Choosing the Right Legal Entity, Incorporation, and Funding your Startup

Authors: Brandon Kennington and Matt Dotson
Topics: Podcast on Nov 16th, 2009 | View Comments

One of the reason’s business owners can build wealth faster than employees, is because they get to play by different rules. When you incorporate your business, you can take advantage of a large set of tax breaks, cashflow tricks, and risk avoidance that you would otherwise be missing out on without it. But what business entity is the right one? LLC, S-Corp, C-Corp, or Limited Partnership. We cover all the benefits of each, the tax ramifications, and how to save money doing it all. We also show you some potential pitfalls to look out for. Find out why we think you should not get investors, and why you should not have a partner. Surprised? We’ll explain it all in this episode of Automate My Small Business.

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Transcript:

Welcome to Automate My Small Business where we show you how to set up and run your own automated business on the cheap. So get ready to take back your life and add a little spice. It’s time to build something automated.

MATT: Hello and welcome Automate My Small Business episode #9. This is Matt.

BRANDON: And this is Brandon.

MATT: And today we’re going to be talking about business operations and finances and getting started and stuff like that. But before we get started with that, what have you been up to?

BRANDON: Well, I got back from Paris and I feel like I just gained about 10 lbs from eating French food and all the thick sauces and stuffed baguette. So I’m looking forward to getting back in shape.

MATT: So back to the P90X?

BRANDON: Back to the P90X. So got to move out all the boxes and stuff from the garage to make room for that and, yeah, I’m focused on that right now to get in shape. How about you, what have you been up to?

MATT: That sounds like a lot more fun than I’ve had. I’ve spent the day at the vet. My dog has kennel cough because we boarded her. It’s been fun listening to her hack up s lung all day so that’s been my exciting day. And I just spent a little bit of time throwing Windows 7 on my Mac book which I’m pretty impressed with so far.

BRANDON: Yeah, how’s that work? Did you have to build a virtual machine to get that working or how did you get that to go?

MATT: I did it with the Boot Camp and then I can run it as a virtual machine which I thought was kind of a cool hybrid between the two so I can either be in Snow Leopard running it as a virtual or a I can boot directly into Windows 7 and I used VMware Fusion for that.

BRANDON: And no crashes, no blue screen, nothing like that, huh, it works really well?

MATT: Only Snow Leopards crash I mean so far so..

BRANDON: The operating system that’s supposed to work likes a dream doesn’t necessarily hold up to its name.

MATT: I’ve had a few problems I mean over all it looks pretty good but you know I’ve had quite a few issues so far so I thought I’d get Windows 7 a try and clear it out for a while.

BRANDON: I’m impressed with Windows 7. For anyone of you guys out there that haven’t given a shot or two where that’s it going to be something like Vista, it’s definitely not. It’s much cleaner, better interface. I like the way that they handle the open applications along the taskbar at the bottom and there’s a lot of other little benefits but definitely is a smoother running operating system.

MATT: Yeah, my favorite feature is the window docking, on the side of the windows if you drag like your browser to the left side of the window, it will dock and take up half of the screen so I can really easily get things side by side. I’m always trying to compare two documents or copy one thing from somewhere and reading into another webpage into Basecamp or something so that’s been really nice and really productive for me.

BRANDON: Yeah, that’s a good feature. I also like the search function in there. Finally, they figured out how to get that right.

MATT: Yeah.

BRANDON: Vista just never did it right. I don’t know why they couldn’t get that done but now finally Windows 7 has it so it works pretty much every key stroke comes up with listing, that’s good. Well, yeah, so I guess that actually is big news for last week, Windows 7, on their launch.

MATT: Yeah.

BRANDON: I’ve been using that for a couple of months, I know you have too but it’s been in the news. So we’re talking about finance, business operations in this episode. There’s a lot to know. This is not going to be complete in any sense because there’s so much to know about finances, and business entities, and LLCs, and corporations, and taxes, and tax advantages, and tax deductions.

MATT: Before we get started, I have a question for you.

BRANDON: What’s that?

MATT: Are you a lawyer?

BRANDON: No.

MATT: No, neither am I. So whatever we say, you ask your lawyer if we’re really right.

BRANDON: Yeah, always the claim that we don’t know what we’re talking about so ask somebody that does, right?

MATT: Yeah. We don’t provide legal advice or at least we don’t provide good legal advice.

BRANDON: But one thing we can offer is our experience and what we’ve learned and our opinions about it so what we talk about here today will be purely really just our opinions and our experience that we learned and if you want to verify or confirm any of it, an attorney is a good option.

MATT: And also CPAs, we’ll get into that later too.

BRANDON: Yeah.

MATT: So legal entities. So should I be LCC? Should I be a sole proprietor? Should I be S-corp or C-corp, LOP, Inc, what the heck do I want?

