What You Need to Know About Starting a Business Before You Quit Your Job

18:55Sean Pyles:There are also a bunch of other corps, like a C-Corp and an S-Corp, and this can get a little confusing and easy to mix up. Can you outline those? Yeah. So you can also create a partnership or a corporation. So C-Corp, S-Corp, there's also a limited liability partnership. These are all taxed differently. I would recommend talking to a lawyer if you are considering any of these entities. They are a little bit more complicated and the paperwork required to set one up is a little bit more involved. An LLC is typically just filing articles of incorporation with your state. I'll throw out there too, since we don't want to go too in the weeds here.

19:29If you would like to see the different types of business structures out there, we will link an episode description to an article where you can see a breakdown of all the different business structures.

19:38Sean Pyles:And Elizabeth, I was going to say not to air your business, but you do this all the time anyway. You've already mentioned this in the podcast, but you recently switched to an S-Corp, right? Oh. Well, not recently anymore. It's been two years, maybe three now. But yes, I started out as a sole proprietor. Then I did an LLC. Then I went to an S-corp as advised by my tax person because everyone's situation is different. I remember maybe my third year in business, I was hit with like a$10 ,000 tax bill. And I was like, whoa. Luckily, I had savings. Yeah. But, you know, my tax person was like, hey, you know, if you have an S-corp, then that could help lower your tax bill.

20:12So I changed it over and it has indeed lowered my tax bill. When you're an S-Corp, that means you can put yourself on payroll. Whereas if you're an LLC, all of the business's profit is sort of considered your income. So once your business starts doing really well, once those profits go up, if you're an LLC, that means your income goes up, right? And you're taxed more versus a corp makes it easier to keep it in the business. Yeah. So S Corp does have its expenses. So payroll is one of them. And you may end up paying your tax person a bit more because they're going to charge you more for managing S Corp versus an LLC.

20:41But I find that the benefits outweigh the cons. So again, it's about what works best for you. Definitely want to emphasize, talk to your tax person to make sure you understand the pros and cons for your specific situation. But I want to circle back to the other thing you mentioned, which is insurance. So just like in your personal life, businesses need insurance too. We recommend that basically every business have something called general liability insurance, which protects you against lawsuits in general. This is where you see like a classic slip and fall lawsuit, which is somebody got injured visiting your business or whatever.

21:13Another very common thing that you may need is professional liability insurance, which you'll need if you are giving advice to clients. So if we're going into consulting or something like that, I would definitely recommend professional liability insurance. This will protect you if a client sues you and says, you did a bad job, you made a mistake, and that affected me later. Check on your car insurance. If you're going to be driving frequently for work, your personal auto insurance may deny a claim by saying business use isn't covered. So there's commercial auto insurance as well. Most of the same major carriers that do personal also do business auto.

21:47Let's talk about business accounts. This is something that I very quickly realized was important, as we briefly mentioned earlier, because I was commingling my personal finances with my business finances. And it was a mess during tax time because I'm looking through my personal statements, trying to figure out what was my own money and what was my business money. But anyway, I did end up opening a business account, which now I put all of my business expenses in. What are some things that people should consider when they're opening a business account, Rosalie? It's a lot of the same things that we think about when we're looking at personal checking accounts.

22:21So does it charge a monthly fee or is there a minimum balance that you need to maintain to avoid a monthly fee? With a business account, I would definitely recommend checking on fees for things like wire transfers or making cash deposits. You may be in situations more often if you're working with like a vendor or a supplier where you're paying via ACH or wire a little bit more than you would in your personal life. We talked a little bit already about some of those software tools that business bank accounts use. So that can include things like tax planning. I'm also starting to see more business bank accounts offer things like the ability to send invoices to a client and take a payment like directly through the bank's payment processing systems.

