 and welcome to Connecting Hawaii Business on Think Tech Hawaii. My name is Kathleen Lee, owner of Kathleen Lee Consulting, and I am your host for this program. Think Tech Hawaii is a platform that encourages civic engagement through conversations that educate, enlighten, and inspire. We are live streamed on ThinkTechHawaii.com as well as on Think Tech Hawaii's Facebook page. And viewers like you have the opportunity to ask us questions by sending them two questions at ThinkTechHawaii.com. Now, before I start the show, I do want to state the disclaimer that everything presented today will be for informational purposes only and not to be construed as legal advice. And if you do need legal advice, consider scheduling an appointment with an attorney to discuss your particular issue or need. With that being said, our show is about LLCs and sole proprietorship. And my guest today is the managing partner for Hugh and Bordeneuve, Ryan K. Hugh. So welcome to the show, Ryan. Hey Kathleen, thanks for having me. Thank you. And thanks for pronouncing my business partner's last name correctly when I mangled it myself. So I hope he's okay with that. Yeah, tell us a bit about yourself and your role at Hugh and Bordeneuve. So I'm Ryan K. Hugh. I'm a business attorney. Basically what that means is I like to say I shuffle paper around. I help business owners small and medium size a lot with their transactional and compliance work. So commercial leases, setting up LLCs, whether they're the parent company or holding company, buying and selling businesses. I'm working on a couple of projects like that right now. And then on the compliance part, a lot of, a lot of regulation in our state. So a lot of licensing, permitting, or even should I be doing it that way, questions that I get from my clients. So in some ways, I exist to help deal with the stressors for especially business owner types. And that's my role as an attorney. As managing partner, I do a lot of these kind of outreach. So again, thank you ThinkTech and you Kathleen for having me of talking about basically what the law firm does. We're smaller and yes, we are a younger firm respect, not age wise, but respective wise to some of the more established and long existing firms out there. But I'm usually responsible for a lot of the marketing and kind of the operations of firm side. You know, the fun admin stuff that fellow small business owners, and I like to remind them, I commiserate with them on all that other stuff that you don't really be working on. That's kind of what I work on. Well, I do want to point out to our viewers that the way Ryan and I connected was through their, his marketing efforts through social media. And one thing that really caught my attention was his draw the law segment. So if we could pull up that video, and this is available on human board names Instagram account as well. So Ryan, tell us about draw the law. So back when I was a young solo attorney before I did a business partnership and I was out there hustling and trying to like make sense of everything and you mentioned social media. During law school, I had a Facebook account and a Twitter account and I did nothing with it. Move back to Hawaii, worked for the state legislature, HR company, but then when I went on my own, I was like, well, I need clients, I like eating out. So if you see me around town, that's usually where I am when I'm not working is trying a restaurant. But I then realized business law does not lend itself to being readily understandable by the people that need to rely or use it or understand it most. Again, small business owners and medium sized business owners. Frequently, a lot of mom and pop shops or contractors consulted, like some of them have not been to business school. They don't have a JD or they don't have an MBA. They don't understand this LLC incorporation stuff. They just know is that I have a viable product or service. But how do I articulate and why do I form this thing called an LLC? And so long story short, I found that having a blog at the time was very helpful for communicating it. But long written format, even then as, you know, great, we have a streaming now and video. Back then when I started, it was just kind of slowly emerging and moving away from web.0 to now what we consider web 2.0 and kind of all this kind of contact production stuff. And I started doing doodles because it helped me in law school understanding concepts and connections. Because for a business attorney, especially when I work with medium sized or growing business owners, they decide to form subsidiaries or children company of their main company or starting new brand lines. And I need to map out the relationships. I thought, why not? And actually I did, hopefully this will pick up, but I found this book at Barnes & Noble one day. It's called on the back of the napkin. And Dan Rome kind of uses these doodles basically to do pitches and stuff like that. And the reason why he came up with it, right on the back of the napkin, you're having a business, well, before pandemic, have business meeting and you would just drive it out. And I took that and I ran with it. And a lot of social media friends here liked it. And that's how the law was born. I think it's awesome and useful. And on that note, we can launch into what we're talking about, which is, you know, what an LLC, what LLCs and self proprietorship are. So, so, Ryan, what is an LLC? Let's pull up the first slide, which goes over the why, but if you can kind of go over what exactly an LLC is and then launch into this. So an LLC is a type of business entity. It's a legal entity. And I'll get into why I use the term legal person or legal entity in a minute. But all LLC stands for is Limited Liability Company. And here