Wealthy & Wise: LLC History and How That Applies Today

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Cort:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie. And today we’re going to be talking about the history of LLCs, limited liability companies. When you’re thinking about starting a business, you need to choose the type of entity or business structure that you’re going to set up for your new business. And there’s various choices when it comes to that. But the LLC is the most common type of business structure that’s out there. Over 80% of businesses are registered as an LLC. But where did they come from? How do they get into existence? Well, I brought you an expert today. I brought Bryan Hawley, that’s going to be talking to us today with all of his experience. He’s been coaching business startups for over 15 years. He’s a business specialist at NCH. And he’s going to share with us the history of LLCs. Bryan, welcome to the show today.

Bryan:

Thank you very much. For having me.

Cort:

Thanks for your time and and sharing your knowledge with all of our viewers today. So where did LLCs come from?

Bryan:

Well, out of the blue kind of. Well, the actually answer is, Germany and France. They had an entity and they still do. But 50 years ago, some of the states started looking at some other entities in some other countries where you had the easibility of running your business like a partnership. But unlike a limited partnership, for instance, where only the limited partner has limited liability and the general partner of what you need at least one on each side. The general partner was generally sued if the thing got sued. His assets, his personal assets were not protected. The limited partners were protected. And what was exposed is only what he invested into the entity itself, into the partnership. So, but with a limited liability company, it’s like there’s no general partners. It’s everybody’s a limited partner one could say. But it’s a limited liability company where you have members as owners instead of stockholders for a corporation. So really the answer is other places, because that’s what we do in America. We make things better.

Cort:

So, it came from Europe? Right?

Bryan:

And just like corporations did.

Cort:

Brought in over here.

Bryan:

Yeah.

Cort:

All right.

Bryan:

And about 50 years ago is when this happened. So, the fun thing is where Congress said, okay, states, you guys can have these things, but we’re not going to vote on nor make Congress our pardon me, nor make the IRS interpret that vote and write new tax code. And the IRS is like, thank Christ. So, that’s where a lot of people say check the box solution, right? Where you get to choose existing tax code. And it’s really, really interesting because in certain situations where you want the asset protection, you want that corporate veil from the Daddy Corporation, because an LLC is essentially a hybrid between a corporation and a partnership. So, from Daddy Corporation, you get that corporate veil, you get that indemnification of all members and managers unless you’re up to something illegal like Bernie Madoff. Right? But that’s what I always use. But when you get that, you maybe want to install that veil, but you don’t want to change the tax situation, for instance, like passive income. Right? Rentals, you know, it’s pretty hot. So rental income, you want that on your schedule attached to your 1040 schedule specifically. But the reason for that is the best place for income is where you’ll be taxed the least.

Cort:

Of course.

Bryan:

And where are you going to be taxed the least for rental income is on your schedule E attached to your 1040 right? So, our job is like a structuralist would be to insert asset protection without messing up a good tax situation, which would be through the personal you know. My CPA says an LLC or corporate structure is going to mess up my taxes, not if you use it disregarded for tax purposes LLC, which is the first way I’d like to talk about like how LLCs can be taxed and such, right? Because where they’ve come from is 50 years ago they came up but in that, in the berthing of them into the United States and Congress not wanting to write any tax code. It left a lot of versatility. That’s why like what’s the number of new entities 80%?

Cort:

Over 80% right now that are registering as LLCs. So, you know this is like it has been adopted really strongly.

Bryan:

Right.

Cort:

It’s kind of the default now.

Bryan:

Yeah. When I started 15 years ago, in fact at this very company in 2006, I would furnish a corporation to a new client about every I mean, pardon me, an LLC about two or three a week. Everything else is corporations. Now it’s like two or three a month of corporate. It’s completely flipped and even more so. So, the corporations still have their place, but again, most small businesses need the need slash want the versatility of an LLC and so it can be disregarded for tax purposes if one owner just completely ignored. And I think in cartoons. So, you’ll have to excuse me, but imagine the LLC standing between you and the judge saying you can’t sue them. They just work here, the owners, right? It gets between them and the tax man, local, state, fed says, oh, well, yeah, everything’s going through my books right? Everything’s I’m responsible for all the payments coming in and out for legal reasons because you have to use that LLC so that it could protect you. But as far as the taxes go, the owners are like holding up a windowpane of glass. The taxman sees right through it, sees the owner smiling face and whatever it is that they’re doing ends up on the proper schedule. And a lot of times that’s what you want. But here’s where it gets fun is you can also have an LLC tax corporately like from Daddy Corporation. It can be the Common S corp Small Business Corporation filling out a simple form after the entity is born, that rhymed. Or even taxed like a C corp. Right? So, if you want all of those things.

Cort:

Now this gets confusing.

Bryan:

Yes.

Cort:

So, you know, our viewers are listening. They’re thinking LLC. Okay, I’ve heard I need an LLC. I’m going to form an LLC. I’m going to start this new business or I’m a real estate investor, I’m going to use it for the purchase of my, you know, next property, whatever that property might be. But now you’re bringing in corporate tax.