22:59Some will let you take tap to pay credit card payments in the bank's app. So if you're, you know, vending at a farmer's market or over the weekend, I went to the Renaissance Fair. Right. And I did some tap to pay. That might be something that's useful for you. A couple of accounts will pay interest on checking account balances. that's relatively rare, but never hurts to get, you know, 1 % interest or so if you can. We have a bunch of resources for this on NerdWallet's website, which hopefully we can throw in the notes as well. I want to throw one more thing out there, minimum balance fees or requirements.

23:31As a new business, you're not sure when you're going to have money and when you're not. And there have been months where I had no money and thank goodness I wasn't charged any fees because I picked a bank that doesn't charge me fees for that. So think about that as well. Yeah, that's common, especially with big national brick and mortar banks to require a minimum balance of usually it's like one to five thousand dollars. And if you fall under that, you'll get hit with a fee of maybe 15 bucks per month, which may or may not sound like a lot of money, but it's certainly annoying if you didn't expect it.

23:59Sean Pyles:Let's talk about business credit cards. I've passed on these so far for my business. I get plenty of offers in the mail that go straight into the recycling bin. Do you think that they are necessary or not? Are they nice to have? What do you think? I definitely don't think they're necessary. If you're a person who prefers not to use credit cards in your personal life, you definitely don't have to use them for your business. But they are useful in a couple of ways. Number one is probably the biggest pain point I hear from small business owners is at the beginning, the cash flow just isn't there.

24:29You have all these expenses. There's so much that needs to be done. Credit cards are one of the easiest ways for new businesses to access financing. It's really, really hard for a brand new business to get a business loan. So a credit card is, you know, kind of a flexible line of credit.

24:43Sean Pyles:Although you will be paying for that with a high interest rate, I assume. Yes, I would definitely not recommend like funding your entire startup on a credit card, both because of the high interest rate and because even though it's for your business and even if you formed an LLC or a separate entity, you are going almost always going to have to sign a personal guarantee. Right. Which is a promise that if your business can't pay back whatever you owe, that you personally will pay back whatever you owe. So if you open up a credit card and then your business just never finds its customers, it never takes off, and you're left with whatever your startup costs were, you're still on the hook for that.

25:20Sean Pyles:So that fancy metal credit card you get in the mail is going to tear right through that corporate veil? Yes. Well, no. Okay. So corporate veil is intact, but the finances you're on the hook for. Yes. So the bank or the credit card issuer still wants its money back, right? If they lend you$10 ,000 and you use your credit card to furnish your space or whatever the case might be with your startup costs, right? And you get to a point where your business just can't pay that back. Typically, when you take out a business credit card, you have to sign what's called a personal guarantee. They just won't issue you a card if you don't sign a personal guarantee.

25:54I see. That said, there are some useful things that business credit cards do. A few have a 0 % APR intro period, just like personal credit cards do. These are usually a little bit shorter for business cards, usually up to 12 months, but that can buy you a little bit of time with no interest to build up that cash flow. The rewards are pretty similar. We see cash back business credit cards with cash back of 1 % to 2%, higher cash back rates for certain categories. The other thing to think about here is that just like you individually have a personal credit history and a credit score, your business has a credit history and your business actually has about a dozen different business credit scores or it'll develop them over time.

26:34We don't need to get into all of this today, but business credit is important for in the future qualifying for business loans, establishing trade lines with suppliers. I've heard people say that if they're kind of a retail vendor and they're trying to get into a major national chain, that national chain will pull their business credit because they want to make sure that they kind of made good on their word in the past. Most business credit cards report your payment history to the business credit bureaus, just like personal cards would to the personal credit bureaus. So if that's something on your mind, business credit cards are one of the easiest ways to start that process.

27:11Sean Pyles:One last big area to touch on is health insurance because, you know, our listener here is not going to have access to their former employer's health insurance. And I imagine it's going to be pretty expensive on their own. How do you think that Blake can plan for health insurance when they are starting their own business? Yeah, this is a big one. And this is usually the toughest conversation I have to have with people in my life who want to start a business. Health insurance on the private market is really expensive. I've bought marketplace insurance before and it was I mean, it was expensive 10 years ago.

