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Hi, I'm Rob West. If you're starting your own company, you have options for setting it up. Each has advantages and disadvantages that can be confusing. I'll give you the pros and cons of each today, and then it's on to your calls at 800-525-7000. That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions.
Well, it's a question we get a lot. I'm starting a business, but I'm not sure how I should set it up legally. Should it be an LLC or a C-corp or some other type like a partnership or a sole proprietorship?
If you choose incorrectly for your particular situation, it could cost you money at tax time. So let's take a look at some of these just in case you want to start your own business someday. And we'll look at the LLC, the C-corp, and the S-corp, three of the most common. First, the LLC or Limited Liability Company. As the name implies, this is a business structure that protects you from the personal responsibility for the company's debts or liabilities. LLCs are really hybrids that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
Now, what does that mean exactly? Well, it gives you protection from debt collectors and lawsuits involving the company, just as a corporation would. But unlike a corporation, the LLC allows what's called flow-through for tax purposes. That means the LLC doesn't pay corporate income taxes. The company's profits and losses or deductions are passed on to the members of the LLC.
That avoids the double taxation that a corporation pays when the company pays income taxes and the shareholders then pay income taxes on dividends or capital gains taxes when they sell shares. So an LLC is a formal business arrangement that requires you to file articles of organization with the state, but it's easier to set up than a corporation. It also has certain disadvantages. For example, it may have to be dissolved if a member dies or files for bankruptcy. That's unlike a corporation that theoretically can last indefinitely.
Another disadvantage? An LLC is not a good option if you decide to take the company public someday. The ownership or equity stake of an LLC cannot be publicly traded, but for many folks starting a business, forming an LLC is a great way to get started. Now, the LLC is often compared to a C-Corporation or C-Corp, as in, which should I choose? But in most cases, you wouldn't be faced with that decision.
That's because there's a very important distinction between the two. While both an LLC and a C-Corp will protect you personally from the company's debt and liability, the C-Corp does not allow a flow-through treatment of profits and losses for tax purposes. C-Corporations are subject to corporation income taxation.
That means the taxing of profits from the business is at both corporate and personal levels, creating the double taxation situation I mentioned earlier. A C-Corp also requires you to hold annual meetings and have a board of directors that's voted on by the shareholders. That's a whole other level of complexity, but it has a major advantage over more simple company structures. That separation between management and the owners or shareholders is what allows C-Corps to live beyond the life of an individual owner since they have many owners called shareholders. It also allows for the possibility of passive income for those shareholders. Now, I said that the question for how to establish a business in most cases won't be a choice between an LLC and a C-Corp. That's because the vast majority of folks who are starting a business would want to avoid the double taxation inherent in a C-Corp.
So how do you get around that? Well, it's with an S-Corp. This structure has the best features of both the LLC and the C-Corp. The S-Corp provides you with liability protection, but also allows you to pass profits and losses directly to shareholders so you're only taxed once. Filing an S-Corp can also reduce personal income taxes for the business owners by characterizing money they receive from the business as salary or dividends to owners. That will often lower their liability for self-employment or FICA taxes. An S-Corp will also generate deductions for business expenses and wages paid to their employees, which again can be owners.
Okay, so those are the advantages and disadvantages of the three most common company structures just in case you were thinking about starting a business. We're back with your questions just after this. 800-525-7000. Stick around. They want to help investors do well by doing good to explore a new way of investing that aligns with your values. More information is available at oneascent.com and by clicking Analyze My Investments. Have you downloaded the Faith Buy app yet? You need to do that today because this is going to make your life easier. Yes, you can manage your money through the in-app envelope feature, but also plan out future goals. I want to buy a house in five years and I'm on track to do that.
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Let's go back to the phones to Plantation, Florida. Hi, Jordan. Go ahead. Okay, thank you.
I have... Let me interrupt you for one second, Jordan, and just ask if you'll turn down your radio. That'll help to avoid that echo there, and then you can go right ahead. Okay. I want to know, I have two investments with Fidelity and with Vanguard. Fidelity is a money market, and with Vanguard it's a brokerage company. My question is, who is better, the brokerage company or the money market?
