs and do their own taxes. It, there’s something about it that you need to, first of all, if you know what you’re doing, you’re going to be, tend to do the things that you otherwise wouldn’t with a client, right? You’re going to take some liberties with yourself, right? That you probably need to have somebody else check on you. Um, you need to have a great attorney, um, help you with navigating this very litigation society that we’re in. Um, and just being proactive. A good attorney is going to be proactive. You need to have a good financial advisor.
Speaker 1 22:17 You have to have a good insurance person and we’re going to have coming up soon. You know, one of our guests going to be, you got to have insurance is as a way to leverage as a way to hedge your bets as a waste to protect your investments. A great banker, you’ve gotta have great banker, and if you’re in a prior to selling widgets, you’ve got to have a gray supplier where the person is in and out or the U S those as what makes up your team now. And then you got people who are going to be advising you on really the temperature of the market. You need to know what’s going on in the marketplace. So those are, and those settle for the first one that comes along. You’ve got gotta, you know, you’ve got to interview these people,
Speaker 2 22:54 right? And this really leads into kind of our next segment on, um, business structure, um, and, and putting together an advisory team. So you have your team of employees and then you have your advisory team. And your advisory team typically is not an employee, but you may have a key employee that that is part of your advisory team. It’s not, it’s not a situation where we, we just never do it. It just, there’s going to be people who are non-employees that, you know, wouldn’t expect them all to be, but you know, this is really where we get into business structure and how do we structure ourselves from a sole proprietorship to an LLC.
Speaker 1 23:32 That’s going to be exciting conversation coming up. So I don’t want to start really too much on this topic right now until we come back from the break. But this is, if you are in business, think carefully as to how your structure is because that’ll play a role later and even plays a role later as you exit. If you want to sell your business, you are, um, you will, you will do yourself. A favor is, you know, it boggles the mind to me how people just decide to skimp on advice, right? You know, like, is it you, I, I, I, I don’t want to pay an attorney, so I’m going to go to legal zoom and actually create my own corporation later. $100,000 worth later worth of trouble. You realize that you should’ve paid somebody 1,002 or $2,000, $3,000 to get it right the first time because you were not the expert. I’m not an attorney. Why would I even claim to be one that 1100 bucks? But you saved $100,000 worth of headaches. So, Hey, you’re listening to business illegal talk with Leo and Claudine here on power. Talk a am 30 60. We’ll be right back.
Speaker 4 24:34
Speaker 0 24:49
Speaker 1 25:02 all right, everybody, welcome back. We’re having so much fun talking about business here. Business and legal talk with Leanne, Claudia here. Power talk was just, wow. I, I, we need to start kind of bringing it home. So, um, we have talked about a lot of things. Let’s move on to licensing.
Speaker 2 25:22 Licensing. Well, I think licensing is one of those things that, um, you know, you have to have your business license, you know, that’s, that’s just kind of a thing. More so, uh, licensing is if you require a particular license to conduct your business, do not attempt to do it without a license. And I know so many people are attempting to, um, the classic is contract without a license. I mean, if you’re, you’re doing painting work and you’re, you’re every third or fourth job, you keep it under $500, but the rest of them are kind of over $500. I, I just really want to work with clients and, and express to people, don’t try to navigate around things. I have clients come in every day and they say, okay, well I’m going to do this. I recently had a client who bought a, um, uh, a diesel truck, uh, you know, for hauling, hauling goods, and he had never been in the trucking industry.
Speaker 2 26:22 And then he realized that the, you know, the insurance when you’re brand new is very high. And so, yeah, he’s going through all of these explanations and, well, if I have the truck and, and it’s, it’s under so-and-so’s name and then so-and-so, it’s on their insurance. And then I, uh, you know, we have a corporate and we, and I, I think I said during the conversations three times, what are you, what are you avoiding? What is it you’re trying to avoid? It just you say, um, I, we didn’t really get down to it, although I think it was a world that was new to him. And so he was just, I don’t know if it was avoiding paying the higher insurance premiums or if it was just a world that’s super new. And so he was just kind of swimming around like, Oh, this is going to be really expensive over here.