27:41I know they said they're 27, so too old to be on the parents plan. But if they're married and their spouse has health insurance through work, that might be the cheapest option. And to get on that plan, leaving your job is a qualifying life event. So you are allowed to change coverage mid-year. Your spouse would be allowed to change coverage. You can also buy private insurance. So we can go through the healthcare.gov marketplace and compare your options or you can work with an insurance broker. Rosalie, we've covered so much. If you had to sum up our conversation and give the top three to five things that an entrepreneur should do before they leave their job, what would it be?

28:17I think it always comes back to that North Star, which is separating your business and personal finances. It's going to make your life easier. It will protect you legally. It'll make tax time way easier. Everybody needs a business bank account. Think through whether you want to incorporate. If this is going to be your primary source of income and you are hoping to build this into something, I generally recommend forming an entity rather than remaining a sole proprietor. Everybody needs some kind of business insurance. I'd recommend a business credit card if you can qualify for one. That mostly depends on your personal credit score.

28:47If your FICO score is in those good or excellent ranges, you probably have a lot of options. And then lastly, make sure you understand how your business will be taxed. If you're a sole proprietor, if you're an LLC, if you're an S Corp, we've talked about this. We all know lots of people, I think, who didn't go into this with a full understanding of how their business would be taxed. And that's fair because it's really complicated. But I don't want you to get hit with that really, really unpleasant tax bill. One last thing to mention about taxes. Technically, when taxes aren't being withheld from your paycheck, you're supposed to make quarterly payments to the IRS.

29:20I'm sure Smart Money has covered this many times. Put those dates on your calendar. It's the 15th of April, June, September and January, just so you make sure that you're making even approximate payments on those days.

29:32Sean Pyles:All right. Rosalie, thank you so much for all this. I know that we had a lot of questions for you, but I think that they'll really help Blake and anyone else helping to start a business and do it well. That's awesome. Thank you so much for having me on and good luck, Blake. Okay. In a moment, this week's money news. Stay with us.

29:51Sean Pyles:Today's episode is sponsored by Rula. Finding a therapist is hard enough, but finding one who actually takes your insurance, that's where most online therapy platforms fall short. Many don't work with insurance at all, which means you're stuck paying the full cost out of pocket or paying for an expensive monthly subscription. Rula does things differently. They partner with over 100 insurance plans, making the average copay just$15 per session. That's real therapy from licensed professionals at a price that actually makes sense. I mean, think about it. You use your insurance benefits to maintain your physical health.

30:25So why won't you do the same for your mental health?

30:28Sean Pyles:Rula isn't just affordable. The experience is tailored around you. Other online therapy platforms might match you with the first available provider, whether or not they're the right fit. Rula considers your goals, preferences, and background to provide you with a curated list of licensed in-network therapists who are actually aligned with what you need, because they know that finding the right therapist can make all the difference. No wait lists, no frustrating back and forth. Rula makes it easy to find a mental health provider who is accepting new patients and appointments are available as soon as tomorrow.

30:57Plus, Rula sticks with you throughout your journey, checking in to make sure your care is helping you move forward.

31:02Sean Pyles:Go to Rula.com slash smart money to get started today. That's R-U-L-A dot com slash smart money for quality therapy that's covered by insurance. The average copay for Rula patients is$15, but depending on your benefits, your copay could be as little as$0 per session. Rula partners with a network of over 15 ,000 therapists and psychiatrists nationwide, enabling you to find your personalized solution and the right therapist for you based on your needs, preferences, and state requirements. Thousands of people are already using Rula to get affordable, high-quality therapy that's actually covered by insurance.

31:36Visit Rula.com slash smartmoney to get started.

31:40Sean Pyles:That's R-U-L-A dot com slash smartmoney. You deserve mental health care that works for you, not against your budget. The following is a paid sponsorship, not an endorsement by NerdWallet's editorial team. Today's episode is sponsored by Built. You've heard me talk about BILT as the loyalty program that lets you earn points on rent wherever you live, and they just leveled up even more. As of 2026, renters and homeowners can also earn up to 1.25x points on their housing payments. This is thanks to BILT's three new credit cards, the Palladium card, Obsidian card, and Blue card. All three can turn your housing payments, rent, or mortgage into flexible rewards.

