August 2025
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Hey there, and welcome to another episode of Couch Side Conversation. I'm Kevin Rex, and I'm joined by my partner and colleague Mike Rudow. And we're excited today because we're talking about three mistakes that self-employed people make and what they should avoid. And so the three mistakes that we're going to talk about today, one is going to be structure, two is going to be how to get money out of the business, how do you pay yourself. And then the third one is around retirement planning something that they often times forget or maybe over fund.
Yeah, so to start with let's talk about structure. This can get complicated. We're not attorneys. We're not CPAs. But let's talk a little bit about the mistake to avoid is to do what when structuring a new business.
So there's a lot that goes into formulating a new business. Right. And a lot of times people I feel like are so excited about the opportunity to become business owners that they rush into creating a business without putting a lot of thought into what the right entity for that business is, when in reality, the the structure of the business, the entity type, could have really severe tax consequences in the long run if it's not structured properly based on the type of business in the beginning.
Sure. And I think sometimes, like you said, you're excited for the business. You're like, I don't know. Just give me one. I want to start selling or growing.
Do a little bit of research like this sounds good. I'm going to start it. You know, an LLC. I'm going to start an S Corp.
Yeah. Your friend did that so i'm going to do that.
You're going to launch this business. And in reality, what you need is you need to kind of take a step back and say, okay, what is my 3 to 5 year trajectory for this business? What are my goals? Is it going to be me as the sole owner? Am I going to have partners? Are they going to be owner operators or are they going to be financial partners?
Right. There's a lot of things that go into the thought process before. You actually should decide on the structure of a business. And right when you think of the different structures you have, you've got one a sole proprietorship, right? Where if you're a sole proprietor, it is not a legal entity. You are taking on all legal liability yourself. Any income that's generated is passed through straight to you. And it's, it's fully taxed with self-employment income. Right. It's as simple as it gets. Right? If you're a freelancer, if there's not a lot of risk in the business that you're doing, that's okay. Right. Next you've got an LLC, right? A limited liability company. LLCs are unique because they can either be taxed like a sole proprietor but give you liability protection. So we're a sole proprietor. It's, you know, you've got the the legal liability. Under an LLC, you have that liability protection because it is a legal entity. What also makes an LLC unique is, is that you can elect different tax structures within an LLC. You can make an S Corp election. You can make a C Corp election. Or it could be taxed as a as a pass through like a sole proprietor. LLCs are great for flexibility. You could bring on different types of partners. You could bring on outside investors, you could bring in foreign investments in some cases institutional money in some cases. Right. There's a lot of ifs.
It seems like it gives you a lot of options.
It does, but it also depends on the type of business, the state, the location of the business. So that's why having the right team around you, having an attorney, that can help guide you through that. Once you know what you want out of your business and what kind of the protection of the business is, and then you've got, you can be, a corporation, right? Incorporated. And with that, you can either have an S Corp election or a C Corp election. With the S Corp election, there's a lot of benefit tax wise for that. But there is some restrictions. So whether the an S Corp, you could have only 100 shareholders or less. As far as raising outside capital, it is not as easy because there's only one share class.
Right. So if you've got multiple owners and some are owner operators, but some are just financial owners, it doesn't make sense in that situation. So really understanding where your funding is going to come from. But it's also in that corporate structure. So it is more formally structured, which can be beneficial if you need bank loans or things of that nature.
So also things to think about. And then there's a C corporation. And C corporation is best if you're a startup that, you know, has a huge growth trajectory, you're looking for possible institutional capital for an investment, VC or private equity funding. You've got the, the corporate formalities. So meeting minutes, filings. But you also have the opportunity for unlimited shareholders. And you can eventually essentially go public or have unlimited shares to sell. So there's just a lot more flexibility, kind of the gold standard. If you envision your business taking off.
So we're both business owners being partners here at Morton. And my wife owns a couple businesses on her own. And I remember when she was getting started, I think like most business owners, you get into it thinking you're going to grow this business, but you also make that decision of what type of entity kind of based on what's easiest for you in that moment.