BRANDON: You know that’s probably one of the first questions that anybody who’s starting a business wants to know. What I want to be? What entity should I be? What are the tax advantages? Just to back up a little bit, you know, just having a corporation in itself is an advantage, whether that’d be an LLC or S-corp or C-corp, just being a business is a big advantage and there’s tax advantages you can take advantage of. You pay expenses with pre-tax dollars. Just by being a business owner, you take advantage of a lot of cost savings and frankly you make more money than you would be than by being an employee, not because you’re generating more income but because you can pay yourself after you pay all your expenses with pre-tax dollars. So strategically, it’s a good thing to have and when you have a company, you’re going to be the only one in it and I’ll go over that more later but …

MATT: So if I’m just starting out like I think the easiest thing to set up is a sole proprietorship, right? You basically file a DBA, a Doing Business As, with you county and hey, you’re off and running but what are some of the limitation with the sole proprietorship? What don’t I get and why would I want to get something more sophisticated or … ?

BRANDON: Yeah, well, when you’re a sole proprietor, you basically just calling yourself a business and that’s all there is to it. You can be a sole proprietor without even telling anybody that you even own a business. The problem with that is you don’t get any sort of protection. You are liable for any of your debts or the business debts or any liabilities, whether it comes from civil suits or you know criminal suits. People will sue your business and it goes right to you. So you’re not protected one bit.

MATT: Right. So someone could take my house if they sued me?

BRANDON: That’s right.

MATT: Okay.

BRANDON: And you know, yeah, you can still get your own checking account as a sole proprietor and it would still be under your social security number but you can have a named checking account as a sole proprietor. I think that we should probably just cross that option off right away because it’s probably good to do that right at the very, very beginning if you have a good idea or a good chance that this business isn’t going to take off but you just wanted to kind of test maybe some ideas, maybe on the internet, throw up a Google adwords campaign and see if there’s any sort of interest maybe if you’re going to start off as a sole proprietor. But you’re going to want to quickly get started as an LLC or an S-corp. I would advise against going with the C-corp although a lot of larger businesses would say that’s a better one to go with. The problem with C-corp, and the C-corp is a type of corporation that you’re most familiar with, the ones on Wall Street and all the large public companies are all…

MATT: Exxon Mobil and those guys, right?

BRANDON: Yeah. Those are all C-corporations and they by law have to be a C-corporation if they’re a public company which is just one of the laws about being a public company.

MATT: Right. So I think if you’re looking to try to get investors and IPO and do a lot of sorts of stuff with your business then you know maybe that’s reason you might want to go with the C-corp. But for the types of stuff we talk about here, that’s not our goal so C-corp is probably not something we’re looking for.

BRANDON: So scratch out sole proprietor and we scratched out C-corp. The other main two ones are LLC and S-corp. Those are both pass through entities and when I say pass through entities, you’re income goes through the corporation and gets taxed only once and it’s at your level wherever you live, at the state that you are at.

MATT: And maybe we should talk about what the alternative that is which is what we’re trying to avoid, right? So you know if your corporation is making a couple of million dollars a year, well, if you’re being taxed as a corporation, your corporation is going to pay taxes on that. They’re going to pay corporate tax and then when they pay you as the CEO or employee of that corporation, you’re going to get charged income tax and that’s what the double taxation is.

BRANDON: Right. So you’re pretty much paying tax twice when you don’t need to be.

MATT: Which you know the government could probably use it right now so if you want to pay tax twice you know that might help out our health care and all sort of stuff.

BRANDON: Right. Now there is advantages of taxing yourself twice and that is if you wanted to play some cash flow games where you didn’t want to pay yourself until the first of the year, the company will pay its corporate taxes when it received its money but if you held off any salaries of your own until the first of the year, you’re pretty much saving yourself one full year of taxes because you didn’t pay yourself, let’s say in ’09, you paid yourself in 2010. There are some cash flow games you can play and the C-corporation does have advantages but for the most part, you’re not going to be able to really do that.

MATT: And I believe in both an LLC and an S-corp, you can opt to be taxed that way if you wanted to.

BRANDON: You can. You can always take the S option which is why they call it an S-corp subchapter S. You can take the subchapter S even though as an LLC which I just learned it recently. Most LLCs are set up that way anyways but as an LLC you can actually opt to be treated in any way you want tax-wise but for most part you’re looking at an LLC and an S-corp being your two options and basically the difference is an S-corp has shares and an LLC has membership interests. And if you don’t have multiple share holders, it really doesn’t make a difference. There are some meetings and regulations and corporate compliance things that you’re going to need to do as a company as any corporation like a C-corp or S-corp but you don’t have to do as an LLC.

MATT: So things like having a board and board meetings and things like that, right?

BRANDON: Right. Yeah, you can get away with not doing them but if you do you’re running the risk of not acting in the respective how a corporation should be run and therefore you could possibly lose your liability veil is what they call it you know. They could pierce the corporate veil. If anybody wanted to sue you personally that they may be pointed out that you weren’t acting like a corporation because you didn’t have your board meetings every year and don’t have your minutes stashed away or kept neatly in a binder or something like that.

MATT: So do you talk to yourself in a room for a couple of hours and … ?

BRANDON: Me? I actually have an S-corp and I like it that way. I had a different purpose of using it when I set it up originally. So it doesn’t really apply any longer but it is nice if you ever want to get investors, having an S-corp is a good way to do that because that has shares and you can give them shares. But if you’re not going to have investors which I actually advise not to get, an LLC is a good way to go to, which you can still get investors. It’s not just through shares. You’re just going to have a contract with them that says they own 10 percent or 15 percent of the interests.

