DON'T HURT YOUR BUSINESS | Episode 4 with Meny Hoffman & Simeon Friedman

Good morning. We're back again. Another episode. >> Time flies. >> Yeah. You know the it's it's so interesting. I I know I mentioned it last time, but the I wouldn't imagine the amount of feedback I am getting. And actually, somebody told me something very interesting. He says, um it's interesting to see on these episodes that when you interview people, they're so into their passion, into their what they do that the way they deliver it. So we had uh like episodes with Pin Kashiff from Friday on sales and everybody was saying like it's it's contagious how like his the energy comes across and somebody told me exactly the same thing is now we're doing finance and and I see it from both sides. The energy that you bring to the table in terms of the finance industry and the people that are interested in these topics are just getting excited about it. So >> well my understand again I don't do this I don't do these podcasts very often. I understand the audience. Uh these podcasts, these episodes are not made for seasoned experienced uh uh you know it's it's made for people that are you know to an a certain extent want some knowledge. I'll call it bullet points. Sure. Right. >> Um and it is important to be aware of it. Um I actually got some feedback as well. One one person I met says I like how you you simplified things. Yeah. >> Claire kept it simple. And that's what I'm trying to do. I'm just trying to keep it simple and obviously everything has there's more details and everything but that the point is not that. >> Yeah. And this is this is the the whole reason about doing these episodes is is to open up the mindset. We spoke about it last time is a business owner just to know these things exist. Um um and and a leader that's always growing always has to know okay what what are things that I don't know yet and just to know not that because they have to know everything >> but just to know the concepts exist. So that's that's uh it's you know it's very helpful that we get that dialogue from other people that are listening. Sometime we're sitting in the studio we have >> I have clients that are very smart and I have clients that are maybe I'm not so smart. >> Mh. >> Uh this the the metrics on if you're successful believe it or not doesn't necessarily have to mean if you're if you're smart. Uh but but if you know that you have limitations and you're relying on professionals that know to ask >> you don't have to be the the you know you don't have to be the shrewest person but you relying on people and you know to ask the questions. >> Exactly. >> Right. >> And surround yourself with you know never be the smartest person in the room. That's something I always share. When I go into a room and I say uh oh chances are I'm I'm on the high level like on the smartest people. I'm the wrong room. >> I still I still learn new things every day. >> Every day. >> Y >> yeah. So uh any feedback on last episode we we we dove we spoke about tax tax planning and we dove into this whole conversation about the difference between the CC corpor and LLC's. Any any feedback on that? Anything you want to add? >> There was there was one thing that that actually came to mind. Someone had asked me uh he said I had losses but my accountant said that I can't take the losses but it's from my business. Mhm. >> Uh you know to that extent uh I I think I think people should be aware of um if there is what's called an at risk limitation which means the IRS allows you to take losses up until the amount that you're at risk. >> Right? So if you're let's say a shareholder in an escorp and you have losses that generates negative um ne negative basis or negative equity in in your business that loss technically you can't you can't uh you can't take on your personal return. So, it's called a suspended loss. And the only way you can dip into that loss is either you invest money into your company, which means you're adding your risk to the company, or if the company makes profits in the future, losses that were suspended that you couldn't utilize, you'd be able to utilize it at that time. >> Um, this also ties in, and people should be aware of this. You find it more by real estate where you buy a property, you invested whatever it is you invest in a property and then at some point it generates losses, right? And then you uh refinance and took money out where you have negative equity in the company which means your the accumulated amount of losses that was generated and it could be depreciation loss or whatever it is and or the amount of money you took out from refinance. you took out more money than you invested, you're at a negative you're at a negative basis, let's call it, right? >> When you sell the property and even if you don't sell it for a big profit, chances are you're going to have to pick up a gain. you may have to pay tax on what phantom income that you had because in theory the IRS says, "Okay, now is when you recognize the loss or whatever it is, but you got profits throughout the year on distributions on refinance money that you never really pay tax on." Then that's when it comes back to bite you. So, you have to you have to be a aware of that as as well because it could come back to hit you. And you'll find it a lot with the uh uh with the uh real estate guys that took a lot of bonus depreciation where their equity is is a real high negative uh basis where at some point it's going to come back to bite you. >> This episode of the Let's Talk Business podcast is sponsored by Flow Digital and