So what you said really resonates with me having a one, three, five kind of ten year plan for where you want to take that business is really important. And so for us, it kind of came down to an LLC taxes in S Corp or actually incorporated and becoming an S Corp. And when we looked at it, the LLC is really beneficial if you're going to take on outside investors, they're not going to be involved in the business. Private equity type stuff. That was never our goal. She kind of wanted to be the main owner. And then on top of that, as far as being the S Corp, she can get bank financing because she's incorporated. It makes it a lot easier.
If she wanted to bring on partners that are active in the business, the share class didn't matter. So we kind of went through that. We wanted the benefits of the taxation of the S Corp, but the LLC didn't fit as nicely as incorporating.
Yeah, you didn't need the flexibility from it. You needed kind of that corporate structure to give you a little bit more credibility. And that makes sense. But it's because you guys thought through it, you had a three, five year vision of what the business was going to be, how you were going to grow into that eventual, you know, the eventual goals of your business. And you made that decision based on that, which is exactly what we want to kind of help our clients and, anyone that needs help, like, really feel like they're in visioning before they make that decision.
Yeah, absolutely. And it's her plan would be to eventually sell in the future in the S Corp and I structure for that.
Yeah. Now speaking of your wife's business, which I know you're involved in, the second part of this conversation is how to take income. Right. And I know that can be very challenging for some business owners, especially if, say, you're in an S corp.
How much should I pay myself? Her salary. How much of that should be distributions. What's the benefit of either or. Can you kind of walk me through, you know, why you guys or how you guys do that and your thought process behind it.
Yeah, it's not easy, actually. And I think this is probably our the conversations we have most about the business is money's coming in and often times the business, if you're a small business owner or a new business owner, your income's not necessarily predictable or consistent.
There's a lot of ebbs and flows to it. And so it's figuring out, okay, if I'm going to take a W-2 income, and for her as an S Corp, she has to take a reasonable salary. So she can't just pay herself a dollar, has to be reasonable for her role. But she also has to make sure she has enough money to make that payment every single paycheck.
And the benefit of going W-2 versus taking things as distributions is you're starting to pay into Social Security. And so over time, you're going to build that benefit into the future. The downside, though, is that you're paying Social Security and Medicare tax. You're paying that FICA tax.
Yeah
I think it's worth 15.3% if you're a business owner because you're paying both the employee and the employer side.
So W2 income is not as tax efficient as taking distributions. So we sit down and we created with our CPA and attorney what's the right amount for her to take his W-2. And then the distributions come out as necessary and as needed. Because then the next part is how much to leave in the business, how much to take out and spend personally. She does have business partner. So then that complicates it. If you're taking a distribution, it has to be equal amongst the shareholders and owners to be to be the right amount.
Because your an S Corp.
Because your an S Corp. So if she takes, you know, a certain amount, whatever percentage, her business partners have to take the same amount. So it just creates some complexities. And I think one other thing that goes into it too, and business owners have a really cool benefit, is they can write a lot of things off through the business if they have business needs, whether it be cars or travel or dining out. Oftentimes, I know most of the business owners, we know every meal they've ever had has been for a business purpose.
As you have partners, that gets complicated too. Or you know what, if your partner wants to drive a Ferrari and you're comfortable driving a Honda Accord, how do you balance that out? Or they want to take their family on vacation all the time. That's putting your business at risk because they're doing things that maybe could lead to an audit or, you know, under some investigation.
So we play this game of how can we be as tax efficient as possible, get money out in the right way, keep the business afloat, and make sure we have enough in that for rainy days or or downturns, but then also expensing things that are legal, but making sure that we're not taking money out of the business to pay for things that could actually be run through the business.
Yeah. No. And with that you've got an appropriate salary. You're taking appropriate distributions based on, you know, how many different owners are of that S Corp and kind of an agreed upon amount. Are there any other benefits with the distribution side of it from a tax perspective that, you know, you think about optimizing when in like a S Corp structure?
Yeah. So that's a great question because on was the Tax Cuts and Jobs Act. And now it's been extended through this administration. You get what's called the QBI deduction. So it's a 20% deduction on distributions if you meet certain qualifications. And so that's another way. You're not paying the 15.35 FICA tax and you're getting a 20% deduction. You can see how that benefit.
