[00:00:01] Speaker A: Hello. Thank you for joining us. Welcome to what Counts podcast where we dive deep into the world of information governance. Here we highlight proven solutions developed through our experience working with companies across various industries and we talk about how you can apply these solutions to your company. Whether you're interested in information governance, have a need, or just curious to hear about information governance challenges like email management, retention management, or asset data management, this podcast is for you. This is Lee. And in this episode or and I will talk about a fundamental topic that's critical for setting up businesses for long term success, legal structure and compliance.
Maura, what are your thoughts? If you're just starting out or even if you're looking to solidify your existing foundation, this episode will guide you through the essential steps. What should we start with?
[00:01:00] Speaker B: Let's start with an explanation just to remind everybody of why we're talking about setting up your small business on our information governance podcast.
There's two reasons that we're doing this. We're in a little bit of a series. We're a little arc now around small businesses. And our first reason for doing that is because we are a small business and we've been doing this podcast for three years and sharing a lot of our experience with our listeners. But we also wanted to share this other side, which is what it means to do all that work as a small business. We worked together with large businesses, real life experience for sure, but we worked together doing the same information governance work when we worked for a large company.
It's different doing it for a small company. And the more we got into this, we thought it would be helpful to share that side of our professional lives too. The second reason is that as a small business owner, you, our listeners, if that's your situation, you still have information governance requirements and they kind of weave into all these decisions that we're talking about in terms of how you set up and manage and run your business. So that's why, that's why I'm here. It's to talk about the information governance side of this while you, Lee, handle the financial side of our business.
So it's a good back and forth.
So today, legal structure and compliance, that's heavy on the information governance side.
[00:02:37] Speaker A: Thank you. That's what I was going to say. This is important stuff that you need, you need to keep like this is life of business when it comes to retention, management, keeping this information that we're.
[00:02:47] Speaker B: Going to talk about. So life of business.
Yeah, life of business. If you have listened to some of our earlier episodes on records retention Schedule and important business records, important business information.
They're sort of our. Well, there's a lot of, there's a lot of theories or a lot of way to describe it, but one of the key, key sets of data, sets of documents usually. But the data that you as a small business have to have to demonstrate that you are a business, a legitimate business, and to support your tax returns and your insurance applications and all of those other things. That set of information, we refer to it as life of business because it's not something that you can get rid of as long as you want to be in business. So you might call it permanent records, you might call it indefinite. We call it life of company.
And that's what we're talking about today on the IG side of this legal and compliance discussion.
[00:03:52] Speaker A: So we've been in business.
Sorry, but we've been in business for over 10 years. And the question to you is, have you been asked either this year or last year for articles, incorporation or an operating agreement?
[00:04:10] Speaker B: I have been asked for those things in the last couple of years.
So we're a small woman certified small business enterprise, women own women owned business enterprise, and a woman owned small business certified for the Small Business Administration.
I don't know we're going to get into that at some point. I don't know if that's today or not. But the.
When we did our first certification application to be a WBE and a WOSB women's business enterprise and women owned small business, which was three years after we started operation, because you can't do it right away. Even if we were women owned, which we were at the beginning, they didn't care. You had to make it through three years of business to apply in that first run. We had to provide the articles of incorporation and the operating agreement. When reaching farther back than that, when we set up our very first bank account, we had to, we had to supply the articles of incorporation and our operating agreement to prove that we were a real business. It's part of, potentially part of know your customer rules from a banking perspective. But either way, it was you. We couldn't do it in the wrong order. We couldn't do the bank account first. We had to do articles of incorporation and the operating agreement first just recently. So with the WBE and the wosb, you have to recertify, renew your certification every year and then every five years they go through not quite as much of a review as they did in year one for the first time, but a, but a pretty significant renewal review effort and in that last round, which was two years ago, I had to provide again the operating agreement and the articles of incorporation. I also had to, just due to a little quirk in the process, be in the room with the paper documents. That was the first time that anyone had asked me that. And then just this year, doing our regular annual renewal, a question again arose around the operating agreement. So this is the document that while we might have thought we were done when we signed up or not, that's.
[00:06:26] Speaker A: What I was getting to, was this is not only life of company from a retention perspective, these documents, but also they come up almost every other year where you have to produce them, you have to, somebody's going to review them, you need them. So very important to choose your legal structure.
You know, there's, there are.
[00:06:46] Speaker B: Wait, wait, wait. I was going to say we skipped your item one on your list. We jumped right to the articles of incorporation.
