What You'll Learn In Today's Episode:

  • Properly structuring small businesses, such as S-Corps, is crucial for long-term success.
  • Long-term planning and exit strategies are essential for business owners.
  • Choosing the right legal structure and tax selection requires careful consideration and expert advice.
  • Co-mingling personal and corporate assets can lead to legal complications and the piercing of the corporate veil.
  • Keeping financials clean and transparent is important for business owners.
  • Having a well-defined succession plan is crucial for the future of the business.

In this episode, Jamie Shilanski is shedding light on business structuring and long-term planning strategies. She explains why selecting the right legal entity is crucial for maximizing tax benefits and prepping your exit strategy. Jamie also breaks down the risks of mixing personal and business assets, a no-no that can pierce your corporate veil.

But keeping clean books is just the start. Jamie emphasizes the need for a rational succession plan to ensure your hard-earned equity doesn’t go up in smoke. Jamie discusses the importance of properly structuring small businesses, particularly S-Corps, and highlights the risks of co-mingling personal and corporate assets and the potential consequences of piercing the corporate veil.

Resources In Today's Episode:

Read the Transcript Below

Jamie  

We all know what the S stands for, don’t we? Shenanigans. Welcome back TPR Nation. This is Jamie Shilanski in an episode of Worlds to Conquer. And today we are going to be talking about my favorite types of small businesses, which are S corps. And we all know what Subchapter S stands for. It’s for shenanigans, because that is what I see most business owners do repetitively. They start up a business, they make it an S corp election, because all roads lead to S corps. In fact, I was sitting with the CPA and he said that it’s a standard joke that in the CPA community, that if the answer on some type of continuing education or examination CPE is on there, and the answer could be a sub chapter s, always take the S election, because that is where almost all the correct answers lie. And certainly, when I went to structure a couple of organizations with different attorneys and CPAs, because when you start up different practices and different lines of work and you’re bringing in multiple people – I want to explore all of the options in front of me. Now, under the Tax Cup and Job Act, there were a lot of really great restructurings that sometimes a C Corp, as in Charlie, a C Corp, made a ton cents for people, but there’s also different levels of taxation that you can pay. So really start off by saying that if you start a company, because a lot of people get confused when I talk to them about this, and even if they’re in the profession of finance, and especially if they’re not in finance, if they are one of these poor individuals out there that have a really brilliant idea or skill set, and they absolutely have a hobby that they love, and so they love it so much they decide to turn it into a business so that they can forget why they loved it in the first place. Then I want to make sure that I have these conversations about how we design and structure different entities. So the very first thing I’m going to do is I’m going to take a legal assessment, that’s my very first approach. And I say, Do we have a single individual? Do we have multiple individuals, who’s all coming into this organization? And then I take a little bit different approach to those people. Most people decide to say, hey, what do they have in place right now? And let’s get the entity structured as such. I say, what are we doing in the next five to 10 years? Where’s our goal at, what is the ultimate this? And the reason I ask those questions is because often we start up an organization and don’t give ourselves an exit strategy. We don’t know how to either get out because we want to, because we have to. I can’t tell you how many people I have talked to in the business world that have started really incredible businesses and painted themselves into an absolute corner because they did sloppy financials and they had no long term planning in mind. So I sit down and you know, does this mean developing a business plan? Sometimes, sometimes it’s worth it. Depends what we’re doing and if we go borrow money, if we need to find investment, etc, but I’ll build a business plan always in that case. But a lot of times when I tell people, oh, let’s start with the business plan. It’s such a laborious task for them that it just sucks all the energy and all the fun out of what they’re trying to create. So instead, we do a lot of vision mapping and say, Okay, great. What does this look like long term, where are we going, where are we headed? What does this look like? And the very first question that everyone gets super excited about is, what to call the business? What should I call this business? What is the website domain that I should have? I want to have a rock star killer name. Now I’m not attached to a name. I think a name should be pretty clear