Pipe Drive. Sales is the lifeblood of every business. No sales means no revenue and no business. So, if you are a business owner or in sales, you already know how important it is to have a proper CRM. A good CRM helps you manage your sales process and keeps leads from falling through the cracks and make sure you have the proper reporting so you could analyze what's happening every single day. If the CRM is too complicated or not set set up properly, the team just won't use it. When that happens, leads get lost, follow get missed, and ultimately deals stall. That's where Pipe Drive comes in. Pipe Drive is an easytouse CRM designed to make tracking and sales process simple. You can see your pipeline at a glance, move deals forward, and make sure you never miss a follow-up. And with built-in AI, get insights to help you close more deals. But that's not all. Easy to use doesn't always mean efficient. That's where Flow Digital steps in. I'm personally a Flow Digital client that helped me set up the pipe drive at PEX. Speaking from personal experience, I could attest they're the best in the business at setting up CRM and automating the sales workflow. As one of the top Pipe Drive experts, Flow Digital builds automation and AI powered workflows that handle the busy work. Pipe Drive becomes one of your most powerful tools for your salespeople. As a listener to the show, you can sign up for a free Pipe Drive trial at flow.digitalb digitalb where you'll get a 45day trial of pipe drive plus you'll be able to get a 45minute consultation to get your CRM set up the right way. Once again that's flow.digital/LTB. So you get the best of both worlds. You get the easiest CRM out there which is Pipe Drive and you get Flow Digital to help you set it up. Remember, your business and your sales team will always thank you for setting the right system so they could focus on closing more sales. >> Yeah. So, this this again another concept that um speaking to professionals and I and I I mentioned it in the the earlier episodes that we did um on the when I interviewed your father at the Accelerate um um conference. Um, one of the things that he mentioned over there is, you know, having good rolodex and and and and I like that concept because there's there's professionals that are really into their their lane and and and when you have these type of questions for setup um it's always better to ask before >> and or if you have some sort of um hesitation about something, ask because at least uh you might get a better answer than you thinking of whatever you plan to do, >> right? And if you have an issue in business where you're thinking about it for a month and you can't come up with with a solution or you coming up, we've had situations where I can do A or B and then I want to sit down to discuss with you which one should I do A or B and then >> I come and say hey how about C? >> Yeah. >> And then you say I didn't think of that. >> Think about that. And this brings me to another point um um which is I always tell people is you could have a professional that you're actually dealing with. Let's say in this case, you could have an a great accountant, but they have a limited skill set because they've never done transactions like that. Um, it's it's perfectly okay to take a second opinion sometimes just to see if what's out there in terms of concepts, especially when it comes to um going back a second to tax savings and stuff like that. Um, you know, some >> even even accountants um again there is a limitation. Everybody has their limitations and you have to acknowledge those limitations. you stay in your lane and where what you're good at you're good at and where you believe somebody else is better >> bring them in. >> Beautiful. And even even for tax strategy, there are firms that are strictly focused on tax strategy. Meaning there are profirms that do firms that do certain uh certain structures that's specific for tax strategy, which the accountant doesn't necessarily have a day-to-day doesn't happen very often, >> but these firms >> um this is what they do. Mhm. >> Uh it would be good advice for the accountant or the client to be aware of that and when needed bring those professionals in. >> Got it. >> So today is we're going to have a fun topic because it's a little bit more more less technical more emotional which is how do you pay yourself without hurting your business. >> Um obviously everybody that does your works you could have as much passion as you want for your business. you want to take you want the business to be profitable because you want to take out as much as you can for your own benefits. So I want to start off with the difference between um salary versus distributions. What's your opinion about business owners that are growing the business is growing? Some people you see they're never oh I'm not taking out a salary. I'm just taking out whatever I need for distributions. Some some people will say as soon as you have employees everybody's on salary also take out a salary. like what's your opinion about it? >> So the you should take out a salary and there could be various reasons for it. >> Uh let's I'm not saying that all the money that you take out of your company should be via salary. Uh you should make a there should be a judgment call as far as what salary makes sense for me to take out of the company. A based on the function that I have in the company and B what the company can afford. >> Uh but you want to take out a salary. Uh just to note, this is one of the differences between a a corporation and an LLC. A corporation as the