You want to take as much in distributions as you can. Obviously doing it all structured in the right way. So for business owners in S Corp, for us personally that's you know most of our income comes through partner distributions.
So that's meaningful tax savings. And you know it comes down to putting some time and energy into having a plan going into it.
A lot of owners don't know what they don't know, so they don't necessarily know what they're missing out on. But having the right advisors around you, and then having a plan of how you're going to be taking your salary and your distribution.
It matters. I know you and I were talking about one of your clients that was going through this.
Yeah, I recently started working with a young woman who runs a marketing company. And for years, her marketing company was somewhat flat, and she's structured it as an LLC and taxed in a traditional LLC way. So taxes the sole proprietor. So everything's coming through. She's taking distributions essentially when she needs it. So they're pretty sporadic, taking money out of the business.
Everything that she's taking out is subject to self-employment tax, which is at 15.3 or whatever percent.
Not efficient.
Right. Not efficient at all. But also like she's growing a family and she was trying to, get qualified for a mortgage loan. And lenders don't see those types of distribution is as favorable because it's not consistent income. Right. So, and it was also hard for her to put away for retirement plans because, again, she didn't know how much she was going to need to take out to use for life.,It was it was kind of sporadic and there was no consistency to it. But her business's has been growing and making more money. And so we sat down and we developed a plan, and we actually changed the tax structure of that LLC to an S Corp election, where now she's paying herself a fair salary. And with that salary, she's actually been able to qualify now for a mortgage loan. So she's been able to get a house.
They see the consistent income.
They see the consistent income. But also we've been able to do some planning on where she's able to now put into, a SEP IRA and build that retirement account. And when she's taking distributions out of the business, those distributions are no longer subject to self-employment tax.
So there was a lot of benefit by just understanding her situation, what her needs were, and then kind of reexamining what changes can we make to optimize this from an income in a tax standpoint.
Yeah. No I love that. So we talked about the structure avoid just kind of picking a random structure because it matters getting income out of the business the way that you choose to do that efficiently matters. And you talked a couple times about retirement planning. This is something I'm passionate about for business owners. Often times they look at their business as a sale at the end of their life, you know, the end of their working years to be able to fund their retirement. And they don't always do traditional retirement. They kind of avoid that. And I think one thing that we need to talk about is avoid avoiding that.
Right. So let's talk a little bit about yeah, the retirement plan option.
I mean when you think if you're a W-2 employee, your ability to contribute to retirement plans are, it's tough because you have you have really no control over what's presented to you. Right. Your company might offer a 401K if they do offer a 401 K, great.
Now you have the opportunity where you can contribute up to $23,500. If you're over 50, you could get another $7500. If you're between 60 and 63, there's another catch up. Right? So, Max, you're putting away around $34,000 a year. If you're a business owner, you could be putting away 70,000. You could be putting away hundreds of thousands of dollars if the the entity is, is set up right and if you're taking your income the right way. So there's a lot of opportunity to be putting away meaningful amounts of retirement, money and avoiding paying the taxes. Now, if that makes sense for you for a financial plan, because as a business owner, you have the ability to contribute to what's called a SEP IRA. You have the ability to contribute to, a solo 401K, and those are two plans that non business owners don't have the ability to contribute to you. And those are plans where you could put away up to $70,000 a year tax deferred. You get that tax deferred growth and then eventually you'll pay the taxes. But also those are defined contribution plans. There's defined benefit plans. There's pensions, there's cash balance plans. If you're making a substantial amount of income and you know, you know, you want to avoid paying those upper tax brackets, you could put away hundreds of thousands of dollars into those plans by having just doing the due diligence, having the right planning, going into it and setting up those, those structures.
So retirement planning for business owners is essential if that's what makes sense. Based on the financial plan. Like you said, the other side of that, though, is there's a lot of people who are trying to avoid paying taxes. Now, as. Right. So they're putting away as much into retirement accounts as they can, and then they sell their business when they're 50 and they have no income.