about what you do, but keep in mind that our RIA or ask is named Shilanski and Associates. So what do we sound like? We sound like a law firm. That’s what we sound like. In fact, we get calls every single week that says, Do you guys practice XYZ type of law? So it’s not saying that you can’t name yourself, you know, wealth partners or use your last name, it certainly works. And if you don’t think you works, think about Charles Schwab, when Raymond James, Edward Jones, come on. It works. Schlotzsky’s deli. It’s a deli franchise, brand that sells delicatessen sandwiches. It works. Guys, everything out there works. But you need to choose what’s your long term strategy? Is this something that I’m building because I want legacy and I want name recognition? Because that’s what that is, that’s ego and that’s okay? Or is this something that I want to build and I could potentially hand over to someone’s to run it some other day that isn’t tied to my face? Is it tied to my name? And I’m not the only one responsible for the brand.So we sit down and we kind of troubleshoot that, and the naming convention really gives a lot of insight when you have conversations with small business owners about where they’re headed, and also opening up other doors, other possibilities, other ideas. So once we have a talk about that, and it’s a great Okay, let’s go through like, the risks now, right? So whenever you do a SWOT analysis, so strengths, weaknesses, opportunities and threats. That’s what SWAT stands for. So you draw four boxes on a piece of paper, you identify each one of those and go through them. And if you’re sitting there with a business owner who is the one that’s really driving the conversation, this is the one that’s the most charismatic, the one that gets done, the one that really drives the idea forward. They’re always your biggest strength. And as soon as I write that person’s name down, I immediately go to the diagonal box under threats, and I write that name down again, and then always, and they always end up looking at me like, What are you doing? I’m not a threat to the organization we just identified. I’m the biggest strength, yeah, but if you are one person and you are the biggest strength to an organization, that means you’re also my biggest threat, because our success now hinges entirely on you, and you get into one bad PR or litigation issue, and now we can’t recover from that. We’ve got a lot of spending to have to do. So I want to identify that and also get some thinking about maybe this is bigger than just me. Most of the successful small business owners that I know didn’t mean to build as big of organizations as what they did. It wasn’t what they were five years old and certain out to. They just found an area that was either underserviced or had a really great idea and said, I can do this better than somebody else. And then they get started. I mean, you want to talk about the number one hack to get rid of head trash. And I’m telling you right now, the second that you start feeling inadequate, not good enough, not smart enough, or, like everybody else has it figured out, go to a mastermind. Go to a small group of other people operating at a C suite level. So those are your chief operating officers, your chief executives, etc. Go in a room with those people start having conversations, start, you know, picking their brain, start asking them questions. And you know what, you’re gonna determine real quick, that not a lot of people are smarter than you are. It’s incredible how you can get it in a room full of really expertise people and discover that you have the same stuff, your makeup of the same mold. They might have one or two things figured out better than you do, but they have the same struggles, the same battles, the same problems that you do, and they’re trying to navigate it through as well. And guess what? They also have head trash. I’ve never once met with somebody unless they were a completely out of touch narcissist that didn’t have some type of head trash that they weren’t good enough, weren’t smart enough, weren’t thinking things through enough. We weren’t being strategic enough. And so if you want to ditch that head trash go into a room full of just other people who you think are smarter and learn, and if they are smarter, great, now go learn from them. Go figure things out from them. But they will start working and identifying and giving you ways to problem solve all of that head trash. All right, so now we can decide, all right, we need to create a kind of company that can be handed off to somebody else. Now we’re going to choose the legal structure, and so sole proprietor limited liability companies. I’m a big fan of limited liability companies, but there are two types of limited liability companies you can set up, you can set up the standard LLC, or you can do an LLP, a limited liability partnership. And so both have pros and cons, you want to really bring in an attorney. At this point, you want to kind of go through a rudimentary sketch with your clients, what’s most appropriate for you, just so that when you do bring in the corporate attorney, and