shareholder, you can take a salary like any other employee. You get a W2. An LLC, the partners in the LLC's really should not take salary, W2 salary. A partnership, um monies that they take out is not salary and they shouldn't really run it through salary. Although you know I've seen situations where partners run their salaries through although their business is an LLC. So how do they then take out money on a consistent basis um they take out a distribution which they deem as a guaranteed payment. Guaranteed payment means where the own the partners agreed that I'm entitled to take out every week a thousand dollars or $2,000 regardless of what the profits of the company is. I want to make I I want to live. I have to have a continuous consistent flow of income. So we determine we each can take $2,000 out and that's as if we're employees, right? That's a guaranteed payment. It's treated like salaries, meaning it's subject to social security and Medicare. um and uh and it's actually reported on your K1. If you get a K1 from an LLC, right, you have the income that the business generates and then there is a box specifically for guaranteed payments, right? So that's the consistency of it. You do want to take a salary because you want to have that consistent income like any other like any other employee. I find that also when you're in business and you don't take a salary and you're going for a mortgage for your house or whatever it is and they look at your tax return, they say, "Hey, yeah, you're making income, but I don't see consistent. I don't see the the salary line." You want to have a consistent income that you know you can rely on and then you can take distributions on on profits, but you should take a salary. Question is, how do you determine what the salary should be? You're in control of the checkbook and you can do whatever you want. >> So, let's talk about that. I think the question is are you >> are you could you afford what you want to pay yourself, >> right? >> Um I I I think what your question was the difference between salary and distributions. Um from a profit and loss standpoint, if you determine that my salary either based on what the market would pay someone for doing what I'm doing is X dollars, that's on your profit and loss. Meaning, if I'm not here, I would have to pay somebody else to do what I'm doing. That's justifiably on your profit and loss. If you decide to take distributions of profit out, that's not a income. That's not an income. Uh uh it's not a deduction against your income. It's how you use the cash generated by your income that you took it out, but it's not an expense on your company. Right? So, so >> where does it make a difference? >> Where it would make a difference? for instance um um on on on which meaning from a dollar from a cash standpoint there's no difference it's cash >> correct cash your P&L at the end of the day let's say in terms of uh understanding the profitability of the company that's where it's going to >> so distributions tend to be volatile it's when there is money I give myself a distribution if you want to do cash cash projections you want to see how much money you're going to have to cover and you know consistently the amount of money I take out is x which could be as salary or maybe you have consistent minimal distributions that you take. At least from a consistency standpoint, you're treating it like an expense on the company, >> right? But if you're just taking out money here and there, it can throw things off where now we're cashri have a reserve for A, B, and C. >> Uh you run you run into problems. Uh but the clear differential is salary. consider that taxable on your personal it's your personal income that you have. You're going to pay social security tax on it, which you can argue if it's a good good thing to do or not. Um but that's a salary. And then distributions are profits that you're distributing to yourself. >> Could you could you um could the the full check be a distribution even if it's like as you mentioned before like a guaranteed salary or consistency? So if it's a C if it's a corp where you're taking a W2 wage then it's like everybody's you use outside payroll company and you get every week a check there's withholding on it >> etc right so that that's in the flow with everything else >> um from a from a distribution standpoint um and and escort there isn't guaranteed payment that guaranteed payment is on the LLC right >> if you're in an LLC and you want to put in guaranteed payments. It means I as the owner, I'm putting in a lot of work. I want to get paid a salary which is consistently the same way the employees get every week a check. I want to get a check consistently every every single week. >> And you get that and the guaranteed payments can run through your payroll company. Meaning, even though you're not getting a W2, the payroll company can process that where you're going to get your if it's direct pay or whatever it is, didn't go into your bank account, >> but it does it's not reported on your payroll uh filings because it's not payroll. It's a guaranteed payment. >> Uh so guaranteed payment is the same thing as a distribution. >> Um no, >> it's different. >> Guaranteed payment is the same thing as salary. >> It's just not there's no withholding. >> There's no withholding on a guaranteed payment. And then you have to be careful because if you're getting if you're in an LLC getting guaranteed payments and 100 $200,000 a year, whatever it is, being that there's no withholdings, you have to know that you're going to have to pay tax on that. And