MATT: Yeah. With an S-corp, can you distribute dividends and things like that?

BRANDON: Yes, absolutely.

MATT: Yes. That might give you a little bit more flexibility with taxes as well as oppose to just pure salary.

BRANDON: Yeah, that is true. Dividends in some cases are taxed differently but for most cases it’s still ordinary income. So I would say if you’re going to pick one blindly, an LLC is the easiest one to form. It’s very quick to do. A lot of people have the myth that you got to go hire an attorney to get a corporation started. That is not true. It’s pretty easy to do it right online with the Secretary of State. Whatever state you live in, you can go to the Secretary of state or sometimes called the SOS of your state and pretty much file right online. You did that recently, Matt, right? How did that go?

MATT: Yeah, it’s like fill out six little boxes like what your name is, you know, what the corporation name is, what the address of the business is going to be, and not too much more than that.

BRANDON: Yeah.

MATT: One of the resources I’d recommend if you’re trying to decide between LLC and S-corp and some of the different stuff, as I was doing a non-profit stuff, I found this great website called nolo.com and it has ebooks about all these different legal aspects of LLC versus corporation and they have all the non-profit stuff I was looking for but it was a really good ebook and I’d really recommend that.

BRANDON: Yeah, there are a few entities worth mentioning, limited partners, limited liability partnerships, those come into play if you are a partner. I’d say it’s good to have your own company without having a partner and we’ll get into reasons why that is and of course there’s also exception to that. You might ask, “Matt and Brandon, aren’t you partners?” Yeah, we are but we also have our own corporations that we do most of our financial deductions and stuff there. So we get to take advantage of those deductions independently from each other and not have to worry about mixing those up so that’s why I think I would at least advise any good friend of mine looking to start a business to start one on their own and have full control of it and not let go of a single percentage if you can, that would be ideal, right?

MATT: Yeah, if you want to do a joint venture, you can always have your independent corporations share ownership and that shared entity, right?

BRANDON: Right.

MATT: Another thing that we haven’t talked about yet is—so I decided I want to create an LLC or I want to create an S-corp, whichever one, we talked about going to Secretary of State but which Secretary of State do I go to? Everyone is doing Delaware, right? Do I go there? Do I do it on my own state? What do you think?

BRANDON: Good question. Well, it’s been popular to think that you can go start a company in Delaware and not have to pay corporate taxes and not to have to pay any taxes. Well, the truth of the matter is that was possible probably in the early ‘80s and then the IRS caught onto that and a lot of the other states caught onto that and that just doesn’t happen anymore. So the bottom line is no. Go ahead and start the company in your own state because you’re going to end up having to pay state taxes on that anyways and having a Delaware company just means that you’re going to have to pay Delaware taxes also.

MATT: Yeah. So taxes, yeah, you’re right. You’re going to end up paying double taxes or you’re going to be taxed on those states. We live in California so we’re doing business in California. Regardless of the businesses we’re really operating somewhere else. But the one thing that it does matter for is your liability and the state that you’re incorporated in is the laws that you have to abide by. So if you get sued they have to sue you in your state.

BRANDON: That’s true. If you really feel like you want that extra protection, Nevada, Delaware are very well-known for keeping secrets.

MATT: Yeah, I believe that the Secretary of State of Nevada doesn’t share any of your tax information with the IRS so they’re really shady.

BRANDON: Or if you just feel like you want that extra protection, you and I both know some people that are extra secretive.

MATT: Yeah.

BRANDON: So there’s that level of security if you want.

MATT: And then the one other thing we should probably mention is the Vermont with their new…

BRANDON: Yeah.

MATT: … virtual corporation or whatever they’re calling it.

BRANDON: I think just last year they passed a new law that allowed virtual corporations to be actually real corporations. So there is no actual location at least in Vermont.

MATT: Yeah. So one of the reasons this is important is if you do decide to incorporate in another state, so my business is actually incorporated in Nevada so what I have to do to do that since I live in California was I had to hire a registered agent to represent me and accept service of law suits if I get sued and so I have to pay a yearly fee for something to do that for me in Nevada but you probably wouldn’t have to do that as a virtual corporation, right?

BRANDON: Supposedly so, you know, I haven’t read a lot about this Vermont new passing the law but I did catch a load of it and it seems that’s the case. By the way, who do you use to have your registered agent for Nevada?

MATT: I used rasi.com. A friend of ours that started that and you know it’s been a great business. When I had to do this I went to him and ask him all the questions and they were helpful to answer everything for us and so I highly recommend it.

BRANDON: They’re extremely inexpensive. I think they’re the most inexpensive around.

MATT: And it’s a great way to outsource something else that you don’t want to worry about, right?

BRANDON: They’ll even handle doing all your corporate filings and stuff if you don’t even want to do this on your own.

MATT: Yup.

BRANDON: Once you get your company, you can get a tax ID.

MATT: That’s about the easiest process in the world. You basically go to the IRS website, say, “I want tax ID” and say, “here you go.”

BRANDON: Yup. They pretty give you a random number and so now you got a tax ID. So now you got a company, now you got a tax ID and that means you can go and get a checking account which is kind of the ultimate goal because now you can keep all your stuff in one checking account and all your payments and expenses together and that kind of starts the ball rolling.