in Hawaii, the Limited Liability Company Act that is the law that enacts or creates LLCs at the state level for Hawaii is Chapter 428 of the Hawaii Revised Statutes. Yes. Okay, you all fell asleep. Perfect. You can have the Kanak attack after lunch. Anyway, segueing past that, the entity part means that an LLC is a separate person. It's not a living, breathing person like you and me, Kathleen, but in under the eyes of the law, it's a separate person from the business owners that is the business. I know you have a slide on this and so let's pull up the fifth slide on Limited Liability. Okay. And you can go off like that. Okay. So what happens usually when you start with an LLC, even if it's what we call a single member LLC, and that's how we're going to get into the sole proprietorship thing when we backtrack a little, is usually the business owner contributes valuable assets into the LLC. Usually the key critical event for that is here's some cash. I'm going to open a business banking account under the LLC and that's the LLC's money. Notice that there's a separation. There's the business banking account on one side and then there's the business owner's personal checking and savings or other financial accounts and that's their personal. So the way Limited Liability works is they're limited to what they've contributed what we call capital contributions into the LLC. And that is what they are limited in their liability up to in terms of their investment. And it is because of this separate person concept. So everybody's like, Oh, I don't want the LLC to be sued. No, you want the LLC to be sued. You as a business owner do not want to be directly and personally liable and sued directly. And thus, it's that separation pulling apart the business side from the personal side that that we aim to do with LLCs. And that's why they're called Limited Liability Companies. That's why we attorneys say they're a separate person from the owners or the owner of the business. And the term we use for them is member. You're a member of an LLC. It's like a country club kind of situation. I like that distinction because I mean that was one of the very few things that I had learned about when I was starting my business. So let's go over what people need. So second slide, what do I need? Or any business owner starting? So for me, usually when I assist clients, I usually tell them your first critical your first critical step is driven a lot by banking law and the requirements of what a bank will want you to provide documentation to set up a business account under the LLC's name and not your name. And generally speaking, it's articles of organization, which is a document you file with the business registration office under the Department of Commerce and Consumer Affairs. If LLCs are persons, I usually like to say the articles are kind of like its birth certificate. Next document, usually it's an operating agreement, especially if you have more of a partnership situation. If you have two members, three members and things like that, it'd be wise to have an operating agreement. It forms the contractual relationship of the members to each other as business partners with this LLC. Last situation is an EIN, which is the IRS's employment identification number. Yes, even if you do not have employees when you're first starting out, you'll want to grab an EIN because the bank is going to request it to affix to your business banking account. Again, so if we go on the analogy that articles are kind of like the birth certificate, then the EIN, I was like, it's kind of like the social security number for the LLC, because you're going to use it for a lot of other things, you're going to identify the LLC that has this number. I'm going to skip ahead too, because I know and thank you for providing these slides for us. This is from one of the presentations that you have done for people before as a subject matter expert. Let's go over to the sixth slide, which is the other uses for LLCs. Oh, just really quick on a side note. I believe this presentation that you took these slides from is on our YouTube, and I think a few of the draw the laws are also on our YouTube. So if you just kind of like, I understand our name isn't probably easy or YouTube searchable, but yes, if you look for Hue and Bordeneuve law, it should traffic you to our channel and it's all free. You can take a look at it because obviously Instagram doesn't allow the hour long video. That's true. Okay, so let's go over the other uses and then we will go on break after that and then you can go into those sole proprietorship. So other uses. So you don't need to, a lot of times I think people don't realize how flexible LLCs are and what we as business attorneys advise. I would say not just business owners, but wealthy or investor type of individuals in terms of how they can utilize an LLC because of that separate person situation. So a lot of times people will use LLCs if they're a serial entrepreneur as a personal holding company. That is, they have this parent LLC and say, you know, example wise is, Hey Kathleen, I have this personal holding company and you have your own company, but let's do a joint venture. But let's take the ownership interest or the membership interest of this child company between us and I'm going to stick it my personal holding company because I want the income to flow up to my personal LLC and then to me. And then if you sit and think about it for those serial entrepreneur types because they're making lots of deals or different partnerships, maybe they've invested in a corporation where they don't do anything. Maybe they've set up a number of different LLCs if they're a restaurateur and they take slivers and having different investors. They use this