do not use your estate planning attorney. Estate Planning Attorney to work on what they have it in the name estate planning, you need to go hire a business attorney, somebody that does with Corporation, small businesses and even potentially litigation. You need to find somebody that specializes in this. Do not choose a general practitioner, because they are going to have glaring problems inside of your operating agreements and buy sell agreements and your succession plans. Make sure that you sketch out your long term objectives. You sort of like a checklist. Does this apply? Does this apply? So that way, when you bring in the attorney, you flushed out a lot of these ideas and concepts. So you’re working with your business attorney, and they’ll bring up the great things like, hey, actually, I don’t think you need this. I think you need that. And they’ll talk to you about all of the reasons a limited liability company draws a moat around all the assets, serves people protected. They’ll talk to you about piercing the corporate veil, so what is piercing the corporate veil mean? When you set up a corporation, you are trying to distance yourself as an owner or shareholder from the entity. So in your mind, I want to think about, you know, the only the human has a heartbeat. But when we breathe life into this unlimited liability company. When we create it, we are giving it life. And what we want to do is we want to say, Hey Jamie and her LLC are two different entities. I don’t want to take all of my family’s wealth and assets and tie it into this company. I want this company to operate independently of me and my family, and so when I do that, I set up this corporation. Now I have to abide by the laws and regulations of your particular state, because this goes off the site so it stays specific about how my LLC should be operated. You can’t just spin up an LLC and fail to do any of the work. If you fail to do any of the work that it takes to create an LLC and maintain an LLC long term, then you’ll do what is referred to piercing the corporate veil, and piercing the corporate veil is literally taking a pinprick into the red balloon and saying, ha, gotcha. You were supposed to set up this corporate entity. You were supposed to run it like this. You failed to do so. Therefore you’re going to lose all of the liability protection that you had with the LLC so piercing the corporate veil is not impossible to happen. It happens if you run your business sloppy, that’s what this is, or somebody else opposing counsel, just as a really good attorney, that could happen too. I mean, you can do all the things right and think you’ve completely protected yourself, but somebody else’s attorney just might be better than you were and be able to pierce it. So how do you protect yourself? How do you make sure that you are going things, and when you’re working with clients who have set this up, creating this as a value add, to check in with them constantly and say, Hey, do we have these things, you know, are we abiding by Corporation laws? Are we doing our bylaws, our articles of incorporation? Are we doing updates? Are we getting memos out to all of the shareholders. Are we also giving them copies of the financials on a regular basis? Are we documenting them? Are putting inside of our corporate binder? Are we doing all of those things? Now, if you’re doing all of those things, here’s where it gets a little sloppy, and this is why I want to talk to so once we set up the legal entity, we have to make a tax selection, and you can decide if you how you want to be taxed as a partnership, as S corp, et cetera, et cetera. I’m not a CPA or atorney. I just like the business planning and development. And then I bring in those experts in those particular field to help me final construct this. So I think of myself more as a general contractor building a house. I got to have a little bit of knowledge on a lot of stuff in case things go wrong, or I got to check up on certain things, but I’m not the guy that’s responsible for pouring the concrete correctly. How do we do that? How do we make sure that we’re keeping ourselves free of making sloppy mistakes? I just mentioned all the ones before, making sure you’re doing your due diligence and following all the rules, but then also make sure that if you have capital calls, did every single person make the capital call? If every single person didn’t make the capital call? Did we now trigger buy-sell agreement. And here’s the one that I see constantly with small business owners, because it’s just easier for them. Or maybe this is how they got started before, when it turned was a hobby, and then they turned it into a business. Or maybe they have real estate. This is where it gets more technical, and you as a financial advisor, have to pay attention to this, and you pay attention to this for your clients and for yourself. Co-mingling assets. When personal and corporate assets are mixed together, you make it very difficult to distinguish between the two. The court may decide that the corporate veil was pierced because you commingled those assets. So what does that