Bryan:

Yeah.

Cort:

Law and code.

Bryan:

Right.

Cort:

What does that have do with an LLC?

Bryan:

Yeah.

Cort:

And so, this is where it gets, you know, people come to us and say, I don’t understand, I have a corporate tax rate, but I have a limited liability company because I didn’t choose a corporation. That’s hard to wrap your head around.

Bryan:

Exactly. And dealing with our new clients because as a business specialist here at NCH, I get the opportunity to take the new client because when somebody is, when our talented staff is bringing on a new client, introducing them to the company, telling them what we’re about, tell them what we could do for them. And then ultimately when they choose us to help them with their business formation and their new baby, right, their business. Then I get to take over as one of the coaching type business specialists and help stay with them for at least a year. Make sure the concrete dries properly. Right? So, all the time I do here, I’m like, okay, so I see that your LLC is taxed like an S corp, if that’s the case, I was like, Oh no, no, it’s an LLC. And then much of what I just shared with you and our audience today, I have to go into all of that fun stuff and it’s like, well, yeah, because it doesn’t have its own tax classification, which is good because you get this versatility. So, for those that are doing active income, right, because we talked about passive investments using real estate, right? Like rentals as an example. That for something active, like if you’re manufacturing something, providing a service, selling something that’s all active, even punching the clock at work, which you can’t use a business entity for, but all of that’s active. Any time you’re actively seeking income, those things are subject to nasty, nasty things like self-employment tax, right? Like 15.3 boom, right off. You can’t do anything about it either. So having a corporately taxed structure, the right one and you got S and C and we’ll get into that in a second as corp, C corp. right? So, it can help mitigate, you know, a lot of times in half, if not better of that self-employment tax simply by owning a company that employs you. Right? So, instead of saying, you know, I’ll have a corporation, you’d say I’ll have an LLC, a limited liability company, but I choose to have it taxed like an S corp because that’s good for me right now. And that could change. You could escalate into a C, you could downgrade into a sole proprietorship. If you change the mode of what you’re doing. There’s just a lot of, too much versatility for us to go into. But the good news is that especially here at NCH that you get to talk to somebody about what it is that you’re doing, right? And you get to find out those answers. Because, you know, though, you found this on the Internet, right? And when people watching this, our audience, there’s a lot of stuff out there and you’re not going to find you. Where you’re going to find you is in a conversation with either our talented staff that bring the clients to me so that I can help them further or through me once you are a client. And that’s where all the really fun stuff is, is being able to go through that and figure out what’s best for you.

Cort:

Yeah. And I think, you know, for the viewers that are listening to this, they like there’s confusion around the different taxations of an LLC and that you have to choose how they’re going to be taxed also.

Bryan:

Yeah.

Cort:

Which often isn’t talked about. And then you say the best way to identify the right type of taxation for you is to talk to somebody that specializes in it, has been doing it for 15 years. Bryan, like yourself and the listeners here are going, oh, he’s going to try to sell me something. You know, I don’t want to get on a phone call because I’m going to get trapped into, you know, feeling obligated or that I’m going to spend some money and, you know, that’s not how you approach clients. And anyone that’s looking to, you know, set up an LLC, it’s a conversation that they’re looking for that they need, not just looking for. If they’re thinking about starting a business, the next step is, okay, choose the taxation of that business. But it’s best to know that going in.

Bryan:

Yeah.

Cort:

But it can always be changed later on.

Bryan:

Right.

Cort:

But I know from people that have worked with you directly, they get a ton of knowledge, they get a lot of free expertise and they don’t have to do anything or move forward. You know, I always, of course, the hope that we’re doing, we’re in business that they will choose to want to work with you, but there’s no obligations to do anything. And you’re willing to give up your time to talk to people so that they will come in and understand how this works.

Bryan:

So absolutely. And also, remember, by the time a client gets to me, they’re no longer really thinking about whether or not they want to do business with us. They’ve chosen us. And one of the strengths that I think that we really have out there as far as within our market and that’s being a 50-state model, right? Not just doing, focusing on Nevada or Wyoming or Delaware. You know, if you’re a heart surgeon, that old veil isn’t going to do well for you. It’s where do you live? Right? Let’s get you an LLC right there. Right? So, there is a certain amount of anxiety in doing anything new because, you know, human, right? So, when we have somebody find us, whether it’s through their friends or family or some advertising or whatnot or even this video, and they decide to become a client. It’s during that process, that decision making process, where they are informed that they don’t have to think of every single little question and permutation. And, you know, be standing in the middle of little nail bits, you know, biting their nails and everything and being tense because, you know, once you get the business structure set up, there is versatility for what it is that they’re doing. And that’s really what we want. We want our clients at ease so that by the time they get to me, like you said, it is a conversation. It’s what are you doing? How are you doing it? I see some notes here, but I want to hear it from you. And I see here that you’re doing like active style income. And tell me about that or who would I have to be to be a client of yours? You know, you’d have to be looking for this and that kind of market with this kind of need, you know, and which allows me to live vicariously through a lot of different types of businesses because…

Cort:

Yes.