personal holding company as a funnel. Okay. Well, on that note, we are going to go on break, but I do want you to pick up on that. Okay. So we will be right back. Back to connecting Hawaii business. My name is Kathleen Lee and on the show today, we have Ryan K. Hugh, managing partner for Hugh and Bordenave. And we are talking about LLCs and sole proprietorships. Now before we went on break, Ryan was going over the other uses for LLCs. And Ryan, we have a slide that talks about the myths of LLCs. So let's pull that up. The slide set. Sure. Yeah. So how long have I been practicing? I was like, I want to say it's like 10 years now, 11 years. I don't know. I realize, so I'm using a filter everybody. So just letting you know, light and content production. But yeah, I've been doing this actually longer than people realize. But I want to say it's like 11 years now. In my practice, I've received what I consider a lot of frequently asked questions that I keep. I feel like the internet or how information gets out kind of repeats. And for small business owners, they kind of pick up on that and they always ask me these things. So one of the first things is, is like everybody only thinks LLCs are for small businesses. The prior slide you showed is they're very flexible. And there are real estate investment whoies in general, like investor LLCs that they move huge amounts of money. If you actually look sometimes, you know, if you have a commercial landlord, sometimes they're using an LLC child company to hold the building rights or the land rights. And that's who you're paying your rent check to them and it's going up to a corporation. But yeah, LLCs are not only for small businesses. This would probably be good segue for the second one for the sole proprietor situation. But I think a lot of people think LLCs have too much paperwork compared to a sole proprietor or a partnership situation, which yes, there is more paperwork. But a lot of times a lot of things you're going to end up having to do is just part and parcel on, you know, it's hard to advocate for a sole proprietorship without recognizing that LLCs have the limited liability shield that we talked about. And that's why you do it. I mean, that's the main thing. Moving down to some of the other things, because we're out here in Hawaii that I always get is, oh, what if I organize my LLC in Delaware or Nevada or Wyoming? I've heard that a lot. But what is that? I mean, like, how does that affect LLCs? Do people even need to do that? So to some extent, you'll find that where you organize doesn't matter in the sense that it really depends where you're operating. So even if you were to organize in another state, and you're operating here, you would have to register as a foreign business entity if you had a Delaware LLC, but you had like commercial space here or a business bank account here. So it's like that kind of defeats the purpose. I think some of these came up because Delaware is used frequently for corporations that are heading toward an IPO. I'm sorry, which is an initial public offering. So they want to be listed on one of the public stock exchanges. In terms of Nevada or Wyoming, I feel that people feel like there are possible tax quote-unquote tricks, which when we get into that situation, it's very dicey. And I'm glad you mentioned the disclaimer is, is that I think for people starting out, they don't realize how many kind of hoops and not to mention if you're plotting some kind of tax evasion situation. No, that's a bad idea. And you know, it's very illusory that you're going to get benefits from Nevada or Wyoming. Again, that is usually sometimes where a professional like an a tax attorney or a CPA can kind of help the business owner map out why this may or may not be worthwhile. But in my experience for the type of business owners I work with frequently, it's not worthwhile or it doesn't, the benefits are very illusory. They maybe in Nevada or Wyoming attorney might feel differently, but I mean, you can usually ask for initial counsel if that's the case. Other things is, oh yeah, going back to it is, yeah, LLCs and corporations both have the limited liability shield. People kind of get confused because they have different names, but no, they both do. So those are some of the biggest ones. Okay. Well, let's pull up the business entity formation graphic. So you can pull over what a sole proprietorship is. So that's the eighth slide. Yeah. Okay. So what is a sole proprietorship? So in law school, my business law professor and other people would always like to use the lemonade stand, right? Typical summer. And I mean, I suppose we have lemonade stands here too, but that definitely feels like a mainland thing. So what I like to use locally is like, you know, the fruit stand or the vegetable stand on the side of the road. If you literally just take your produce and just start selling stuff, you're a sole proprietor. That's all it is. There's no, unlike the LLC or corporation, you don't have to have all that registration paperwork. It's just you. It's you just carrying on for some type of profit in terms of selling service or products. That's all a sole proprietorship is. It's me and I'm selling my produce here on the side of the street. Now, Kathleen, if I outreach you is like, Hey, I need help harvesting my produce and selling it on the side of the road. You're like, sure, we're in a partnership. And that's all it is too. There is no paperwork, we're now in a partnership. But because of that lack of formality, and it's so easy to slip into, we get into that personal liability situation. And that's where there is very big hesitancy for a business attorney to ever tell anybody, look, for a little bit of time, effort and sorting some paperwork, you're