mean? That means separate bank account. Means separate titling. That means separate deposits. The way that I see a lot of this kind of go sideways very quickly is when business owners have to cut checks for things, and they just use their personal account, and then they transfer money back and forth between their personal account and their corporate account. Corporate account with no documentation as why? Another way that I see it go sloppy is they make deposits in their personal account that really should have been for the corporation and made out to the corporation, but maybe they knew the person really well as a vendor they’d work with a long time. Somebody was out of town, somehow, some way, something got mistaken, and it went inside a personal account when it should have been inside of the corporate so really paying attention to make sure that we have the tying these wall up between the two is a critical aspect to making sure you don’t pierce this corporate veil that I’m speaking of. So when we talk about corporate shenanigans, right? Those S corp elections, these are the things that we want. Now. What are the other areas I see this happening that become super, super sloppy. Two, there’s two other sloppiness always occurs with S corp people, and don’t think you’re exempt from it, especially if you work with a lot of small business owners and you think, Oh, they’re being sloppy. This is the time to look inside and see if you are equally as sloppy as they are. And here are the two other methods that I look at. One, what kind of shenanigans are we running on the profit and loss sheet? Where are we writing off things that we really should not be writing off just because we’re getting the business deduction. Now, does that mean I’m saying you can’t have your kids on payroll. You can’t have your spouse on payroll this? No, I’m not saying that at all. You absolutely can. What’s your long term plan if you’re building an S corp, and it’s only ever going to be you and your spouse, you and maybe one child that you’re running it with cool run those types of things. You put the spouses on payroll, put the kids on payroll, start funding different things, buy the cars through the company. I’m all about getting legitimate tax write offs. I could be a patriot every single day of the week for half off I spend cutting a check to the IRS. However, that doesn’t negate me from the responsibility of making sure I’m documenting those things and doing them legitimately. Now this is the other part of the nanny shenanigans that I just talked about with running games on the profit and loss. It ties into the second part of the shenanigans that I see, and that is a failure to have a succession plan in place. You will not live forever. You will not live forever. And you can ask Sybil why you shouldn’t. So with that in mind, you want to make sure with the company, how are you transitioning your clients? How are you making sure somebody inherits this book of business or maybe buys you out? So we got a couple of different options. There’s a lot of private equity money going around right now. If you have not read the Plunder, put it on your must read this summer list. It is jaw dropping material. But if you want out of this business, or if, God forbid, you become disabled, and you have to get out of this business real quick. How many financial advisors raise your hand right now. Just move your index finger if you don’t want to put it up all the way. But how many of you out there have disability insurance on you, on you. If you don’t, it’s cheap and you’re stupid for not having it in place. Because what happens when your greatest asset becomes disabled and you can no longer give clients advice? There’s a lot you can do as a financial advisor, but if you can’t think, if you can’t communicate, that is becomes very problematic to being an advisor, so making sure that you have disability covered on you, because a lot of us advisors out there, myself included, you’ve got one primary breadwinner in the household. You have one. Your whole lifestyle is funded off of one’s person’s income. Primarily, that doesn’t mean the other person or other party doesn’t contribute, that’s not what I’m saying. I’m saying that if you lost the ability to earn your income there would be dramatic changes in your life, most likely. That’s why we get into finance, and if you’ve been in this business longer than five years years, this probably applies to you. So making sure there’s really great, cheap resources for joining certain associations and getting disability insurance put in place, we’re pretty much a low risk factor. God forbid something happened, like a car accident, but it’s not like we’re running around with nail guns all day in our line of profession. So there’s no excuse or reason we shouldn’t have this. So as we start looking at the succession side of things, how are we going to bring somebody else in? Either life goes as it should. And you want to retire one day, you know, late into your 60s or 70s, and you want to hand this practice off to a protege, Junior advisor that you’re bringing in. You want to do