It's a good question, and if you'll maybe turn it down slightly just a bit more, that'd be helpful. You know, it's really comparing two different things. So Fidelity and Vanguard both can house your investment accounts, and both can do very well at it. Vanguard is a mutual fund company, but you could have an individual account there, meaning a taxable account. You could have an IRA, and then you'd typically put the Vanguard mutual funds inside it, and they have some good ones, and they're known for being low cost and have high quality funds. With Fidelity, very similar, although you're going to have access to more investment options. A brokerage firm where you can have any kind of account basically you want, and then you can put inside that account, you know, the investments that you select. You could use Vanguard funds inside of Fidelity or any other fund family, stock or exchange traded funds. So it's not, Jordan, as much as one being better than another, as it is what type of investments are going to best suit your needs and who is selecting those. If you're doing the one selecting them, and if you're happy using Vanguard investments, then there's no reason for you not to have an account with Vanguard. If you want more flexibility, more options, more investment choices, well then Fidelity would probably suit you better. Does that make sense? There's no reason for you not to have an account with Vanguard. Let's do this.
We're getting a lot of echo there. Hopefully that'll help you, Jordan, and if we can serve you in any way in the future, don't hesitate to call back. Thanks for your call today.
800-525-7002 Idaho. Hi, Sherrilyn, go ahead. Hi, thank you for what you do. I've been listening to you ever since I discovered you and it's wonderful. Oh, thank you. Yeah, it's wonderful. If a lot of questions get answered, I don't even have to call. That's the idea. You're on to something there. That's good. Yeah, I can just listen.
If I listen to it every day, pretty sure you're going to answer. But I am fairly recently widowed. I sold a house.
I bought a new house. I have a little chunk of money that I'm going to be putting to lower my mortgage payment because I won't be able to pay the mortgage payment otherwise real well. And I'll have a little bit of money left when I'm through and I'm not sure what to do with it. I'll probably only have after I leave a little liquid, like about 10 grand liquid for the house in case something happens, you know what I mean? But then I'll have about $5,000 to $8,000, maybe $10,000 left cash that I want to invest in something. I have a Schwab account now with one Schwab account that has $10,000 that I don't touch and it's been doing quite well to stock.
But I don't know what to do with that small amount of money if I should get gold or if I should just not. My husband helped me a lot in this area and he's not here anymore. Oh, yes.
Well, I'm so glad you called and thanks for that helpful background. Let me just clarify something. So you're going to pay off the mortgage entirely, is that right? No. No, I'm just going to put about half down. Okay. But that's not going to help you free up cash flow because if it's an amortized mortgage, that payment stays the same unless you pay it off in full. No, I'm going to refinance it.
Oh, you are going to refinance. Okay. Yeah, because it's not a good loan right now and it's not a good loan.
Okay. What makes it a bad loan? Is it the high interest rate or something? No, at the time my score was lower and my husband was worried about not getting the house because people were fighting over it.
Okay. So we went with a credit union that didn't put the taxes in, didn't put the insurance in, which we were used to, and was actually way high. The rate was almost 6% during a whole, when everybody was down to 2 and 1%. They said they'd raise it back down when the interest rates, when our credit score went back up, which it went back up within a month.
It was just a little bleep, but they never did and so I'm not real happy with them. Okay. What is the amount you're going to be borrowing with the new loan? About $190, maybe a little less. Okay.
Between $185 and $190. Okay. And that's what you owe today or are you going to cash out a portion?
Today I owe $377. Okay. And so you have enough cash to pay it down from $377 to $190?
Mm-hmm. Okay. Because I really need that lower payment because I don't have enough money to cover the little bit of savings I still have.
I don't have enough, it'll be gone, you know, I'm about $1,300 over what I bring in every month because of these, you know, the mortgage is high. Okay. So how much do you have in cash today before you do this refi? Oh, not much. Well, you've got the proceeds of that home sale, right? Okay. Oh, I do.