[00:06:52] Speaker A: We did. So I was trying to go.
[00:06:54] Speaker B: Which is something we file you, that you file with the Secretary of State. The operating agreement is more of an internal document, but like we said, banks ask for it. Certifications ask certification, certifying bodies ask for it. Some other people have asked for it.
So now going back to your first point on your list. Sorry for interrupting.
[00:07:15] Speaker A: It's okay. Legal structure. Sole proprietor.
A simple low cost, one person operation, partnership, llc. C Corp. S Corp. These are all so many examples and I have descriptions of these. But I think, you know, one of the episodes we talked about, books tell you all the, everything out there. The Internet tells you everything. So there's a lot of reading material on this. The key thing here is what is the IRS going to consider you? And so you do need to do that filing. We put in that we were going to be an LLC and that, you know, it protects your personal assets from any business liabilities. And right away, since we were a partnership, we were a two person llc as a tax perspective, we were taxed as a partnership. I know that's as clear as mud, but that's what the IRS does to you.
Do you want, do you want to clean that up?
[00:08:18] Speaker B: I mean, I'm, I'm gonna try. So this, looking at these five things, the sole proprietorship, that one's pretty straightforward. You're one person, you own the business, you're gonna run all your, you know, cost of, cost of goods, cost of sales, operating expenses in, you're gonna show your revenue and then you pay your taxes off of that. It's most straightforward. If that's where you are, then you've got on the way other end of the scale you've got the C Corp. That's an incorporated, that's a company, that's usually a big company and that has.
It's an. An entity unto itself. It's separate from the owners. The owners are typically employees in the case of a, of a corporation, an employee as opposed to an owner. And again, this is about how the IRS looks at how you get money from the corporation. So if you worked for a C Corp, you would be a W2 employee like you are in any other company where you're just an employee. You get a salary or you get paid by the hour and you get a document at the end of the year that says this is how much the company paid you and this is how much they withheld in taxes, either state or local or whatever federal. And that is the document that you use to submit with your tax return to say this is how much I'm going to owe based on everything else. As everyone does. We're not tax people, not tax advisors in any way, but this is a familiar construct.
So with an llc, you can choose that's typically for. It's not a corporation. So you are an owner. It is a limited liability company to protect your personal assets. Like you said, Lee, we're an owner. We don't get paid a salary.
That was a choice we made. We could have decided to be treated as something else and we could have put ourselves in a place where the LLC stands alone and we become employees.
But we're too small. We didn't do that. And then you've got this S Corp, which is just a pass through option or you have the partnership. And we went back and forth. We actually submitted multiple forms to the IRS in our first six months trying to decide how to be treated. Because what we ultimately learned from our accountant was that if we looked like we were paying ourselves a salary, if we did pay ourselves a salary, we would end up being taxed as the llc, as a partnership and also being taxed as individuals on that same set of income, basically.
Right?
[00:11:09] Speaker A: Yes.
[00:11:10] Speaker B: That's the double taxing.
[00:11:12] Speaker A: You get a dividend or you get a share, you offer yourself a share at the end and you get taxed on that as well. Yes.
[00:11:21] Speaker B: Yeah.
Again, we are not tax professionals. Please take all of this with a grain of salt. The message here is you need to ask your accountant what the best choice is for you.
But once we'd made our asks of the IRS going back and forth on how we wanted them to treat us they said, yeah, you're going to be a partnership because you have two people, you're an llc. You have two owners who are member managers. You take a draw, which means that we take money out of the company to pay our living expenses in lieu of a salary.
And it's not a regular thing. We can change that. And we have changed that down to zero at points in. In the past when we needed to, because we.
Because of the cash flow of the company. So that, from the IRS perspective, is a partnership. And that means that our company is taxed on a limited amount of things, and all of the revenue and profit that go through the company end up accruing to us as income, whether we take it out of the company or not, whether it's sitting in the bank account that belongs to Trailblazer and is on the Trailblazer books as cash and whatever, as profit, or we've taken it out as a draw, it doesn't matter. We're getting taxed on it either way as individuals. So.
And ultimately, we didn't really have a choice on that. By the time we got to the end of the day, that was how the IRS wanted to view us. So you started this sentence by saying, it's important to choose your structure. I think it's also important to understand what your options are or aren't. And the best advice. We talk to bankers. We talked to a consultant when we started our company and had a checklist of things to do, and we talked to our accountant, and we made the best choice we could. And I don't know if you remember this, but in our very first year, maybe two months in after we started operations, when we were trying to do this and we were going back and forth, I said to you, well, if the worst thing that happens is that we pay too much in taxes, I guess that's okay.