that includes social security tax, Medicare, it all is calculated on your personal return. >> So, you got to make sure that you're paying in quarterly estimates to cover that. If it's a W2, you're withholding the taxes. I'm I'm good. One of the things that I I hear a lot from, you know, CFOs, bookkeepers, is that like they're trying to help the owners uh get more in a rhythm and consistency so they could plan better. Uh I want to take a step back and I think we covered a little bit of cash flow in the past but I think u um related to this conversation um in terms of um a business as you said if everybody's getting a paycheck and you have a function in the business um you need to get a paycheck. I I I once heard from um from somebody like early on when I went in into business and I went in with the partner he says there's two things there's partnership for for profitability and distributions and then there is salary for whoever is actually doing a function in the business because that function could have been done by somebody else you needs to hire. So how do you how do you determine um when it comes to partnership or even just in general to know that you're not draining the business of just putting that that number on say this is the amount of money I have to take out. >> So on the partnership side the usual scenario is when you have an active partner and an and and meaning an operator one that's an in inside guy let's call it and then you have an outside guy which is uh let's say the investor right or the money the money guy. Mhm. >> Um and yes, it's justified for a partnership uh for a partnership to to to to have in there that the active partner gets paid for his services. The argument there is is that for the investor he's better off if the partner that's that he has that his partner is actively involved in the company because if his partner becomes passive and starts doing other things then you're dealing with an issue where there's no >> so for the investor or the money partner he for him it's an advantage for the for dear to be an active partner because he has skin in the game it's his company or he's a partner in the company and you're better off, it's safer that way. The flip side on that is if he wouldn't be there, you'd have to hire somebody, it's perfectly fair or it's fair to argue that the active partner should be entitled to a salary for the work he does. The passive partner is the money investor. he's going to reap the benefits of the profits, but the the investing partner has other businesses in where he earns money and takes a salary maybe in his other business. So, you want to level level the playing field to a certain extent. >> One thing that keeps on coming up on these episodes is all about cash flow and financing for businesses. Now, if you're a growing business, you sometimes have a cash crunch. Why? You're investing in infrastructure, inventory, and or sometimes you just want to have something available. That's called a line of credit. For lines of credit, I want to introduce you to my friend Moishi from Capitalize. He is somebody I've known personally. I've recommended them for many, many businesses when it comes to businesses line of credit. So, if you are looking to have a line of credit available for your business or maybe you have a need immediately um in order to expand and grow your business, reach out to Moshi. Go to ptxgroup.com/loans where you're going to be directed to Moshi directly and he will actually guide you through the process, tell you your options, see what's available and ultimately help you to the finish line. Remember, financing and loans, you have to be responsible how you use it. We spoke about it on the podcast and we'll continue to speak about it. But if you need it or you want to have it available for reserve, reach out to Moishi. Again, pxgroup.com loans where you'll speak to Moishi and when you speak to him, make sure to tell him that many have missio. You're mentioning this. It's a very important point and I I want to make sure that it comes across because I've seen this where somebody's starting a new business and they're finding a um an investor in order to get them off the ground and they say okay my I'm going to be have sweat equity. I'm going to be putting in the effort and that might be the first few months a year at one point that person needs to take out a salary and that's a lot of times not discussed properly in the beginning and that becomes a whole a whole big deal with the partnership. I think we should do a separate episode on on on partnerships and the issue that can come up and and to make sure that you're >> properly in in that topic. We'll we'll actually cover that. We'll also cover about syndications and everything that goes along with partnerships. >> That is a and I've I've done a lot I' I've been involved in a lot a lot in partnership disputes or part not disputes but disagreements and or assisting partners with putting together an operating agreement that's going to work on the long haul. So that's >> Yeah. So let's leave that. So let's let's go back to the topic of okay so the people that are working there is a salary because that's for the work they do and then so how do you determine that is that market value is what the company could afford obviously you can say both the question is so you have you have that issue comes up more when you have a partnership >> um or there are two shareholders and one is actively involved and not is coming out of the other other partners' pocket or at least this percentage of it is how much salary could he