I have 200, okay, I've got the $190, a little over that actually, that I put in a three-month CD at the bank because they are paying $4.5, which is pretty darn good for three months. Yeah. And then in March when this horrible loan comes into this balloon payment that I didn't even realize we had, when all that happens, they wanted to reassess me because my husband passed during the loan. I told them, you know, I don't really want to go back through them, you know, and they were also trying to prepare me for a higher interest rate, but I already found a much better rate with my own bank. Okay.
Wells Fargo. Okay. And so that's okay. So you have a balloon payment coming up, is that right?
Yeah, there's some kind of balloon thing I didn't even know about. Okay. All right.
That's helpful. The thing I was concerned about is, you know, you were going to take a 6% mortgage, which I realize you're not happy about for a variety of reasons. And, you know, a 30-year rate right now is probably almost seven, you know, six and three quarters. I don't know what your bank's quoting you.
So if your rate actually goes up and then the cost of the refinance is probably three, four, five percent of the loan value, I just want to make sure that this makes sense. But if you've got a balloon payment coming up, I get that. I also understand that you're trying to lower your overall monthly expenses, although you could take that, you know, $190,000 and invest it.
But let's just say you go forward with your plan. You know, what I would want you to keep in reserve is not based on just what your housing expenses are going to be, but really a function of your total monthly expenses. And I'd love for you to have three to six months worth of expenses set aside. Do you know how much you spend on a monthly basis, total, roughly?
Well, with my bills, I'm about $5,500 a month. Okay. All right. Let's do this. This has all been really helpful.
I've got to take a quick break. When we come back, let's get to some answers. I'll give you my thoughts on kind of where you go from here. And I know you're looking for some investment advice as well. So stay right there.
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Welcome back to Faith and Finance. I'm Rob West. We've got lines open, maybe room for one or two more questions. 800-525-7000.
You can call right now. Before the break, we were talking to Sherilyn in Idaho. Her husband has passed away. She's just looking to reposition her finances. She's got some money that she wants to set aside for savings. She's got a little bit of money she believes that will be left over beyond that. She's wondering about investing. She's got some stocks and a Schwab account. She's also having to refinance a loan that is about to come into a balloon. She's happy with where she's going to head with that. And because of a home sale, she's going to be able to drastically reduce the mortgage balance to get her expenses in line with her income.
All of that's good, Sherilyn. I think the thing I'm wanting to make sure of is that you truly have $5,000 to $8,000 that makes sense to invest or whether that should actually just become a part of your emergency fund. And we would use your expenses to determine that. You mentioned that you're spending a little over maybe $5,000 a month.
But let me ask, once you're done repositioning yourself with this new mortgage, what would your expenses then be without the mortgage payment? I think they're going to be, gosh, I have it here. I can't remember the exact number, but I have about $4,500 between my Social Security and his pension. Okay, so probably around that number. Yeah, I'm thinking it's going to be pretty close with everything.
Okay, all right, good. Yeah, so what I would typically say is I'd love for you to have, let's call it $5,000 for round numbers, I'd love for you to have three to six months expenses. So that's a minimum of $15,000, a max of $30,000. So what I would say is I'd probably feel better with you in this season of life, especially with you kind of still settling into your rhythms on income and expenses and managing cash flow. I'd rather you not put $5,000 to $8,000 to work in the market. I'd hang on every bit that you have. So that would get your emergency fund up to $18,000, which is probably about the right number.
I'd in fact like it to be a little bit more. So I would say my advice would be don't invest that. With regard, you mentioned $10,000 in I think Schwab. You mentioned a stock. Is it a single stock or is it a mutual fund?
I think it's a single, it's McDonald's. So that's not diversified. It doesn't really matter what the company is. Putting all of your eggs in one basket is just giving you more risk than you really need to take. You'd want to talk to your CPA or your advisor on this because you likely create a taxable event. But I'd like, as long as you consider the tax consequences, you're probably better off to move that to a mutual fund where instead of owning one stock, maybe you own 50 or 100 or a couple of hundred stocks.
