Lee Chen is an attorney at the California office of Kyler Kohler Ostermiller & Sorensen, where he works with best-selling author, national speaker, and radio show host Mark J. Kohler.
His firm, KKOS Lawyers, bills itself as the entrepreneur’s law firm. He and his colleagues specialize in setting up structures for small businesses. They start by helping their clients determine what type of entity to set up– be it a sole proprietorship, a general or limited partnership, a limited liability company, a corporation or s-corporation– and the right time to set it up.
Chen doesn’t advise setting up an entity just for the sake of setting up an entity.
“We want to make sure it makes good financial sense,” he says.
He has conversations with clients about why and when they should consider setting up an entity, looking at the costs and the benefits and helping them determine the right time to pull the trigger. He doesn’t expect them to be experts on structuring, but he does want to help them make more informed decisions about their business.
When it comes to structuring, most business owners set up an entity for two main reasons, Chen says: for tax benefits and/or asset protection.
Entrepreneurs often set up their business through an LLC or a corporation so that they’re not personally liable for whatever happens to them. If they’re worried about personal liability, it might make sense for a business owner to set up an entity right away.
“It depends on the type of the business and depends on the risk tolerance of individual,” Chen says.
From a tax standpoint, the benefits of setting up something really only make sense if the client knows they are going to net $30,000 or more annually.
“If you’re not making any money, then you’re not going to get tax benefits,” he says.
Oftentimes, he hears from clients too late in the year about setting up an entity that will give them tax advantages.
“If someone does everything in their name as a sole proprietorship and then come Thanksgiving, they made a lot of money and want something set up, I’m sorry, we can’t go backward to set something up,” Chen says.
Business owners need to do a level of forecasting of their net profits in order to determine when the best time to set up an entity might be. If it looks as if they’re going to be generating a significant income, that’s the time to consider structuring.
While it’s possible for business owners to form entities without consulting an attorney, Chen says there have been plenty of times when he and his colleagues have had to unwind things that were not set up correctly.
There’s a huge amount of information and strategies out there for running a business. Business owners shouldn’t expect to know everything about everything, though. Chen says a successful business owner needs a team that includes experts like business coaches, attorneys, accountants, and consultants.
“The problem with people who are just starting off is they don’t know what they don’t know,” he says.
For entrepreneurs looking to be schooled on all aspects of running a business, Chen recommends visiting Mark Kohler’s YouTube Channel and picking up a copy of his book, The Tax and Legal Playbook, which summarizes several different strategies and protections for small business owners. There are plenty of resources online to help new business owners familiarize themselves with the issues surrounding running a business.
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