Speaker 2 27:06 Well maybe I can do it this way. Um, when you find yourself starting to do that and you’re starting to create all of these ways to kind of navigate and maneuver around, stop yourself, ask yourself, what is it exactly? I’m trying to avoid if it’s, if it’s avoiding, if you’re trying to avoid writing a check for that insurance policy, get over it, write the check and move on with your life. Right. Because these, all of the strategies to, if I just, you know, I will, I will bid the job. I’ll give the client five invoices for $500 each and then I’ll stay under the $500 limit for contracting without a license. And ultimately just go take the test. Just legit, right? Throw it out there because, Hey, I have this question for you and I wasn’t I just wrote it. Franchising hoo. Woo. All right.
Speaker 2 27:56 So if you had a choice, if you’re starting a bit and you’re quite not sure where you want to do, what do you think about the concept of franchising? I think franchising has its place. Um, we’ve done some franchise agreements. We’ve drafted them from the beginning to the end. Um, and um, just so let’s just so people know out there when whenever you draft a contract, um, the contract can be either weighted, say for one party or it’s weighted for the other party, or it can be, um, a very neutral contract. So for example, if we write a lease and the client is, our law is the landlord, that’s our client, we would typically write it weighted on behalf of the landlord. That’s our clients. We’re looking out for their best interest. Franchising is always waited for the franchisor, right? So if you’re looking at pizza hut and you’re looking at buying a pizza hut franchise or a subway or you know, whatever, whatever the case may be, go into it 100% understanding that you are there for the benefit of the franchisor, you’re maybe gonna make note of this.
Speaker 2 28:58 If you’re listening to this show, you’re going to maybe make a little bit along the way, but they are not there for your benefit. So people get into franchise agreements thinking that they’re going to have all of this support from corporate and corporate’s going to help them be successful. And I think to some extent that’s the sales pitch that franchisors give to franchisees is that, you know, kinda come on with us and you know, give us 20% of your, of your take. And in exchange for that we’re gonna. You won’t have to think about decorations. You won’t have to think about lighting. You won’t have to think about anyway, we’re going to help you, help you, help you, help you. It is something that you need to go into eyes wide open. I think there’s a great place for them. I think for people who are not necessarily trying to make living off the
Speaker 1 29:42 franchise and you have three or four of them and so you’re making a fractional amount of money off each one of them. Right? I think it’s a great place. Um, there’s a lot of structure, right? If you want to go into business for yourself and you want to be creative and think of your own ideas and do things on your own or you know, sales plans or product plans that, you know, um, campaigns we used to call them in the nonprofit campaigns. Um, you’re not going to do any of that. You are very regulated, you know. Um, I actually have a thing to say about franchising. Um, when I first started in business, I was a VP. I knew what I was doing. I have built territories from the ground up for a staffing company all over the West coast. I, even though I knew what I was doing, I still couldn’t pull the trigger.
Speaker 1 30:30 So for me, getting involved in a franchise was a good thing until I learned the other side. And the grass is not green. You know, the other side. And then I learned that when you’re in a franchise system, you may have ideas and they may even adopt the franchise, maybe even adopt some of your ideas, but you don’t have the final say on anything down to the color. Uh, and the color palette of the logo. That’s great. It’s done. Now it only works if you’re on a passive side of things. You have an owner. So if you’re an owner operator and you’re working 80 hours at a McDonald’s franchise, then is not good. You basically traded job for another job. Right. But if you are, have the wherewithal, the financial wherewithal that you can actually buy four or five and you are allowed by the franchise sought to develop it in a, you don’t have to work at it and you have the deep pockets, you know, you may actually buy yourself what I call an annuity.