MATT: Yeah. You want to talk about getting a DBA on top of your LLC?

BRANDON: Yeah. The structure that both Matt and I use is where we have a kind of a main corporation that then we get DBAs for you know since our philosophy here is to go build small companies, hopefully they succeed and you know sometimes they fail and that’s okay. Because we’re keeping our cost low were you know lean and mean and sometimes we’re going to have to be a different company. Now just because you have a DBA doesn’t mean that it’s a whole new entity so if you have a partner in one DBA, you might want to have to start a new entity to start fresh. But basically imagine the tree structure where you have one trunk and then you know you have multiple DBAs under that tree.

MATT: Yeah, one reason I know that we do that is being in California every new LLC or S-corp or C-corp that you start is another 800 bucks, right?

BRANDON: Right.

MATT: So you know if we can start these DBAs I think it’s like 30 bucks, 40 bucks and like that with the county clerk you know. We can have the LLC that is doing business as some other business name.

BRANDON: Right.

MATT: And we can get the bank accounts and everything for those.

BRANDON: The other good thing that using a DBA is good for is you know when you want to get a website, you’re going to you know of course scour the web for a good website that’s catchy and you’re going to have a name that people might refer to you with the website as your name. Well, that may not necessarily be your company name, that might not be a corporation name but it could be a DBA of that corporation. So your DBA is basically as it said doing business as your larger corporation or your company entity. So you can have 5, 10, 15 of these DBAs all under one corporation and people Doing Business As is basically a way of saying to the public, “hey look, I might be calling myself company xyz but I’m just really doing business as xyz where the real company name is abc.” So you can have lots of them.

MATT: Yeah. So the reason that you might want to not do that is when you do this as one LLC with a bunch of DBAs, basically the assets of the entire LLC are at risk if any one of those DBAs get sued, right? So if you have something where you might have some legal risk or you want to really isolate those things separately then you might want to consider creating a separate LLC. But one of the good things is you can kind of spin these companies off if they take off so if one of the DBAs takes off and you know it really is becoming its own business then it’s not as big of a deal to you know separate it and pay that extra 800 bucks or …

BRANDON: Exactly. So it’s a good way to structure your company especially in this type of you know what we’re talking about where we’re starting small companies, cash flowing them quickly and they may or may not work out. But DBA wise it’s going to work good. Taxes.

MATT: Taxes, taxes, got to pay the tax man.

BRANDON: Yeah. So a lot of the structure of an entity all kind of revolving around getting taxes set up right. I mentioned before the main advantage of owning a business is you get to pay expenses such as your computer, your phone, your car, your gas, internet connection, any sort of business tools, all that gets paid before you pay taxes.

MATT: Yeah and by business tools you mean anything that’s really related to your business, right? So like I have you know electronics business and so I can buy related electronics that I use for that business like you know I bought a digital camera that you know I might use in that business and I was able to write that off, right?

BRANDON: Right. Where you may not be able to do that if you have an employer you know working a 9 to 5 job. They may give you a laptop or they may give you a phone but that’s pretty much where it ends you know. Let’s say you got a nice desk in your home office and you wanted to get a webcam for your computer to you know talk to your outsourcing, all that’s deductible and you get to save quite a bit of money from utilizing that.

MATT: Yeah all those business books you might read…

BRANDON: Yeah.

MATT: Those are all you know, business expenses. Some business meals so you can go out and talk with a partner and eat a nice lunch over, that’s deductible.

BRANDON: And I guess arguably you could say any sort of business attire or clothing.

MATT: Brandon, do you expense your pajamas?

BRANDON: No. I have expensed a pair of new business shoes, you know, to go with my suit. I have been told though by CPA that it actually technically the IRS only allows you to expense or deduct what would be considered a uniform. So they have to be actually clothing that is required for you to wear, for example, steel closed shoes or boots or some sort of like jumper or something like a hard hat you know stuff like that. But I know a lot of people that also deduct you know suits or ties and stuff like that which is considered business attire but that’s kind of pushing the limits. But you get the point here.

MATT: So by writing all that stuff off I mean you’re essentially saving what like 33 percent on all those stuff, right?

BRANDON: That’s right. Yeah. By whatever tax bracket you are in which is a neat little math trick by the way if you ever have time to do it. I was thinking to myself, “How much money are we saving by deducting,” and it turns out to be exactly the same tax bracket you are in.

MATT: A word of warning though that might encourage you to buy a few more things.

BRANDON: Yeah, it does seem to make you feel like you’re getting a good deal on everything.

MATT: Well, I only have to pay two thirds of this iPhone, I should get it.

BRANDON: So it’s important to get a CPA you know at least the way I think you should start off as getting a bookkeeper and getting your books all in order for inexpensive and then a CPA is a lot more expensive so use a CPA sparingly. Get good advice from a CPA, have him check the books you know every three or six months and then definitely have them do your tax preparations if it gets pretty hairy. You can do it yourself if you want, not really that hard to do but I have a CPA do it.

MATT: Yeah. Or you can have someone else do it and have a CPA review it and maybe that would save you some money.