take out? >> You find out that you're a 50/50 in a deal. Okay, the guy's actively involved. Then you find out that he took out a million dollars uh before I even got any of my profits. And he says, "Yeah, because I'm working, right?" So, you obviously have to come up with a value that makes sense. And that's negotiated between the partners, uh, you know, as to what makes sense. Um, they can either go with market value or they come up with a number that they can both live with. >> And then this is your guarantee. This is what you're getting. and then the rest is going to be based on based on profits. Uh but when you're a soul owner or you're a soul owner, you're the only owner, you're in control. You can you can do whatever you want, right? >> The question is how what should you do >> to give yourself a large salary, meaning I'm going to give myself I'm going to take threequarters of a million dollars on W2. that may may not be so smart because you're pay you're you're paying um uh you're paying although it's limited but you're paying Medicare you're paying uh uh social security or whatever I mean what's the point right uh but you want to have a salary that makes sense and there's another angle that people and I and I've had it with IRS audits also I've I've had a situation where an owner in an escorp again because escorp is here salaries are taken. There's no salary really in a LLC >> where the only didn't the owner took he took a $25,000 salary on a company that was doing $10 million of sales. >> Why? The owner says, "What's the difference? I'm I'm I'm taking money out of distributions. I'm paying tax on the income anyway, so I'm not taking it as a salary." the IRS came back and and said X amount of his distributions should really be deemed salary and he should be paying in social security on that. >> Why? >> Because it it does not it it it does not make sense for a shareholder not to have a salary of whatever whatever amount it is. The IRS says, "Of course, I know why you didn't take it out in salary because you don't want to pay in Social Security and Medicare. So if I'm going to keep my W2 down to $25,000 and instead take it out as a distribution, you don't pay social security and Medicare on a distribution. >> So there comes the end market value like for whatever function you have. >> Or if in my scenario you come up with a salary where if the IRS would say would in other words they would look at the amount of because there's a separate line on the tax return. The first expense under cost of goods sold is officer salary. >> Yeah, >> it's a separate line. Why is it there? >> They want to see. >> They want to see that they're taking out salaries. Now, if a guy runs a two, three, $4 million business and he takes out of 70 $80,000 of salary, that's probably enough. But you want to have a you want to have a salary line uh line in there, right? So, that's another angle where you should take that into account. The question is how much, right? The answer to that is if it's strictly salary, then again, don't go crazy. It should just make sense. where you know you could look at market value or what you would have paid somebody else etc. If you want to give yourself a little more give yourself a little more and then the rest you can take out as distributions on uh distributions on on on profit. >> Um but the benefit is you're getting a salary. You know you're covering your mortgage, you're covering your rent or you're covering whatever uh uh regular expenses you have. The money comes into your bank account as a regular salary. Okay. Mhm. >> As far as distributions, you can take out distribution, but again, try to have a s a try to have a consistent method in how you take out distributions for cash flow so that you can always >> uh project. >> Got it. And now let let me go back a second on on the salary side of things. Um in terms of um understanding the healthiness, I want to go back a second to we spoke about it in the one of the previous episodes about cash flow. um you've seen a lot to where where business owners are actually draining their business and that's actually ruining cash flow. So it's not so much about sales slashexpenses, it's the your cost of living in the way you're actually um um taking out money from the business. >> So that's that's really not a salary thing, right? Um >> a discipline. >> No, no. What I mean to say is that you you can argue with the fact that the owner should have the ability and take out a salary. The issue is when the owner takes money out of the company because there are other things that they get involved in or you have owners that just think that their business is their personal checkbook, right? Where they um you know they just from the business they take um whatever it is they takes that have that has absolutely nothing to do with the business. We're not going to get into that component for a moment, but just from taking money out of the company when there is no right, you it really it really goes it accumulates to a significant amount uh rather quickly if you're if you if you're not if you're not careful. Um, so you should keep it rather consistent so you know how much you take out every month and then as the business generates cash where it can afford for you to take out a significant distribution, take that out. >> But it should be based on not fly by night where I have a checkbook, there's money sitting in the account and I'm gonna I'm g You have a you have a controller or a CFO that's trying to do cash management. And I've had a situation, believe it or not, where the owner used