Speaker 1 31:21 Absolutely. Absolutely. Um, franchises are very, very popular with professional athletes. Yeah. We’ve built a number of Panera’s and fun. Interestingly, who was owning them. Um, but they are cookie cutter. They, uh, run essentially on their own. I mean you have employees, right, but it’s not something that you have to go strategize. If you place it in a place that has the population and the franchisor will guide you through that. Um, they kind of run themselves. They do people, yeah, you need to understand eyes wide open when you come into. So I thought it was, it was great for me when I first started out, but I didn’t realize that if 10 years is too long, the average franchise agreement is 10 years long with a one year with a 10 year option to renew. Now you have a way out. After 10 years you can, it’s very hard to break away unless you fail. But if you’re already failing, what’s the even point of being in business? So that’s the thing about franchising. Just go out at get advise. Um, you also going to have a super high net worth, um, requirements. Um, you cannot even touch a McDonald’s franchise if you don’t have at least one and a half million dollars worth of net worth. But there, you know, there’s a lot of ones that you would be so surprised there’s, there are websites
Speaker 2 32:40 that have a franchisee franchises, um, advertise and you can go through and click. You would be so surprised the franchises you can purchase, um, ultrasounds, that’s a, that’s a new add, a franchise model you can do, you can purchase it. Um, uh, uh, a franchise that, you know, you do ultrasounds and it’s kind of popular. It’s becoming more and more popular as, as we’re, you know, more and more in tune with technology and just about any business can be franchised nowadays. It’s interesting. I mean there’s dental offices, there’s just, there’s this everything dog walking services, everything across the board.
Speaker 1 33:15 Would you suggest retail as a way to get involved in
Speaker 2 33:19 business or not in a franchise level? I think retail is M and an intermediate to advanced program. I a very nice way of putting it. I, if you’re, if you’re just, if you’re a beginner in business, um, retails is much capitalization. It’s huge capitalization, low margin. And um, then you have the things to deal with, which is your employees, employee theft. And, and things that really take a bite out of your office.
Speaker 1 33:42 Cool. So, all right, let’s move on. So, proprietor, legal entities, let’s get into that. All right, so this is your purview. This is your thing. Um, what should, if you are a brand new business owner shoe, you incorporate which way issue you stay as a sole prop, what do you think, what advice would you give?
Speaker 2 34:05 We always start by assessing the liability of your business. So if you are, um, a business that has a high liability, so anytime I have employees out on the road in vehicles, that’s a high liability, I don’t care what you’re doing. Um, just the fact of having a company vehicle with an employee in it out on the road, automatic high liability. Interesting. Um, so if you’re are a seamstress, very low liability, what’s the worst that you’re going to, to create your own is not gonna fit, I’m going to show you. Yeah. So I mean, so you, you may have a, you know, a thousand, couple thousand dollar, you know, liability exposure. So we always start by assessing the, the liability people need to understand. If you are two or more people and you’re operating for a common goal, you are a partnership in California. Whether or not you have a partnership agreement does not matter.
Speaker 2 34:57 Say that again. If you are two or more people operating for a common goal, typically we operate our, we’re operating for profits. So let’s say two guys get together and they want guys in a truck, two guys in their truck and they go out and they want to start building fences. And, and what, what you need to understand is you are now a partnership and you equally have liability. So the liability, if one person has more assets, personal assets and one person has zero personal assets, the one person can receive all of the liability joint and several liability is what we it. And so you are equally liable and your personal assets are on, on the the line. That means your home, your car, your bank account, your savings, um, you know, all of that. So your ability to earn income, it’s all on the line.