at least going to have a very basic limited liability shield. It won't protect you in every single situation. Well, why not have it rather than just being in this sole proprietorship or partnership situation, at least with respect to liability. I know we have some tax questions. And yeah, that it's when you add the tax layer on top of the liability, the liability and paperwork situation that people can get turned around is, I have an LLC and I'm a sole proprietorship. That's kind of true. But that's with respect to the tax, the income tax part. So yeah, that's that's sole proprietorship in a nutshell, it's just you just sell and stuff. And that's it, basically. Well, on the note, I think I I'd mentioned to you that we received a question regarding taxes. And the question was, how does the proposed bill at the legislature to raise income tax from 11 to 16% on those making 200k effect LLCs and sole proprietorship? Okay, so I think slide four in our original order, but I like this is more organic. Yeah. So this is the part where people get turned around. What I always tell them is, yes, you got to take that concept of it's a separate person that we just went over. And then when it comes to your income taxes, completely disregard that that's not the separate person for limited liability thing that that's nowhere in the realm of income tax land. LLCs do not pay income taxes. That's in contrast, corporations that if you have a C corporation, it pays its own separate income tax versus its shareholders, the owners of the business. What happens is, is whatever money's made or lost on the LLC is disregarded and flows through to the single member, if it's a single member LLC, or it passes through if there are business partners in the LLC, if there's multiple what we call multiple members, and they pay income taxes on the business endeavor or losses. Well, okay, you don't pay taxes if you lose money, but I'm just saying all that information gets captured on people's personal income tax returns. So to respond to the question, nothing is really going to change. It really just matters. And you need to speak to your accountant or CPA of what your income taxes is from any monies that you're loo, you are gaining or losing from whatever LLCs, whether it's one LLC or multiple LLCs that you own. And that's really all that's what's happening, is the LLC in itself does not pay an income tax. You do, you pay on whatever you get. And what most experienced business owners who have LLCs, when they're working with an accountant experience over years, is they usually get a schedule that attaches to their income tax return. That schedule represents these profits or losses on the LLC, but the LLC in itself does not file its own income tax return. That's in contrast, again, to a corporation which does. So let's go over, if people want to learn more, I know you were part of a business law core series, Restart Hawaii, we can pull up that graphic. And I wanted to watch you last week talk about this in more detail, but tell us a bit more about that. We have a few, like a couple of minutes left before the end of the show. Okay, Restart Hawaii is put together by a number of business attorneys here in Hawaii that we are contributing and doing a whole bunch of free webinars, seminars to kind of jumpstart and getting people to starting new Hawaii businesses. The intent is to minimize the amount of time you need with an attorney or at all. And so we've put together a series of topics that most small business owners here, whether it be LLC formation, or commercial leases, independent contractor versus employees and branding protection. So that's in that list in the graphic you have. Tomorrow, my friends Greg, Kim and Kat Taschner will go over the more nitty gritty that we kind of just did topically about how do you actually form a Hawaii LLC or an S corporation? What do you put into an operating agreement? And what should you worry about when you form an LLC? So if you go to the Restart Hawaii page in Eventbrite, you can sign up for all these webinars. And we hope to put together a packet of materials at the end, maybe a booklet of everybody's content. And that will be all free in terms of trying to jumpstart and restart Hawaii. And that's the goal for businesses here and business owners here in Hawaii. And thank you for the business law court for putting that together. If people would like to get a hold of you or get in touch with you, how do they go about in doing that? Sure. So I realize again, making fun of my business partner, he's going to probably realize, but if you go to huebordenave.com, H-E-W-B-O-R-D-E-N-A-V-E.com, that's where you can find us. And you can just email me too at Ryan at huebordenave.com. If you want an initial council, I usually do them free for 30 minutes. And we kind of go over your question, what we can help you with, scope of service, and our engagement process. And a lot of people either get enough what they need or they're like, oh yeah, okay, I'm going to need more help with stuff. So either way, and usually my staff is on top of it in terms of trying to get you scheduled for an initial council with me. So other way, but in terms of social media, yeah, just look for huebordenave again, H-E-W-B-O-R-D-E-N-A-V-E. And I mean, I think, I guess I'm very thankful of how unique his last name is because then I was like, you're not really going to find anything else. Yeah, it stands out. But on that note, thank you, Ryan Kahew, a managing partner of huebordenave for being on the show today. My name is Kathleen Lee and you have been watching Connecting Kauai Business on ThinkTech Kauai. Thank you to Jay Fidel and the entire staff at ThinkTech. We had Haley helping us out today for making this show possible. Aloha.