I may have a different view on that now, but at the time, I felt like I didn't want to do anything wrong. I didn't want to somehow break a rule through ignorance. And I felt like our better hedging was okay, we'll end up paying more in taxes.
So do you remember that? Do you remember that conversation?
[00:14:18] Speaker A: I remember paying more in taxes more than I do the conversation. But it's neither here nor there. We are where we are. So just to. Because we're 13 minutes into this already, we talked about articles, incorporation, but we didn't get deep into those. What really.
We talked about a general operating agreement, but we didn't really get into that as much either. I think we should finish the IRS filing with. You need to file with them because you need the employer identification number. That is a key number for your business. You need to register your business as a, as an official business so that the IRS knows what entity they can tax or is getting taxed or is making income, that type of thing.
That's a key piece there.
[00:15:12] Speaker B: That is a good point. And do you want to, do we want to go from the federal level to the state level in this discussion and then we'll save details on the articles of incorporation and operating agreement for the next time?
[00:15:24] Speaker A: Yes, I think. Because that seems like those would fit into the mission statement really well. And I think it's. We should cover that in a separate episode. So. Yes. So filing with the, with the states or finding your.
What's the word I'm looking for? Incorp is our company, the representative company registration.
[00:15:48] Speaker B: Basically it's an agent. Right? A registered. Registered agent, whatever state you're going to operate in. Yeah.
[00:15:54] Speaker A: Yes.
[00:15:54] Speaker B: So registered agent. We're talking over each other.
[00:15:58] Speaker A: Yes. Registered agent.
Either you're going to use the law firm that you use to create your operating agreement. Some law firms have that ability to be a registered agent for a company. And you need that because if you're, let's say you're in Maryland and you have a small mom and pop shop, you're selling dog treats or whatever the case may be, that's perfectly fine. You could have a registered agent of your law firm. If you decide to branch out and you have multiple locations in multiple states, you have to pay taxes in multiple locations in multiple states. That's where your registered agent needs to be able to branch out as well and cover you in all of those states. You have to be registered as a company in those, those states you're making money in.
[00:16:54] Speaker B: Yes. And for every one of those, just like you get that federal employer, employer id, which is basically the company equivalent of your Social Security number, it's your tax id.
The states give you one, too. When you're a company, every state that you're going to register in is going to give you some kind of an id, or they're going to say it's okay to use your federal id, but they need to know that you exist, that you're doing business in that state and that you may be making money, in which case they're going to want some potential income tax you may be paying employees, which brings up even more obligations in terms of insurance and workers compensation and other just payroll tax. And many other things.
[00:17:39] Speaker A: Right.
[00:17:39] Speaker B: And we'll talk about those later. Those many other things. But it's that registration step is really what we're, what we're saying here is there are tax implications to your choices around the legal structure. And it is absolutely essential that you, that you register with the federal government and with the states so that you are doing the right thing. And from an information perspective, saving all of those pieces of information, the application that you sent in, any correspondence that you, that you had with them, the approval letter that says, yes, we've accepted you as an llc, and here is your federal employer ID number. All of those pieces of paper and they, they sometimes are electronic, sometimes they, at least 10 years ago, they were still coming in actual paper. But even, but even so, scanning them, keeping them safe, making sure you have them readily available because they will be requested occasionally and occasionally is more than never. So it's, it's more than could be more than once a year. It's certainly more than once every couple of years that you need to be able to produce that. So, all right, we're getting deeper into the, to the minutia of running a company. And next time we're going to go into a combination of things around articles of incorporation, the operating agreement and how that impacts your mission statement and that kind of thing. So your mission statement, it might be revisiting from episode one. Are you a product company or a service company or something else?
[00:19:25] Speaker A: That's good timing.
It's a good loop in. Yes.
[00:19:31] Speaker B: All right, great. Thank you.
Thank you, everyone.
[00:19:36] Speaker A: If you have any questions, please send us an email at
[email protected] or look us up on the web at www.trailblazer.us.com. Thank you for listening and please tune into our next episode. Also, if you like this episode, please be a champion. Share it with people in your social media network. As always, we appreciate you the listeners. Special thanks goes to Jason Blake who created music.
[00:20:02] Speaker B: All right, see you next time.