to take from the controller blank checks. This is back when you had the books. He used to go to the back of the the book, rip out three, four checks, put it into his pocket, and he used to use it. He's busy with this monitoring the bank, the cash flow, see checks cleared. Now, whoa, there's a $50,000 check. Who? What is this? The owner was hiding it from the CFO, but he doesn't cap. The CFO is monitoring the bank. that working for you >> and this is first of all it's it's it's reckless. >> I know that if I was the CFO I would lose respect for my owner if if if that's what he does if I'm if he think if he's hiding it from me I'm like it's it's part of my function >> and it it just doesn't make sense. >> Um >> yeah, so that's that's that's an important point. Um but I do feel that that business owners that really work hard, they should reward themselves with actually making sure that they're not the you know there's uh in leadership there's a book a very famous book it's called eater um leaders eat last. Yeah. That yeah that comes in leadership because you want to um give autonomy. You want to build your people but financially a business owners has has to be rewarded for the effort they're putting in. So not to put themsel last and different angle of looking at this. You have business owners that are very on top of their people, right? Why are we paying so much for this? Or could we bring the cost down, right? Which is galic. I mean, that's part of part of what a business owner should do is sit with their team and analyze the cost or whatever. It really pokes a hole in the morale of the team that you're trying to hold accountable to keep costs down when they know that you're taking out money recklessly out of the company. So that's that's that's it's a leadership issue. Meaning if you want to have credibility within your organization for them to keep an eye on the money and we want to run a tight chip and we want to you know whatever it is where there's a dim with how we spend money. Don't be you you don't be reckless. You can say, "Yeah, I'm the owner. I can do whatever I want." Fine, you could. Nobody can nobody can fight fight against it. Uh but chances are that the results you're going to want from your team, uh they they won't have as much motivation when they when you're when you yourself are being reckless to your company. >> Very important point. Especially your your core leadership team. >> Your core they know that you're doing left and right. There's money going in, money going out. It doesn't lend well aside from the casual component, but just from a leadership from a leadership standpoint where you're trying to uh uh institute certain policies, procedures, and you go yourself and circumvent that. >> Yeah. >> Uh it it could be a problem. >> It just reminds me uh it reminds me a very interesting story off topic on finance, but it's still important for business owners. Um I met a person that was a number two guy in a company like really really um you know the COO I think was his title officially and he was looking for another position and I asked him like you're there for so many years like like what's what happened. says you want what happened that everything I tried to do the owner comes around and says tell me some examples says you what what was the kicker I'll tell you what happened there's this one person very important role in the company but they just never they don't show up in time we have meetings scheduled they don't show up in time they have to be there 9:00 they just don't show up in time so I knew that the person will be asking for a raise whatever I said you know what this is going to be my conversation with a person so comes to the conversation says I want to give you a you're very valuable, but you have to fix the timing issue. And they made a they made a deal the next we're going to I'm going to give you something now. Let's do this for three months and then if that three months you're improving, you're getting a raise. First week, beautiful. Second week and then third week, fourth weeks, things are falling back. And he says, you know what? Okay, the three week I know already my answer for the three months. Three months comes and he doesn't come, he doesn't come asking for this additional raise. He was thought he was like this guy will come for his raise and then he bothered him very much and he said like what's going on? He he he went over to the guy and asked like like it's three months. He says I got the raise. What do you mean? He went to the boss. He told him like the whole story and he said I'll I'll adjust it. Don't worry. >> Yeah. >> He said that that was my kicker. like if I'm he wants I should run a tight ship and I should work the company and everything else and and all of a sudden >> that's a leadership discussion which which I do see you know I'm not going to say I see it often but it is not unusual >> where it's it's a very it's a big problem when you're when you have certain policies in a company and you yourself don't adhere to it >> why should everybody else >> yeah and I I'll I'll yes bring it back to what the point that you were mentioning I think it's so important important and and I'm just thinking even broader than what you said is any type of any type of expenditure any type of spenditure like if if you're trying to tighten the ship and telling them okay stop doing this doing that and all of a sudden you're just not a buying but it's it just brings brings down the morale >> right >> absolutely >> if you're in the trenches and you're going through or or adhering to policy