And then you're more diversified. So I would hang on to that money and put that all into a high-yield savings account. You could use an online bank that you might select at bankrate.com. The last thing that I would say, Sherilyn, is even though you're happy with the offer that Wells Fargo gave you, I'd get at least three bids on that mortgage before you go ahead with it.
This is the largest transaction you will ever have. And often, and I'm not pointing my finger at you, we all do this, often we'll just get one bid. And you need to let people compete for this business and see if you can get better interest rate. Maybe it's the same interest rate, but you'll find somebody with lower fees. You can still go with a reputable company that offers the escrows, but I just wouldn't settle on one offer.
I'd get at least three before you make that final decision. Thanks for your call today. I hope that helps.
Hey, stay on the line. I want to send you a copy of the book, Wise Women Managing Money. I think it'll be helpful to you and a real encouragement to you in this season of life. May the Lord bless you, Sherilyn. Let's go to Akron. Hi, Ann. Go ahead.
Yeah, I just have a quick question. We're in the market for a used car right now. We're driving in 2007. I was wondering, I know there for a while used cars were very high, very pricey. Is now a good time to buy a used car?
You know, it's better, I'll say, Ann. Used car prices are gradually falling. They were in 23.
This is continuing into 24. The only downside is the inventories are starting to decline as the prices get better because a lot of folks delayed purchases while the prices were sky high. So you're going to get a better deal now than a year ago, but you may have to look harder to find the car you want.
So I would be patient. Make sure you know what make and model you're looking for. Make sure it's going to be something that has a good reliability rating because you don't want to overpay. The key to that is you want to know the value of the car. You want to become an expert on whatever car you're looking to buy in the year that you want it. Get the value on KBB.com or edmunds.com and then shop, shop, shop. The last used car I bought, I bought an airplane ticket and flew there three states away, spent the night, picked up the car and drove it home and saved three or four thousand dollars just because I was willing to wait a couple of months until I found the right deal and I was willing to travel to get it.
So that's another piece of it. Now, with a used car, we always recommend you get an independent mechanic to look it over for the inspection. You may need to pay them a couple of hundred dollars to do that, but it's worth it.
Now, if you're buying it from a dealership that offers a guarantee, you may not need to do that, but you just need to understand what it is they're guaranteeing. But the bottom line to your question, Anne, is yes, used car prices are coming down. They're not great, but they're much better than a year ago. Thanks for calling today. We appreciate it. Let's go to Indiana. Hi, Dora. Go ahead. Good afternoon. I have a question about a program that I heard on your program. It's to do with, I have a small IRA. I'd like to start streaming that to my church without touching because according to what you said before, if you, if I don't have hands on, then I avoid any tax liability or that way.
Can you tell me what the name of that program? I'd be happy to Dora. What is your age?
I'm going to be 72 in August. Okay, so you haven't started taking a required minimum out of this, correct? No, I have not. Yeah, very good.
Okay. Yeah, it's called a qualified charitable distribution, and you're going to want to make two phone calls. One is to the company that holds the IRA for you. It's the company that sends you the statements every month or every quarter. Let them know that you want to do the qualified charitable distribution. They'll tell you how to do it, either an electronic or a paper form.
And then you're going to want to call your church and tell them that it's coming so that they're on the lookout for it and can be ready to receive it. But the bottom line is that gift will not be added to your taxable income. And once you get to the place where you have a required minimum, which is coming, that QCD can also satisfy your required minimum at that time. But you are correct.
It's a way for you to give without recognizing the distribution as income. Okay, that's exactly what I needed to know. And I'm sorry it's redone. Yeah, no, I'm happy to mention that, you know, I'm glad you brought it up, Dora, because this is one that's often overlooked. And we need to talk about it regularly because it's a powerful giving tool for somebody in your season of life. And so don't ever hesitate to ask questions. Thank you for your call today. Hey, we're almost out of time, but I wanted to let you know that you don't ever have to miss a program. Just download our Faith Buy app for your mobile device and take us with you anywhere. Thanks for joining us today. I look forward to talking with you again next time on Faith and Finance. Faith and Finance is provided by Faith Buy and listeners like you.