32:18Sean Pyles:so you can choose the card that fits your lifestyle without missing out on points and exclusive benefits. Built points can be redeemed at top airlines and hotels, Amazon.com purchases, future rent payments, and so much more. Built points have also been ranked by top publications as the industry's most valuable point currency. Your housing payment is most likely your biggest expense. Make it your most rewarding. Find the card that fits your lifestyle and apply today at joinbuilt.com slash smartmoney. That's J-O-I-N-B-I-L-T dot com slash smart money. Make sure to use our URL so they know we sent you.

32:55Sean Pyles:Terms and limitations apply. Subject to approval and eligibility. Built cards are issued by Column N.A., member FDIC, pursuant to license from MasterCard International Incorporated. Time now for our weekly money news roundup where we break down the latest in the world of finance to help you be smarter with your money. Today, we're talking about prediction markets. You've probably seen the names, CalShe and Polymarket by now. I certainly have. Trading volume on these platforms has exploded over the last couple of years, but they're still in this kind of weird regulatory gray zone between trading and betting.

33:29Sean Pyles:To learn more about what comes next for Prediction Markets, our news colleague, Anna Helhosky, spoke with Aaron Klein, a senior fellow at the Center on Regulation and Markets at the Brookings Institution. Aaron, welcome to Smart Money. Thank you, Anna. It's a pleasure to be on. Well, let's start really basic because many people may have seen ads for Calvshe or Polymarket, but don't really know how it works. How do prediction markets differ from stock trading and how do they differ from gambling? Let me explain what a prediction market is, and then we can discuss how they're different and similar to the two things.

34:00A prediction market is based on a binary event outcome happening. So something is either going to happen or not. and each contract settles usually at$1 for whether something will happen or won't. And so if you buy something at 50 cents and say it will happen, then that's essentially a chance to double your money just like a straight odds bet at a casino or if a stock doubles in value if it happens. And if it doesn't happen, it goes to zero. So one thing to know about prediction markets is you're making a decision on an event, and that is either going to pay off in full or go to zero. So unlike a stock, which rarely, generally companies don't go all the way to zero, that does happen sometimes when they go bankrupt, but they kind of go up or down or fluctuate a little bit.

34:53A prediction market is an event contract on a binary outcome. It's either going to happen or it's not. It's similar to gambling in the sense that a lot of what prediction contracts are written on are sports bets. The majority of Calci's business is sports betting, is sports. Now, whether it's betting or not, to me, if you're betting on who's going to win the Yankees game, whether you do it on DraftKings or you do it on prediction market, it's gambling in terms of you're betting on the outcome of a sporting event. But legally and economically, there are major differences in doing it through a prediction market than doing it through a sports book.

35:35And the types of people that can access these types of contracts are also different, which includes some people who have been generally legally barred from gambling.

35:45Sean Pyles:From a regulatory perspective, what's at stake in the distinction between being a financial product versus being a gambling product? Massive. This is monumental distinction. So let's start with, first, are you allowed to do it? Right now, gambling is the pervience of the states. 46 states have lotteries, four do not. Many states allow sports betting, many do not, including California, Texas, Georgia, some pretty big places. So if it's a financial contract, then it's federally regulated, it's a federal situation, and the states have a much more limited role, particularly they cannot tell you no.

36:25There's no state that can tell you you can't buy a stock, for example. So the first thing is that it is allowed everywhere. The second big difference is how old you are. In order to gamble, in every state in America, you have to be 21. But to buy a stock or a bond or a prediction market contract, you have to be 18. People who are 18 to 21 can go on CalShe, but can't go on DraftKings. If you call it a financial contract, you're eligible for teenagers, older teenagers, younger 20s. If it's called gambling, you're not. Three, taxes. This is critically important. If you win money at a casino or on a sports betting platform, you pay taxes like earned income.