a buyout with other advisors. You want to sell it to somebody else. How have you set up your financials to make that happen? What succession agreements do you have in place right now? What do your clients know about this succession? We’re all required to disclose what you know on our disaster recovery if something happened to the core members of this where, how do people access our accounts? Who shoud they contact, etc. But have you sat down and really mapped it out, and if you’ve mapped it out, have you communicated to that person who you’re thinking of leaving all your book of business to that. These are your intentions. This is how it works. Now I have seen successions go really well, and I have seen successions go really bad, as most of us who’ve been in this business greater than 10 years, we all have our stories to tell. So one of the things that you have to be careful of is a lot of advisors structure their succession so that they’re spouse is the one inheriting a portion of their book of business, their income coming in for X amount of years. Now, if that is the case, you need to make sure it is spelled out with the person that is going to be receiving that because I just recently, gosh, no, actually, it wasn’t recent. It was about six years ago. There was a financial advisor who passed away. He left to his daughter, who was just recently licensed in the business at that time, and he unexpectedly died of lung cancer. Signs. He went into the doctor thought he had a chest cold. They said, Nope, you’ve got advanced lung cancer. And boom, he was gone within, you know, six weeks. So his book of business, he had already set up a succession plan. He was leading it to his license. And in that succession plan, 80% of the revenue went to the mom for the next five years. That was the succession that was the how you’re going to buy, essentially, my book of business and and everything. Now in your mind, you’re thinking, Okay, what was the daughter taking care of her mom? That’s no problem. Have a great relationship, really strong, close family. So it wasn’t a problem, necessarily. But did it create financial strain? Yeah, sure did. Because this young girl just got licensed and was building her own book of business, and now she has to for the next five years, she inherited all more clients than she had any capacity to manage. Just independently, she couldn’t go bring on her own book plus manage these clients, and she gave 80% of the revenue to somebody else. So imagine right now if anyone in your succession plan would work for 20% of the revenue, that’s huge. Just use round numbers. Let’s say that, and he was bringing substantially more than this, but let’s just say that it was $100,000 would she work full time developing relationships and at this job with those many clients for $20,000 that’s the real question you have to ask yourself so making sure that you’ve communicated this and it’s fair to both sides, their family didn’t split up over this. It wasn’t something that was just a deal breaker. But does that mean that, had they had a different relationship, Had this not been a mother and a daughter, would it have been different? Maybe, probably. I don’t know a lot of people don’t want to work for 20% of their revenue for five years before they have the prospect of potato getting 100% so make sure you’re having the conversation with the person that you’re doing the succession with, and then what you want to do to tie those two things that I just mentioned, the shenanigans and succession, is, I always tell business owners, regardless of what your long term plan is, build a business you could sell tomorrow. So keep your financials clean. You know, if you’re if you’re doing deductions and write offs, make sure you’re documenting those and the reasons why, make sure every single year you’re doing your ebitda, your earnings before interest, taxes, amortization and depreciation. You know, if you party CPA, the third party, CPA kicked me out and ebitda at the end of every single year, and then I type it up in a resolution, and I go out and I have all of the shareholders of that organization sign off on it, and then it goes inside of my corporate books. Now, why? Well, I have a couple of businesses that are not with family members, and I want to make sure that it’s been the two of us, but I don’t do anything differently if it is my family members. With Shilanski and Associates, a family owned organization. We do keep honest people honest, and make sure we’re all sitting there and going over them because we are guilty, just like everybody else out there, of over inflating our numbers, are thinking that we’re more than what we are worth, and so sitting down, listening to industry standards and saying, Hey, what’s the multiple that people are getting on their practices right now? Great, pull up my financials. Can I support that? But don’t sit there and go, Oh, I have a $2 million practice, and the multiples 10. So somebody’s totally going to give me 20, if you have not sat there and gone through your financials with a fine tooth comb, because many of us, even us, lansky’s, we lie to ourselves. We lie to ourselves. So if you pull yourself out of that scenario, and you objectively go look at your information, and if you say, hey, my revenue is $2 million cool, pull up your profit and loss. Show me the deposits for $2 million you know, log into your bank account, pull the transactions, show me the deposits in which you make $2 million and that’s what we need to see. Everything needs to be evidenced and verifiable. That’s SO, SO SO important.  