BRANDON: That’s true. Now I personally like to have my business CPA separate from my personal or family tax prepare when it comes to tax preparation. I personally feel like that’s strategically a good idea because you know if there’s anything that one person does that you know might be a good tax write off for the deduction. Liability wise, the CPA doesn’t feel like they need to cover the bases on both ends so they’re going to be more aggressive I believe. Now that’s not something that I think could be proven but it’s my opinion.

MATT: Okay. That’s good recommendation. So I think the biggest part of the taxes though is understanding that by having LLC or corporation that you know all these things we talked about deducting, you’re paying for all those that basically pre-tax money whereas the way that you’ve been living the rest of your life, you get taxed and then you spend the rest on all those things, right?

BRANDON: Right.

MATT: So that’s the biggest thing you got to take out all the taxes, getting your CPA set up. I guess the last thing is deciding on a counting system, right? When you start up your business, you got to decide if you’re going to be accrual based or cash based. Accrual is more of like what the big corporations might use and I think as a C-corp you’re forced to use it or anything that’s taxed as a corporation. But …

BRANDON: Well, it’s basically accrual basis means that when you’re setting up your books, you’re basically taking anything that is in the receivables and applying it today even though you’re not getting the money until later, let’s say next month or two months from now, if you have let’s say a net 90 or net 60 payment system set up. You’ll accrue that today and your book say that you are to receive that money as of today and it goes also the other way. If you have a payment let’s say, you need to pay somebody in your payables 90 days from now, that’s also applied to today whereas if cash basis you only watch the cash. So…

MATT: It’s basically like your wallet. If you have 20 bucks in there, you have 20 bucks but not if you have to spend it tomorrow.

BRANDON: Right, and if I have to pay this guy 90 days from now, I haven’t paid him so it doesn’t show up in the book, you know, it’s still in my pocket so that’s how cash basis works. Not a big deal. You can choose one or the other. There’s some benefits to both but talk to your CPA. It’s really kind of a matter of what type of business you have that works best for you. So setting up your accounts is going to be important once you have your legal entity and your tax ID. You can go to the bank, get a checking account. I think that’s important to get pretty early.

MATT: Yeah, if you want to collect some money I guess it’s important to have a place to put it.

BRANDON: Yeah and the sooner you can start isolating all the cash flow from your personal cash flow…

MATT: I think that’s a really big point. Say that again.

BRANDON: The sooner you can isolate your business cash flows from your personal cash flows, the better off you are. You know you want to take advantage of these deductions and these expenses that you can write off as soon as possible so as soon as you start spending money on the business, you’re going to want to show that you’re spending money on the business you know because you’re going to be in a probably in a loss for the first few months or maybe few weeks and you’re going to want to get all that back in tax losses.

MATT: One other thing that you might be able to do around that I ask my CPA about was you know should I invest in my business as an equity investment or should I loan my business money? And so there’s different takes on that on how you should do that. Basically with a loan, it might be easier to get that money back out if you want to pull it back to your personal but if you want to keep that equity in there then you know there’s different ways you may get them out. That might be something you want to ask your CPA.

BRANDON: Yeah. It turns out that you know if you put money into the business which you will at the beginning, there’s technical ways how you can treat that. You can say it’s a loan and therefore you pay yourself back when you can and you can actually give yourself interest on that money. Believe it or not, it has to be a reasonable amount and what would typically be in a typical marketplace but nonetheless you get interest on the money and you do have to pay taxes on that but still it’s a great way to shift money around in the right circumstances. Otherwise you’re giving yourself dividends or salary in some cases but the main point is get yourself set up with a checking account. It’s really simple to do you know if you walk into the bank I think that’s the easiest but I know getting online is pretty quick too.

MATT: Yeah. I was actually able to start my bank account completely online with Bank of America so that was pretty nice.

BRANDON: Yeah, I like Bank of America. I think they have great business checking and I think Chase is fantastic too. In fact, I’m pretty impressed. I had a Washington Mutual account and it got switched into Chase because Chase bought Washington Mutual. I’m looking around Chase a little bit and I’m noticing they have some pretty good features. They have some ACH payments, and ACH deposits which is kind of a new trick. Yeah, you could have done that before but you would have to go through an ACH broker. Now it’s all built into the bank account which is kind of neat. They have web invoicing which you would have typically had to use something like Freshbooks or Quickbooks or something like that to do invoicing with. Now it’s built into the website, I mean, there’s starting to become their own kind of like a Quickbooks or web business books into the website.

MATT: That brings up a really good point is that whatever bank you decide, make sure it integrates with your accounting software. So one of the things I did when I was first sorting out is I got a bank account like kind of a local no name bank rounder and lo and behold when I finally tried to you know integrate on to Quickbooks you know there was no automatic integration. It didn’t just sync up and so I have to have my bookkeeper looked at the statements, copy everything in. It was just a nightmare. Get a bank account with the bank that syncs with Quickbooks or whatever you’re using. That’ll save you a lot of headache and really automate that process for you.

BRANDON: Yeah. That’s important. That’s probably the most important for me at least is to have it integrated with everything else.

MATT: What are some of the other things that you look for? What’s a must have in your bank?

BRANDON: Bill pay is important because I hate writing checks.