37:131099 is the form, but it's just like any type of earned income. But if you win it through a prediction market, that's considered a capital gain. Capital gains are taxed lower than income for many people, particularly the wealthier you are. I think it was a giant, ugly bill. Some people think it was more attractive. But one of the things that that Trump legislation did in cutting taxes for the wealthy was it reduced your ability to offset gambling losses. Prior to the Trump tax law, if you bet a lot of money at the casino and you broke even, you didn't pay any taxes. Now, you can only deduct 90 % of your losing.

37:54So if you go in one day and you win$100, and you go in the next day and you lose$100, it used to be, well, you didn't pay any taxes. Now you can only deduct 90 % of your losses,$90, off the$100 you gain, so you owe taxes on the$10 you won. That creates a tax liability that makes gambling even more disadvantaged from a tax perspective, which doesn't apply at all to prediction markets. So those are the three big differences, the role of states, teenagers, and taxes. There are many others, but those three I think are pretty significant.

38:32Sean Pyles:There is active litigation right now between states and these platforms. Where do you think this ends up? Does it get resolved in court? Does it need Congress to actually legislate? I think it ends up in the Supreme Court. You're already seeing different circuit courts apply laws differently, come up with different rulings. Minnesota just lost a case, whereas I think Nevada won a case. So the courts are disagreeing. And this is a big enough and topical enough issue that I think it ends up in the Supreme Court. A better outcome would be congressional legislation. A better outcome would be Congress making a decision.

39:05Congress has already given the Commodities Future Trading Commission, CFTC, who regulates futures, which is what a prediction market is. They've given them the authority to ban it. In fact, some people in Congress say they really wanted it banned. And the CFTC for many years did not allow these types of things. It's only under this new Trump administration that these have been given the green light to go wild. So right now, the regulator has the authority to shut it down. It's choosing not to. It's choosing to promote it actively. And it would be nice for Congress to come back and say, no, no, we actually didn't mean this to happen.

39:44Or by all means do it, but here's a group of legal distinctions that cover a bunch of things that prediction markets really are struggling with. The definition of insider trading. Do we really want to tax advantage prediction markets on sports gaming as opposed to traditional sports books? What is and isn't allowed? There are a couple things that aren't allowed, but I mean, could you bet on high school sports? Could you bet on referee outcomes? The regulators made some choices there, but those choices can be unwound by another regulator. Ideally, Congress will come in and settle this. In the absence of that, I think the Supreme Court will eventually hear some of the big picture issues.

40:26Sean Pyles:And are there any safeguards in place to prevent someone who has insider access, a government employee, an executive contractor, et cetera, from turning confidential information into a bet and making a profit? There are, but they're minimal. And when you say safeguards in place, the question is, what is and isn't legal? The laws that we've defined about what is insider trading are very much based on the idea of public companies and public assets. And what we're talking about here are events and moments. There seems to be a different scandal every day, right? But one of my favorite ones occurred in France, there was a prediction market question on how hot it was going to be in Paris.

41:09If you read the fine terms of the contract, the high temperature of the day was considered the reading at noon at Charles de Gaulle Airport. And this person figured out that where the thermometer was that took the reading was not in a secure part of the airport. And so what this person allegedly did was make that wager, drive to the airport with a portable blow dryer, go right under the thermostat at 1158, heat it up, and then run away at noon so that the official noon temperature showed a sudden spike. That doesn't seem like a fair bet, right? No, it doesn't. It does not. Right? Was that insider trading?

41:54I mean, was it market manipulation? What was the exact rule that was being violated? The president's teleprompter guy was recently caught by the firm making wagers about things related to Trump. Well, you know, Trump follows the teleprompter until he doesn't. So are there safeguards in place? There are some, but I think they're radically insufficient. The law is not well defined here, or put a different way, the law was defined for a type of insider trading that isn't applicable here. as it relates to these situations.