And it's like, well, all of my net worth is put into these tax deferred accounts where they can't touch it without penalty until 59 and 1/2. So now what do you do. Right. So it's also about understanding like what's your goal is your goal to exit that business as quickly as possible. Then maybe you should be pulling that money out, paying the taxes and building a taxable account so that that can build and then eventually that will replace the income that you had from the business because, you know, you've invested it in an income generating portfolio.
There is no right answer, though. It's just you have more opportunity as a business owner to be able to contribute to a retirement plan or be able to start pulling money out of that business and contributing to a taxable account, because, like you said, not every business entity is going to be a transferable business. So understanding is there enterprise value that can be transferable in this business or is this business Kevin, Rex or Mike Rudow to where, when, when we're done, the business is done.
And that means if that's the case, we should be, you know, trying to build up those investment accounts as possible.
Much like a lifestyle business. Right? Where you the business depends on that person. Yeah. I think you hit on a few times. The planning is so important, like being a business owner. Oftentimes W-2 employees and employees in general, they look at business owners.
They have so many options. They have so much flexibility. That is I think the best part about being a business owner. You also have a lot of responsibility and a lot of weight on your shoulders, but if you don't take advantage of those opportunities, if you don't work with a team of professionals, I mean, just think about how great it is.
If there was like a strategist team out there where business owners could talk to them and get all the information, it's an I'm joking, but dead serious. Like the things that you and Joe and our team does for business owners is to take all of those options, figure out what's best for them. How much should I put in retirement plans?
How much should I pay taxes on, and having taxable assets? What am I going to sell my business for if anything? Because you can't put everything in retirement, you can't put nothing in retirement. You need to take advantage of those options.
Yeah.
So take you know, for all those business owners out there to take advantage of the flexibility to understand your options and make deliberate choices versus just kind of going with the flow and focus only on growing your business and waking up being like, oh, I could have done things a lot better.
And that's what we try to really avoid with our business owners is don't put your head in the sand and just grow to grow right. Build a team around you. Have people who you trust, who are experts in their given fields and, and then have a plan to make the right decisions so that at the end of the day, you're optimizing your tax, your income and all of the other strategies.
That's great. Yeah. So three things to avoid. Don't just pick a random structure. Make sure you're doing a plan three, five, ten years out. Make sure you're understanding the most tax efficient way to get money out of your business. And then definitely don't avoid saving for retirement through those traditional ways that business owners get access to. So thank you so much for your time.
We are going to move into everyone's favorite segment, or at least our favorite segment, the this or that, and we're going to have a little fun with that. You ready?
Yeah. Let's do it.
Awesome. So let's jump into this or that. First question for you. Would you rather be self-employed or would you rather be an employee with W-2?
I would rather be married to someone who is an employee with the W-2 and myself, be self-employed so that we get the best of both worlds.
Nice, good answer. Kind of a cheat but a good answer.
Right?
For you, would you rather expense your travel through your business or pay yourself?
Is it a business trip?
Isn't everything a business trip?
I mean, it can be, I think that I'm not paying for my kids. I'm not paying for, you know, horseback riding. But there are parts of the trip that I think if there's a legitimate business, of course, I'd rather I want to expense everything we can.
Yeah.
So for you, bookkeeping. Do you prefer to keep bookkeeping in-house, or do you source out for it?
Source out. I trust the professionals. I'd rather pay a little bit more knowing that I'm optimizing strategy, than rely on myself and my employees, who probably specialize in other things rather than tax and bookkeeping.
Yeah, it's important, I think.
So. Last one, you maxed out that retirement plan, or are you, taking that money out, paying the taxes and putting it elsewhere?
I mean, I like to be successful enough where I'm maxing out and taking it out. I just think it depends. Right. You want retirement assets, so I'm always putting money in, but I also want taxable assets. So it's a blend depending on your situation. Yeah. Just for answers. Paying the tax and taking it out.
Yeah, I like I like the first approach where why don't you max out the retirement and use it as motivation to make more so that now you have both you have max retirement and you've got money that you could pull out and put towards trips or building a textbook.
That's as easy as you say.
Just let it motivate you.
Great, Mike. Thank you so much. Thanks for joining us. And, please check out our other episodes on couch side conversation.
Wow.