MATT: Yeah. Definitely bill pay. Good web access. I mean being able to get to see your accounts and everything online I think is important.

BRANDON: Yeah, it’s amazing to me how many banks still don’t do interbank transfers but most of them are actually starting to do that. But you know like if you had two bank accounts, one personal one business and you want to just transfer money between the two.

MATT: You can do linked accounts which is one of the things I set up when I was first entering money into my business and I think that was cheaper or free I can’t remember for sure.

BRANDON: I think it’s free.

MATT: Yeah. So it’s a good way to transfer, you know, it’s fast and you don’t need to pay the $25 or $30 for wire transfer.

BRANDON: I guess if you wanted to get a merchant account with your bank but you might want to check into that but I think there’s so many options out there for merchant banks in terms of taking credit cards. That shouldn’t be a big concern.

MATT: Yeah, that really wouldn’t be the next step I would take. Probably the next thing I would get will be a credit card. Because almost everything you’re going to try to buy is going to be with the credit card as you’re starting up, right? When you go buy office supplies or your computer or whatever you’re doing, you know, you’re probably going to pay for it with your credit and I like AmEx. I have an AmEx One card which I’ve been really happy with it and I’ve gotten a lot of cash back from but if you go with AmEx, you’ll get a Visa too.

BRANDON: Yeah.

MATT: Because not everyone takes AmEx.

BRANDON: Yeah. I think AmEx is the one you want to stick with if you’re on the consumer side being the consumer because they treat you well and they give you great rewards. I use an Amex Starwood so if you guys are into travel and you like the Starwood Hotels, you cannot beat the level of rewards that a Starwood American Express gives you.

MATT: Did you stay in a Starwood when you went to Paris?

BRANDON: I did. I went to Paris for free because of the Starwood American Express.

MATT: That’s awesome.

BRANDON: So if you like to travel a lot that’s the one to go with. Although I think if you took a financial analysis, I think, the Plum card, the one that Matt has is going to be the best bet. You’re going to get best dollar for dollar back. What is the deal there on the Plum card, Matt?

MATT: I think you get like 2 percent back in cash of whatever you buy or as you pay your bill within I think 5 or 10 days of when the statement comes out.

BRANDON: Right. Which will probably not be something you can do in the first few weeks or months of your business since you’re going to be probably using your credit card as a small line of credit to start off your business but in the end when you do have cash like coming in and you can pay off that credit card the first 15 days, you’re going to really get a lot back.

MATT: Yeah, I mean, this is your business credit card so a lot of cash is going to be flowing through this card.

BRANDON: Yeah. So you might as well be taking advantage it and get the points. But bottom line is get a separate credit card, you know. You could use your own personal credit card if you have let’s say two or three in your wallet already, and we all do I mean we’ve all signed up in our college days with a credit card and still stuck in our wallet. We never used it. If you have one of those you want to get started right away or you’re not getting accepted for new credit cards, you know, just use that temporarily. Bottom line is just separate those expenses with a separate credit card and it just makes life a lot easier.

MATT: Yeah, definitely. One of the other accounts we’d recommend getting right away is a Paypal account. It’s just so easy to receive money and send simple invoices and get started with the Paypal account. Even before you get a merchant account because you can do almost everything you can do with a merchant account with the Paypal account.

BRANDON: True and you can pay your outsourcers easily with Paypal although Odesk basic credit card you can use that too but Paypal solve the problem of having to send checks to people you don’t know over the internet. Now everything is like electronical and they guarantee the payment. So Paypal is a great way to do it.

MATT: As a consumer, I have been using a lot because I don’t have to give my credit card number to some company I don’t know. So if you’re going to offer Paypal that’s a great way for people to feel more secure about a company they’ve never heard of.

BRANDON: Right. So that leads into how you collect money, you know. You can collect money from Paypal from your website. Some shopping carts don’t necessarily play nice with Paypal but I know Volusion doesn’t actually, that’s a sad setback. But Paypal does work in Volusion but the confirmation that the customer has paid doesn’t get confirmed. You have to confirm that personally you know so you kind a have to trust that they went through which is something I hate about Volusion but other than that they’re pretty good shopping cart.

MATT: Yes. So in addition to this the shopping cart, you can create invoices out of Paypal, just like you’ll create out of Quickbooks or you know Freshbooks or I think there’s another one called the Harvest. Those are all like billing and invoicing tools. If you have a service based business and you know you do an hour of, say you’re a lawyer and you want to bill someone for your time, you could send them an invoice with any of those.

BRANDON: Yeah. So of course the typical collection methods are credit cards, definitely go with that if you could, electronic payment. You got your Quickbooks. You can collect or send invoices through Quickbooks and you can send out billing invoices through Freshbooks or Quickbooks, and like Matt said, Harvest and Paypal and things like that.

MATT: You want to talk about checks?

BRANDON: Go ahead.

MATT: I think physically accepting checks and something someone writes out to you and hands to you and you have to take to the bank is a headache that you don’t want to have. So we obviously recommend credit cards but you know if you really, really want to take checks and your customers are kind of demand it or you’re in the business that it’s expected, look for ways to deposit checks electronically so you don’t have to go to the bank. You said your bank is starting to offer a few things around that?