Speaker 2 35:52 So if you have a few are doing something and you’re functioning in some way that is potentially um, a liability, building a house was the worst case that can happen. The house, you know, falls in huge liability. Um, if you are painting, you don’t really have a huge liability for the paint parts per se of the, of the service that you’re providing. But again, it’s your employees being out on the road. So anytime there’s a liability, we want to move you into a corporation. Um, now what type of corporation depends somewhat on taxes and somewhat on, um, what type of business you are. Sole proprietors take all the liability personally. So why would anyone have a sole proprietorship? Well, I, I,
Speaker 1 36:39 aside from the $800 to the Francesca in case you want to have an LLC, but why would anyone give in this state of affairs
Speaker 2 36:47 in business? You know, people come to me all the time and it just, it is what it is. It’s just, I’ve just been doing this for this. You know, I, I I got my contractor’s license, you know, 10 years ago and, and I’ve just been a solo and you know, I run my own affairs and the next thing I know, um, we have an issue. So we start with liability and then we move into what type of business are you,
Speaker 1 37:14 we’re going to continue to develop this topic more, but I’ll say this, all things considered equal for all liability aside. Yes. If you have a sole proprietorship, you have self employment tax of 15.32% that it’s, if you have a soul, which means you have a schedule C and you 10 40 a and your personal tax inc that I mean your income tax and you have a schedule C and you have self employment tax, why would you have that? So it’s 15,000 for every hundred thousand dollars worth of net income. If all liabilities set aside, why would you want to pay that? Right. Great question, right? That’s a great question. I don’t want to pay it. Don’t want to pay it. So stay tuned. We’ve got to tell you what to do next. You’re listening to business and legal talk with Leon, Claudine
Speaker 3 37:59 . .
Speaker 1 38:21 All right, we’re back. So, so much to learn. Right? And yet, so great opportunities we have out there right now. There’s so much going on in the marketplace. There is no better time. You know the best time to plant a tree was 20 years ago and the next best time is today. It’s say for business. Yes, the best time to start a business was 10 years ago. The next best time is today. So everything that you hear from us don’t let it hinder you from pursuing your dream. Even with all the perils and the, you know, the disaster that you hear and all this things that can go wrong, you will always be better off having your own business. So no question about that. So this is not fear mongering, this is just we are educated and we’ve told you from the outset that this show is about helping you and just got level on his right from their line of fire rifle on the front lines we’re doing, we’re running businesses with dealing with insurance, with dealing with taxation, with dealing with the legal stuff.
Speaker 1 39:18 And we help, we’re willing to help you. So if you’re listening to this show and if you have questions, I’m sure you will reach out to us. Yes, go to Greenland, you know, and in my case, you know, and if it is legal I will definitely refer you to Claudine, but it’s Um, by now you should know it by heart or you call our office five, five nine two one seven three one four eight. We’re here to help you. And Claudine, where should we find you? We [email protected] and that’s S H E R R O And our phone number is two nine four two seven 2200. So I told you at the a, at the end of the last segment that Hey, I was going to keep you, there was a cliff hanger cloud option corporations. So, so what I tell my customers is, if the only reason why you would keep a sole proprietorship and you would not incorporate or go the LLC route, and this, this, this beyond this show, but if you have hardly any income, you know, if you, if you’re doing a couple thousand dollars a year and you have no X, there’s no liability exposure and you have really hardly any income in that case, you’d be better off dealing with the 15%, you know, 15.32% of self employment tax.
Speaker 1 40:32 But if, but what, then again, I’m hoping that you’re not starting a business so you can keep it at $2,000 a year. That’s right. That’s not why you get into business. But there are some people that are, have hobbies, right? That start as a hobby and they have a, I have a good friend of mine who started a business trading stamps. Um, you know, postal stamps for PR. They’re actually a great, is a good little niche industry. We will actually trade um, a postage. Interesting. Yeah. In, in, in a a postage stamp could be worth thousands of dollars from 1920. Like there is an industry built around that. It’s $1 billion industry, a separate culture and people go to stamp shows and things like that. But what started us, it’s a little businesses producing him $300,000 a year in business. Good grief. So I told him yes, that kind of money stop hydroseeding in a sole prop and do something about it because he had so pain today.