Bryan:

You don’t do this and not love business.

Cort:

Right? You get to see it all.

Bryan:

Yeah. It’s great.

Cort:

And it’s like an adventure. You get to experience all the wonderful businesses that are starting in the country and then you also get to help support you know, their vision and their launch and get them going. And there’s a lot of satisfaction. And then you help them get going, you know.

Bryan:

Yeah and thank you.

Cort:

And they’re off. Yeah. Which is a wonderful thing. You touched on something I think that’s so important, too, is, you know, as you’re thinking about getting a business launched and which structure is the right structure, first of all, and then it’s like which type of taxation that you’re going to be taxed under. And then it’s like, okay, wow. There’s so much information, whether it’s on YouTube or whether it’s just, you know, Googling it and getting the information. And then people just kind of start to shut down.

Bryan:

Yeah.

Cort:

And then they don’t do anything. But I think the nice thing of knowing is there’s people like you that are available to them at no charge that they can literally sit down, have a conversation with. And then there’s an organization that has a legal team that’s there to support their business. Then you have a tax team that’s there to help them with that, you know, identifying what type of taxation they want to be under or what code section they want to be under for their business. And then you’ve got these support services beyond that to help you stay compliant and, you know, set yourself up in another state and, you know, services to grow your business, services to brand your business. And so there’s like, we always talk about what it takes to come into our organization, but there’s so much more that you get access to. And I think that’s where people don’t really realize is you kind of have this full support team that you choose when you want to engage that support team, it’s really based on your needs. And when you’re ready and you want to have a phone call with us for something else that you need, we’re here for you. But people like you that are there to simplify it for them because it gets so confusing, you know? And when anybody has 15 years’ experience in any space, you’re an expert.

Bryan:

Yeah. You got your 10,000 hours in at least, yeah.

Cort:

You’re an expert. And so now that you’ve got that expertise, it’s like now sharing it with people that are researching.

Bryan:

Yeah

Cort:

It’s like you get to just simplify it in about 5 minutes of intake.

Bryan:

Yeah. Exactly.

Cort:

Here’s what you need. And they just have to know that they can trust you and trust the organization.

Bryan:

Exactly. And that’s where it comes in with like where I’m blessed to work for a company that you and Derek started 33 years ago. Going on 33 years.

Cort:

Yes.

Bryan:

And, you know, first just starting out with corporations and then, of course, LLCs. And then after hearing enough from clients like, hey, you guys, do you taxes, I really like what you did with me for my business structure. You know, you probably looked at each other and said, are we going to start answering yes to this question at some point? So, because of our clients, trust us to even ask about the other services, you know, and then 33 years of growing, you know what, our clients really want us to do this. Can we operate in that space in a competitive way and do it at a level of expertise that our clients expect from whatever we did for them in the past, which is why they’re asking. And that’s why I really like working for NCH and working with our clients because there is that trust there, right? I would say that the proof is in the pudding. Grab a spoon.

Cort:

Absolutely, and you know, and experts, you know, like you, Bryan, that can help them make a decision. You know, you provide a tremendous amount of peace of mind to someone who’s got a great idea, but now realizes that that’s just one part of a business.

Bryan:

Right.

Cort:

You know, the idea. Then there’s the next thing and then the layering and can I expand and grow? But then we’ve got to get that business organized, licensed, registered, everything else ready so they can build the framework around it. And that’s what we want people to know is you’re an expert at NCH. NCH has the resources as an organization to support them for years. You know, people say, well, how long will NCH be around? And it’s been around for 33 years already.

Bryan:

So for another 33.

Cort:

Well, you know, it’s like laws change, we adapt, tax code changes, we adapt, services for business, we adapt. I mean, there was no Internet when we started.

Bryan:

Yeah, exactly.

Cort:

It’s like…

Bryan:

Old modes of business.

Cort:

We had to Hand-Deliver business registration forms to the state. And so, we’ll be around. I think we’ll be around for another 33 years for sure. So, I do want to thank you for sort of helping demystify a little bit of history about where LLCs came into the United States, coming from Europe and just, you know, helping break it down for people that don’t understand how are these things taxed? You know, what’s the right type of entity that I use? But then it gets like muddy from there on what’s next? And, you know, I’d love to have you back to kind of unpackage this a little bit more. It would be great if you’re willing to do that.

Bryan:

Oh, absolutely.

Cort:

Wonderful. And I know that our viewers here today will enjoy hearing you again. Kind of get into more of the weeds of, you know, how this taxation works and maybe who should choose which type of taxation, what type of businesses, or maybe what maturity of businesses based on the taxation, too. So, thank you for being on the program today.

Bryan:

Thank you.

Cort:

Absolutely. And for all of you tuning in today, thank you for watching. This has been another edition of Wealthy and Wise. I’m your host, Cort Christie, and I appreciate everybody spending the time. Please like and subscribe to our channel. I really appreciate that it’s gets us out there and spreads the word and make it a great day!

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