BRANDON: Yeah, you know, USAA allows you to deposit checks through the scanning and I know Chase now is letting you buy a little machine into your computer and scan the checks almost like you would at the bank so you know there’s lot of options out there if you really need it.

MATT: Yeah, okay. So we’ve talked about getting a bank account up, finding ways to collect money from your customers. So if I’m just getting started, you know, how do I get money other than just writing a check to my own business?

BRANDON: Well, I guess if you have to raise funds you could. You know it’s funny, this is one of those myths that I see a lot of small business owners think that they have to do is go out and somehow raise money with the VC or with the Angel Investor and that’s got to be one of the worse things you can do as a small business owner. It just immediately dilutes your ownership and can give up control so quickly. You end up being a slave to your investors which is not a bad thing if you know if it worked out well but for the most part I like to build businesses more to build a lifestyle that I like to be accustomed to having. So by having a large investor in one of my businesses, just gives me phone calls on Sunday while I’m on the golf course and they’re saying, “Well, why aren’t you in the office?” And I say, “Well, it’s Sunday.” And they say, “Well, I just gave you $500,000. You need to be in the office.” And I’m thinking, whoa, I thought I own this business, and now I don’t and I don’t own my time or anything. So if you can avoid it, I’d say definitely try to think twice before you try to find investors or VCs.

MATT: Yeah and it takes a lot of time too I mean I know you tried to shop a business you know back in the dot com boom…

BRANDON: Yeah.

MATT: The ventures and all that sort of stuff and you know it’s time that you could be spend making your business, and building your product or whatever, and the type of businesses that we promote are earn money fast like. Get it up and running and make it self sustaining, right, and just keep incrementally building on top of that. So if you’re doing it that way, you don’t need hundreds of thousands of dollars to sustain your business while you’re building whatever your building, right?

BRANDON: Yeah and you know you put yourself out with a lot of risk out there on a limb because as we talked about you know your chances of succeeding are very slim. We already know that by being an entrepreneur we’re taking that risk that these businesses may not succeed and that’s actually the majority of them out there they fell in the first year. So to have somebody invest in you, let’s say $500,000 or a million or more, that’s on your shoulders and if God forbid the business doesn’t work, not that you’ll be liable for it personally but I mean that’s a lot to carry. If you can find other ways to build the business without having the investors such as new methods and technologies to utilize to keep your cost almost to zero and you boot strap it from the ground up, you’re going to be you know a lot smarter in the way you build the company and your profits are going to be more almost immediately because you’ve kept you cost down to nothing. And we of course devote these podcasts to kind of showing you all the techniques to do that. I would say avoid it at all cost if you can. But of course there are certain business models that require large funds to get started…

MATT: I think especially when you’re starting out I mean after you have the business running, it’s profitable, it’s proven and maybe you want to take it to the next step, maybe then you’ll look at investors but definitely not when you’re starting.

BRANDON: Right. Nor will the investor would think of investing in you if you haven’t started it I mean with that one show shark tank. I love that show. Have you seen an episode of that?

MATT: I still haven’t watch it yet. I heard good things.

BRANDON: That’s a great—they got this line of investors and these entrepreneurs come in and pitch their idea, their business and you know half of them are left out of the room because they say, well I have this idea and they say how many sales have you had last year, well, none. What do you mean none? How am I supposed to invest in a business that doesn’t show that it’s going to be profitable? So you know it’s funny because a lot of people feel like, oh I just have a good idea therefore an investor should invest in me. Well, unless you have some sort of intellectual property that you can pretty much keep all competition away, or you already have sales to show that it’s profitable and that you can operate the business on a profitable level, no investors are going to invest in you anyway. So it’s a waste of time to think that you’re going to go get money right away and it’s not smart anyway so …

MATT: That’s a great point.

BRANDON: Go build the company on your own, bootstrap it, keep cost super low, super lean and use all these techniques and tools we’re talking about in these podcasts to keep the cost down.

MATT: Okay. So since I’m not going to go to investors and I’m going need a little bit of money to get started up, you know we’ve already talked about credit card as, hey you can put some stuff on credit cards but we all know that the interest rates on these cards are not always great.

BRANDON: Yeah.

MATT: So if it’s going to be a longer term investment which obviously we’re trying to optimize for short term but we understand that there might be some long term cost, what are some of my other options?

BRANDON: Yeah, I mean eventually you’re going to want to keep up with your growth rate I mean if you are growing you may not have enough money to keep the growth rate up to fill all your orders let’s say you know. So you’re going to have to raise money but you don’t necessarily have to raise money through VCs or Angels in that case. If you actually have orders going and you’ve been in business for a year, different banks have different requirements but you can get a line of credit. You can get a long from the SBA, Small Business Administration, your own bank might have some sort of small business loan. I know there’s a few companies out there that focus on giving small loans from $20,000 to $100,000.

MATT: You know I actually saw a website where you can put your business idea up on a website and like other people will fund it kind of a Kiva for small businesses. We’ll put these on the side notes what are the site because I can’t really name it right now but I thought that was pretty interesting. It’s like a 7 percent interest rate which is pretty good.