42:29Sean Pyles:Now, the 2026 midterms are already a massive prediction market event. And I saw earlier before this recording that Polymarket has Democrats as the favorite to retake the House. With millions of dollars traded on that single contract, what worries you most about how much money is sitting on live elections? The prediction markets like to say that politics is such a big market for them. Their big market is sports. Still sports, yeah. as the midterms get closer and closer and closer, it will dwarf compared to what an NFL weekend will do. So make no mistake about it, this is primarily about sports.

43:05A lot of times when you look at these election contracts, I'm worried less about the big dollar ones than the small dollar ones. I'm worried more if people are writing things about state delegates in Omaha, because those are much more thinly traded and much more manipulable. In areas where you don't have much public polling, where you don't have much information, there's a desire by a lot of people to support and vote for the winner. And the ability to manipulate a market by creating the appearance that something is going to go in a certain direction by dumping a lot of money, it would be very hard to manipulate who's going to win the midterms in the House.

43:48Sean Pyles:You're following this so closely. Are there other developments as far as what comes next for prediction markets that you'd like to point out? There are. Number one, prediction markets have entered into what's called the parlay market. So it was one thing before whether I was going to tell you the Yankees were going to win or lose. Now it's will the Yankees win and Aaron Judge hit a home run? Now, this is really mimicking a sports wager. Some people would say, well, bars want to hedge against the risks of the Yankees winning or losing because they're going to make a free promotion. or something that's a little trickier to say.

44:23I mean, I tend to think you're pointing to the tip of the tail of the dog to justify the decision about the rest of the animal. Here, though, I think you're starting to really ask yourself, are you just mimicking sports books and why? Why are you mimicking? Well, sports books tend to be more profitable off of parlays than off of simple wagers. People just tend to overestimate the probability of multiple events occurring or more precisely their own ability to predict multiple events occurring. And so generally you see things wanting to go more in that direction on the prediction market side, which I think kind of belies the fact that this is heavily sports gambling.

45:04The second thing is prediction markets say, well, look, unlike a casino where there's a house, we don't take a position. We're just mirroring for people on contracts both sides. Every buyer has a seller. Yes, that's true. Every buyer has a seller. But they're also market makers. They're often on the other side of this large hedge funds and other private investment vehicles that are on the other side of the contract. So don't think that you're trading against another person. You're often trading against a pretty sophisticated, algorithmic, large money entity on the other side.

45:41Sean Pyles:And if there is one thing that you want people to keep in mind the next time they consider using one of these platforms, what would it be? We as economists distinguish between investing and entertainment. Gambling is considered entertainment. Gambling, some people really enjoy it. They have a good time. But as entertainment, it's going to cost you money in the long run. Very few people are profitable gamblers. That doesn't mean gambling is wrong. Doesn't mean gambling isn't fun. There are lots of forms of entertainment that our society allows and promotes. Investing, you're expected to make money.

46:21Investing is about having a long-term horizon and putting money away now that will grow for the future. And just understand the distinction between gambling for entertainment and investing for the future. All right.

46:37Sean Pyles:Aaron Klein, Senior Fellow at the Center on Regulation and Markets at the Brookings Institution. Thank you so much for coming on. Thanks for having me.

47:06in case you want to see our faces, we do have a link in the episode description where you can follow us and watch our videos. Join us next time as we check in with listeners to hear where they, and of course their finances are now. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

47:25Sean Pyles:And here's our brief disclaimer. We are not your financial or investment advisor. This nerdy info is provided for general educational and entertainment purposes may not apply to your specific circumstances. Some companies mentioned in this episode may be NerdWallet partners, but that does not influence how we talk about them. And with that said, until next time, turn to the nerds.

47:49I'm not giving up. I am selling the building.

47:54Sean Pyles:The final season of FX is the bear. The restaurant is flooded. Everything's either going to be okay. No. Stop. Or not. We are outgunned and we are outmanned. We have each other. FX's The Bear, the final season. All episodes now streaming on Disney+.