TPR Nation, we talked a lot today about why I think the S for sub chapter as election stands for shenanigans, and that is because we are the ones doing the shenanigans. We are the ones not holding ourselves and other people around us accountable. And it works fine and dandy till you want to do something like retire, or you have to quit, or you want to move on, or you get a smoking deal, and you just decide it’s been real, it’s fun, but not every day has been real fun. I’m out peace out Cub Scout. So you have to determine if you’re going to and by the way, just real quick sidebar, if you’re going to clean up your financials, it can take a few years for that to be reflected on your profit and loss on your balance sheet and on your cash flow. If I even have a business owner wanting to be wrapping up and they sell it for another five years, three years, two years, whatever, I get started today, cleaning up those things, because it takes the only time, but you also have to have evidence that things have been cleaned up. Like, why did you have that dramatic shift? You know, maybe you sold a book of annuities, and so for five years, as you ran out alone on it, you had $1/4 million of income that you won’t normally have a business. Well, then guess what’s going to happen in year six, you’re going to show a loss. And so if we show those the loss of that income, not loss of net revenue, net income, necessarily, but we show that loss of revenue, then what am I going to do about that? How am I going to justify that? How am I going to explain it? How am I going to show growth in other areas? What is my long term strategy? What is my plan? And how am I preparing my financials today to get me where I want to be the future. TPR Nation, this is 100% about action items. You know, everything that we do at The Perfect RIA is about driving to accomplish your goals. We are in the pursuit of perfection here, and we will not stop, we will not stop leveling up and become better and better and better at what we do. So I shared with you some of my tips and tricks and strategies that I do with business owners. And remember, if you’re employed with a larger practice, you still have to think like a business owner, because we are still in charge of our own income, and we’re still going to deal with a lot of clients that are business owners. Either they’re small business owner, they have a side hustle, or they have real estate so how are we helping them structure things that makes the most long term sense to get them where they want to be. Action Item: Review all of your financials. We talked a lot about piercing the corporate veil. What does it mean? And could you potentially have your own corporate veil pierced if you’re not operating efficiently? What do you need to do today to make sure, now the one tip I gave you, co mingled assets. Co mingled assets. Easy to do, because it so do you want to take the path of least resistance, which depositing or drawing money, and sometimes we allow sloppiness to occur, Chinese wall. You need to have those divisions. You have that entity up. I’ve helped people pierce a lot of corporate veils, because the business owners, co mingled assets or sign things in capacity saying that they were part of business A and signed as a business a member on business B, which had nothing to do with each other, sure that you have that Chinese wall up and you’re really, really clear about those distinctions. And then also, how are we doing the shenanigans? What write offs are we taking that we need to document evidence and show justification for the third action item? What’s your succession plan? What’s your succession plan when the good Lord takes you home, who are your clients going to turn to? And what does that look like? Make sure that you have that documented, communicated, and part of your long term planning strategy, we have this at Shilanski. How many times clients come to us? You know why we stay here? We stay here because, God forbid, something happens to so and so, I know I’m part of a bigger organization. I know I’m part of a team. I know I will be taking care of ultimately. TPR Nation, this is Jamie Shilanski in an episode of Worlds to Conquer. Go find people who share your values and change the world.

Recommended Podcast

Understanding Annuities and the Characteristics of Successful Leaders

Training in the annuity space and discipline for success.

See More

How to Achieve Success in 2 Steps

The Difference Between Wishing and Goal-Setting

See More

The Annuity Conversation with Guest Tracy Lownsberry [Episode 265]

Understanding annuities and strategies to help your clients.

See More

Contact Us