Speaker 1 41:27 So he decided to go for an LLC, which, which is fine because I always tell clients like if your, if your is to grow beyond $1 million, you probably be better off with an escort. Um, if it is going to be less its LLC. Now from a legal perspective, you know, I’m not going to speak to the legal side. That’s Claudine’s expertise from a tax perspective is really a matter. It’s not a one size fits all. Consult, you know, reach out to us and fee we’ll figure out a, which is the best way to go because it is a byproduct or your goals where you’re going detects that whatever entity. Now, some companies may need, if you take VC money, venture capitalists, if you take angels into your business, chances are if you’re going to reach over 80 you escort will not do, you’re going to have to go to a C Corp, forget about the double taxation. But you know, if that’s where you’re going, you’re going to need more investors. So anyway, so that’s, that’s a quick thing on that. Um,
Speaker 2 42:17 so let me get, let me back up a little bit because I know I have a lot of clients that come to me and are confused about S Corp C Corp or I hear, hear somebody say, Oh, I’ve got six C corpse or I’ve got three escorts or whatever. And as if that their badges that you put together and, and I, I want to explain to people out there who may not understand that corporation is a corporation. When you come to me and we, we file your articles of incorporation and we create your corporation. We don’t determine whether you’re a C Corp or an escort. I tell them that’s not a decision that we make at the law office. That is, that is simply your tax designation, right? It’s simply how you’re going to pay taxes. C, corporate taxes, S small, small or what we refer to as pass-through.
Speaker 2 43:02 So whatever it’s, and it’s a, the same thing with LLCs as the same thing with sole proprietorship. Whatever. Money is not used to run the business is considered your profit. That’s what you pay tax on. It’s pass through taxes. But I want people to be clear that C Corp, S Corp, this, that and the other, those are just simply tax designations. They don’t make a difference. They, the, the corporation functions exactly the same. The LLC functions the same. Um, uh, LLC is a little bit of a hybrid, a little bit less requirements in terms of your filings and in what for real estate. It is very good for real estate. In fact, I’m doing a seminar on using LLCs, um, to purchase an in set buy and sell real estate. It’s gonna be a great seminar. But in any event, um, when, when you’re looking at what, what type of corporation should I be, what’s the difference between a corporation and an LLC?
Speaker 2 43:58 An LLC has a little bit less requirement. It, you don’t have to file your statement of information every year. You do it every other year. You have an operating agreement and a corporation has bylaws. Um, basically both of those are your guidelines. They’re your rule book to running your business. And so they’re, they function in the same way. Um, and LLCs, if you’re in the construction industry, you wanna stay away from an LLC because the contractor’s board will require you to have, I think, a $2 million bond instead of a $15,000 bond. And that’s a mistake a lot of people get really close to make it become, to me, I’m going to put the brakes on that. Um, but, and we, you, you don’t know that until after you go turn yourself into an LLC. And then the contractor’s board says, great, that’s, that’s nice. I want a $2 million.
Speaker 2 44:47 Why do, why is that? It’s because a lot of people use LLCs to build projects and then the project is built. We close the LLC and then let’s just say there’s construction defect now there’s no company to come back after. Oh. And so they make you hold a, a much higher bond interest. Um, and so what is, what, what is the reason why you want a corporation is because a corporation is a completely separate entity than you. It is. You don’t work for you anymore. You actually work for your corporation. Um, and then if somebody wants to Sue you, they Sue the corporation and you ideally, personally, we’ll avoid that liability so your house won’t be involved. The only thing that will be exposed is what the corporation owns. So when we get into, for example, we use LLCs quite a lot for rental houses. When people buy rental, let’s just say you have 10 rentals. We want to start to segregate those rentals into different LLCs.
Speaker 1 45:50 So you’re saying, okay, let’s see, let me stop you. So if you’re a real estate investor and you want to build some passive income and you have a, so we used suggest a, if you have a bunch of single family residences SFRs each one is his own LLC or you put a bunch of them into one LLC or if you have a fourplex, you put it into one. How does that work?
Speaker 2 46:08 I don’t do each one individually. Okay. So everybody needs to understand when you have an LLC, you’re a corporation, your minimum tax burden minimum is $800 a year. Okay? Yup. So ideally you’re going to be making more than $800 a year. So that’s, yeah, it becomes irrelevant. But you, I personally don’t advise one rental house, one LLC, I would typically do two, three depending on,
Speaker 1 46:37 so is the number of units more than the um, the actual structure?