within your company where >> I'm the owner and I'm doing the exact same thing or whatever you you know, you you chances are you could be more more successful in getting your team lined up with that mentality. >> But I will I will go back to what I said before and I think it's important for people to understand that if you are really in the trenches and actually working hard, don't forget about yourself. >> Right. Right. So getting back to it. So getting back Yes. Obviously uh you know if your if your business is doing well uh color cavoid you take out what you what you what your business can afford and >> and put the money away or do some investments or whatever it is uh but you have you have to do it responsibly and a different thing that I should bring up let's let's even assume that your business can afford for you to take out money >> how are you taking it out >> so I've seen many times where directly from the You're going into a real estate investment, right? I'm going in for a half a million dollars. I'm taking money for my company and I'm putting sending it to the investment. That's a problem. Why is your company cutting a check to ABC LLC? Is your company the partner over there? >> Then the K1 goes to the company. >> Well, we know the K1's not going to the company. But why is company why is your your business sending money to that LLC and vice versa? What's if you had a refinance in an LLC and you told the the bank or whatever it is wired the proceeds to my company? Why is money coming from that LLC into your company? You get ordered by the IRS. You're going to say, "Oh, it's because it's a refinance in this LLC. I put it into my company." IRS is going to say, "How do I know? Maybe it's income in this company and it's not money that you just put in there, right? So, if you want to make an investment, how should you distribute to yourself money? And it's this I see very very often. If you want to justify at some point that you invested a half a million dollars in that LLC and you personally are a partner there, show me the check. Sorry. Show me the personal check where you invested in that LLC. The half a million dollars. You don't have it. What are you going to show me? You're going to show me a check from your business and then tell me, yeah, it's it's this is what it really is. >> So, what is the right way? >> The right way to do it is cut a check to you personally to your personal account. Now, that's a distribution. Perfectly legit. You're allowed to take a distribution, right? As far as we're concerned, that's where the relationship ends with this half a million dollars. That's where the relationship ends with your company. Now, from your personal check, cut a check to that LLC. Now five years from now I ask you where did you where did you invest the half a million dollars you have a personal check showing it. >> So you would say the same thing as if you have a partner let's say both partners want to invest in the real estate. >> Same exact same exact thing will take the only way it makes sense on if your company cuts the check to that LLC is if your company is the is the partner over there. >> Get into the question if it's a smart thing to do. But if your company happened to be the partner over there then that is the correct way to do it. Send it directly. But if you're going into a deal, right, and you're taking the money out of your company, take it out personally and then from your personal account, invest it. Don't skip steps. If you skip steps, yeah, you'll run into problems. >> Got it. I I want to speak about another important topic which uh comes up very much um which is obviously you're taking out distributions, you're taking out certain certain expenses which uh we're not going into the legal side of things if it's if you're allowed to do it, if full deduction or not, whatever it is, but it's showing on your P&L. The end of the day, it's showing on your P&L. Now, what people don't realize is it might be um more expenses. So when it comes to taxes, you know, going back to what we discussed on the the pre previous episodes, but the end of the day is tomorrow you want to take a bank loan. Um uh you know, two years from now, five years from now, you want to exit a business. The concept of adbacks um where certain expenses are known to be expenses of the company versus and become or some of the stuff becomes a blurred uh line. What can you share about that where related to distributions or draws from the company? So I guess let's talk about the scenario where it was a situation that over the years people had had had ran had ran p uh had run personal expenses through their business. I'm not getting to the right and the wrong and all that. That's in reality what happened. Um you then what happens is you know why you're doing it. We're not going to get into that right but it's wrong. uh any expenses that run through the business. Even if it's personal related, but it's related to the business, right? Where you're reimbursing yourself for personal expenses that you had for the business and you can justify it. >> That's that's fine. >> If there are expenses running through your business because that's the way you wanted to do it by getting into the tax issue with that, >> you in essence are reducing your your financial statements are going to have uh lower profit, right? If in the future you want to sell your company where part of what dictates the purchase price or the sales price is your track over the last uh three years, five years, two years, whatever it is. If you're if you have expenses sitting in