BRANDON: Really. That is good. Yeah, I know of a company in New York that does small business loans for about $20,000 to $100,000 no more than a hundred actually which is interesting because banks usually make more money on larger loans but they focus on their smaller loans for businesses. The down side is it’s 20 to 30 percent which sounds like a lot but since they’re giving you kind of a non secured loan, you know, and you can only be in business for less than a year, that’s pretty unheard of. No bank will really typically do that. So because they’re doing it, they do charge a little bit more interest rates but if you have the growth and the orders are in place, it might actually be a good strategy.

MATT: And one other thing you need to consider as your taking out these loans is a lot of banks are going to want you to personally vouch for these and put your own personal collateral out. So that’s a place where you might be working around your corporate protection that you have established with your S-corp or your LLC. So understand that when you take out a loan, if you’re making a personal guarantee on that loan then you’re not personally liable so watch out for that

BRANDON: Yeah and the credit cards are going to be usually personally guaranteed every time.

MATT: Yeah and another option that you have that a lot of people might not think of before they get into this is a lot of your suppliers will offer you credit account to buy products from them. So you might hear these as net 90 or net 30 or whatever. Basically they’re giving you a 90 day loan to purchase their products with that you’re going to then resell or combine with your product or used to build your product and you have you know 90 days to pay them that amount which might be enough for you to sell all that and pay them back.

BRANDON: So the downside of that is once you get credit with the company that you’re buying supplies from, they want you to send them a check every month. I hate that because that actually means that I have to bank every month about opening it up their bill and paying it. In return though, you’ll actually get credit and in order to track that credit there’s a company called Dun & Bradstreet or typically called D&B and they’re like the Experion or the Transunion of credit reports but for businesses.

MATT: So D&B numbers are kind of like a business’ Fico score.

BRANDON: Exactly. It does cost some money to get set up with the D&B, I think it’s like $500. And I wouldn’t suggest getting it right away although it is handy to have. If your business depends on getting a line of credit sooner than later, if you want to get some sort of line of credit or get a loan with the bank, you’re going to have to build up credit with the business and most banks like to see your company in business for two years or longer. The longer the business has been in place the better and unfortunately that’s not always the case for all of us but by having the D&B number you can start to build credit and really all of these is after you get your D&B number, you go into a website. It takes 10 minutes to set up and get your D&B number and you do have to pay their fee but once you get set up you pretty much go to their website and fill in any supplier that you have that has offered you credit and that your paying your bill on time and they keep track of that for you and they do contact that supplier and they say, hey this business xyz is paying their bills on time. If they say yes, then that’s good for you because that keeps your credit up. So by establishing a credit you’re going to eventually get in a good situation to get more money off from the bank but that’s kind of a long term strategy and it’s best to probably use credit cards at the very beginning and if the company does offer to give you credit, I’ll say take that opportunity, start building credit. Even if you don’t have a D&B number, it’s still good to have that history.

MATT: Yeah, the net 90 is probably going to be better than your credit cards. Because they’re probably going to be longer term and low interest rates for you.

BRANDON: Oh, yeah. If you could get net 90 on anything, that’s good situation.

MATT: Well, I think that covers the legal entity and figuring out if you want LLC or an S-corp, different tax things that you need to consider and the benefits that you get by being a corporation that you know you’re going to be able to write off a lot of business expenses as the sole proprietor or you know whatever business, I mean just in your personal life that you pay for after taxes. And we talked about setting up accounts, your bank account, your Paypal account and getting a credit card that are separate from your own personal stuff, right, so that you can separate your business expenses from your personal expenses. We talked about how you collect money from customers and how you bill them or you know accept credit cards and stuff like that. And if you haven’t listened to our Shopping Cart episode, that’s a good one to listen to about collecting money for products. And finally we talked about funding your business, you know, the benefits and cons of having investors or venture funders, getting credit, using credit cards versus loans, you know. I think that really wraps up the finances and getting set up initially for a business.

BRANDON: Yeah. This stuff can get pretty hairy so you know make sure you seek out professional advice or if you really do want to send us an email we can help you out as much as we can, we’re happy to do that and you can catch us at podcast@automatemysmallbusiness.com.

MATT: And obviously you can go to the website automatemysmallbusiness.com and sign up for our newsletter which you’ll get a free list of all the tools and websites that we use to run our businesses.

BRANDON: Yeah, and catch us on Twitter #amsb, and we’ll answer any questions that way too.

MATT: And I have not gotten my law degree during this podcast so I’m still not a lawyer. How about you, Brandon?

BRANDON: Not me either. So make sure you seek out professional help if you really do want to make sure what you’re doing is safe and you know you’re not taking in your risks here.

MATT: Thanks for listening.

BRANDON: We’ll see you next time. Thanks again.

You’ve been listening to Automate My Small Business. We hope you enjoyed this episode. To get a list of the links we’ve just talked about or download more episodes and How To videos, go to automatemysmallbusiness.com. Thanks for being with us and catch us next time on Automate My Small Business Podcast.

Podcast music features, “Nothing’s Got Me” by Big Bad Sun, distributed by Magnatune and licensed under Creative Commons. The Automate My Small Business podcast is engineered by Vincent Furlong and transcribed by Flo Umali. And licensed under Creative Commons Attribution No Derivative Works license and may be freely distributed to share with friends, co-workers and strangers.

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