Speaker 2 46:41 Yeah. You want to look at the thing, the judgment here is look at your LLC as a bucket. Everything you put in the LLC or, or that is owned by the LLC is exposed to liability. So if I have four rental houses in one LLC, I have a slip and fall at one rental house. All three of them are, all four of them are, are all exposed. So what we want to do is we want to group like types of property. I typically like to do that. So if I have a commercial building, I’m don’t want to put that in the same liability bucket as my single family residence.
Speaker 1 47:15 Okay. So those, so say you have a commercial building, so you have one commercial building, say with the, you know, six tenants, right? And then you have another commercial building. Were you, and that when another six tenants we you separate two or
Speaker 2 47:30 I would put him in the same bucket D and then we would start to gauge on just how large is this bucket becoming. Because I don’t want, when you have a commercial building, you are inviting the public into your building typically. So that creates a much higher liability than then the residential rental where you have a single family renting your residential home. Because once you start, and by inviting the public in, you now have a different burden. You have a different liability and you are much more likely to have a slip and fall or
Speaker 1 48:04 commercial versus apartment buildings. Which one has more liability? Commercial, commercial. So commercial. So, so if you take it, so the takeaway is if you’re going to have buy a commercial building, don’t put the same building with an apartment building into the same LLC. I don’t like to do that gut. Great, great takeaway. So, um, gosh, we didn’t even talk about branding on. The only thing that I’m going to say about trademarks right now, I’m not an IP lawyer. I just play one on TV. Just kidding. But, but you know, the trademark is very specialized area of law. We do, we do trademarks. You do trademark. So any, any words of wisdom for, for our entrepreneurs out there listening,
Speaker 2 48:39 you know, it’s, it’s not that difficult of a process. If you have a logo, if you have a, um, a particular product, um, I I do advise you to trademark it and you can trade market here in California and you can trade market federally. So two different processes. Um, they’re, it’s, it’s affordable in the long run. It is, it’s an affordable process and we do recommend that you actually do that.
Speaker 1 49:01 Great. Wow. So, um, lots of takeaways. So let’s, let’s go back. We have two minutes to wrap this up. So takeaways.
Speaker 2 49:12 Okay. Takeaways, business plan, business plan, business plan. Stop and sit down and think about it. Take the time. Don’t skip over that. Very, very important process. I’ve done it before. I probably started two or three businesses and I did skip over the process until I finally got disciplined enough to sit down and go through it. You can Google business plans. There’s templates, I think on Microsoft word. Don’t skip the process. Let yourself sit down and think of all the what ifs, how many different ways can this thing go wrong? Think about it. Determine how you’re going to deal with it. When it happens, hopefully it never happens. But at least if you thought about it ahead of time, it’s not a shocker. You’ve already thought, thought out your game plan. That’s my huge takeaway. And then entities, it’s important that you choose the right entity. Don’t be afraid of it. And then once you get it, um, and we didn’t get a chance to touch on this too much. Once you create your entity, you have to treat it correctly or you don’t maintain the protection. Um, and every lawyer
Speaker 1 50:11 you don’t want to appears the Vail, right? Yeah.
Speaker 2 50:13 Every lawyer who sues a corporation sues the corporation and the shareholders and tries to Pierce the corporate veil and then we, you know, so we argue at every time. It’s not just once in awhile.
Speaker 1 50:24 So for me, start with the end in mind. Yes. If you haven’t started a business, you are a great place. Don’t be so in a hurry to start something. Think carefully. Look at what industries have the most chins or you know, be become a disruptive innovator. Um, get into an industry that is going, uh, up, not down. I would stay away from retail unless you have deep pockets. Um, it’s enough for the faint of heart. So see what’s Amazon has done with the whole retail industry. So just go with eyes wide open. So we are grateful that you’re listening to our show. There’s so much more to come. We have great guests lined up in many, many areas. So thank you so much for tuning into business, illegal talk with Leah and Claudia and here in power talk. Have a great weekend.