there that affects the profits potentially can affect the amount that you sell your company for. So you may have saved yourself 30 40 cents on the dollar >> in taxes at the time, but if you're selling your company where you're getting four, five, six, 10 times the profit of or average profit of your company, that 40 cents that you saved cost you um cost you um $4, right? Or $8 depending on on how you how you're multiplying it, right? So it could come back to bite you. However, it is usual for when a company comes to buy another company where you can justifiably provide adbacks. What adbacks means is that you're buying my company and you're valuing the business based on my historical profits. You should know that there's X, Y, and Z expenses that I had which day one from when you take over my company, you will not have those expenses. Simple example is I as the owner have a salary of a quarter of a million dollars. I and I took the salary because I'm an owner, but technically I'm not really needed in the business. Day one tomorrow, you don't have to pay my $250,000 salary. Add that back to my uh to my add that back to my profit. In other words, add add to my profit that amount to give you the multiple on that. Then you're going to go and say, "Yeah, I made a two years ago and I and and I gave the caterer a check, right? And it was marketing or advertising or party or whatever it is. I'm adding that back because it really wasn't a real expense." And then I have my personal life insurance that I'm running through my company and I know that it's not really a personal, it's not really the business exp. You're going to go through that litany of of things that you did and you're exposing yourself. Chances are people are going to have a problem. They don't know what what what what they're getting themselves into. So you have to train yourself not to use your business as a personal piggy bank for a you're running a clean clean business. The marketability of the business is uh gets gets gets more um attractive. Keep it clean. Um employees don't need to know what's going on in your personal life. And if it's running through the business, they know they know everything. Why should they know everything that's going on, you know, and but when you have legitimate business expenses, you know, then you take those. >> Does the same apply to to ad for when you apply for a loan or something financing that they will also look at adbacks >> that what they would look at over there is no you you're not going to the bank and saying I have this P&L and financials, here's my tax return, but I'm telling you that I did A, B, and C and D. No, you're not. you go to a bank and you say that they say goodbye Charlie we're not dealing with you right >> where you do find by a bank is when you legitimately have expenses that are not continuous so say for example somebody had a lawsuit and he had a lot of legal fees and this lawsuit was settled right so this year he had a tremendous amount of legal fees next year he knows he will not have those legal fees then it's it's justifiably to go to a bank and say I have a wonderful expense it's a non non nonrecurring expense, which is true. And therefore, although I didn't make as much money last year, but know that if I keep the sales, I'm going to make I'm going to make more money the coming year because I don't have these expenses going forward. That's a normal discussion you can have with a bank, right? By real expenses that happened during the period in which the bank is looking at your company versus those expenses are not expected going forward, right? What's your some final thoughts on the topic of of distributions or salary for um shareholders? >> My final thoughts are person should be allowed to take out as much money as his business can afford without risking the business. Um do it on a consistent basis and what I think is most important is when you do make investments or take money out of the company, know how to take the money out. If you're a shareholder or a partner, write the check to your personal name and then once it's in your personal account, do whatever you want to do with it. Minimize how much how much transactions you have running through your company between your personal dealings because if money goes out, it has to come back the same way. And between me and you, you know, once money goes out of the company, it's not coming back. So, >> Got it. Thank you so much. I'm looking forward for the future. We we have a couple of episodes left. um um some amazing topics. So, thank you so much for everything we've covered so far. Looking forward for next time as well. >> Perfect. Thanks. >> Thank you. This episode of the Let's Talk Business podcast is sponsored by Flow Digital and Pipe Drive. Sales is the lifeblood of every business. No sales means no revenue and no business. So, if you are a business owner or in sales, you already know how important it is to have a proper CRM. A good CRM helps you manage your sales process and keeps leads from falling through the cracks and makes sure you have the proper reporting so you could analyze what's happening every single day. If the CRM is too complicated or not set set up properly, the team just won't use it. When that happens, leads get lost, follow get missed, and ultimately deals stall. That's where Pipe Drive comes in. Pipe Drive is an easytouse CRM designed to make tracking and sales process simple. You can see your pipeline at a glance, move deals forward, and make sure you never miss a follow-up. 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