Business Structure: How to Choose the Best Entity for You

today i want to talk about how to choose the best legal structure for your business because right now you may be wondering hey sean what's the difference between an llc and an s corp or a schedule c and how do i pick and so this video is going to be great for anyone who is starting a new business or even for people who have an existing business that has evolved over time where you may be in a position where you want to go back and optimize your business entity structure so in this video what i want to do is talk about why choosing the right entity is important do an overview of the four types and subtypes of business structures and simplify which one may be better for you based on your business goals so if all that sounds good to you then our one little request is for you to hit the like button for the youtube algorithm it goes a long way in supporting our channel and helping this video reach more people like you who want to learn about these business structures stay tuned [Music] hey there and if you're new welcome to our channel i'm sean with life accounting the accounting company that helps you save on taxes and build more wealth and as always what i'm going to do is put the timestamps down in the description below so you can skip to the parts in the video that you want to learn the most about however if you are new to the subject then it is beneficial for you to watch the entire video so you walk away with extreme confidence in selecting your business entity structure okay let's start off with something easy and then warm up to more advanced topics starting with number one what is a business entity or legal structure the easiest way to describe a business entity is that it is a structure in which you will conduct and engage in business activities such as selling goods and services so of course it is an important decision to make when you are starting a new business now if you are not proactive about selecting your own business entity then by default you usually will become a sole proprietor or a general partnership which isn't necessarily a bad thing also you should know that if you have already become or selected a business entity that you can later switch to another legal structure or even elect to be taxed differently which we'll talk about a little bit later in this video now a big misconception for many people is that they think you need a particular business structure in order to write off any business expenses but this is not the case okay you get the same tax deductions as you would for a sole proprietorship as you would for an llc or an s corporation as long as you identify as having a self-employed business then you can write off almost anything now generally speaking to set up a business entity structure what you would need to do is register your business with your secretary of state where you make sure your business name is available within that state you will also list all the partners or members associated with that business then of course you would choose your entity type then you'd list a registered agent to receive mail and correspondence on behalf of the business and then you pay a small registration fee and then you're set up okay now that you understand all that and what a business entity is let's talk about number two why choosing the right business entity is so important so there are three big factors that you want to take a look at when deciding how to structure your company okay you want to take a look at the legal protections offered by the entity you also want to take a look at the tax treatment and potential outcomes of the entity and the level of government required associated with having that particular entity so you have this sort of puzzle of options that you want to think carefully through because if you select the wrong entity then you may end up okay putting your personal assets at risk or paying more taxes than you actually need to or going through unnecessary government requirements that could be holding you back from growing your business so you want to choose wisely so you have the best possible outcomes which by the way if you need help with tax planning i have a few more appointments left that i can take and my dad who is also a part of the business has some availability left as well but we are almost done with this tax season so go ahead and click the first link down in the description below if you need more help today all right let's go ahead and move on to number three breaking down the four types of business entities you can sum up business entities into four types okay you have sole proprietorships partnerships corporations and llcs let's go ahead and take a deep look at each type starting with number one sole proprietorships so a sole proprietorship is the simplest business entity of them all okay in fact under law if you launch a new business and you are the sole owner you will automatically become a sole proprietor which means you don't need to go to your secretary of state and register or file any paperwork although some states do require you to get a local business license or permit to sell certain particular goods and services now typically people who identify as freelancers consultants delivery drivers independent contractors and other service professionals fall under the sole proprietorship which is why it is the most common business structure because some people who are just setting up side hustles or side gigs are doing so without realizing they're starting a business and becoming a sole proprietorship by default so the pros of a sole proprietorship are okay it is easy to set up since you don't have to register with your state plus there is no paperwork or ongoing requirements from the government and you still can take qualified business tax deductions as well as filing your taxes are less complicated and less expensive now the major and i mean major con of a sole proprietorship is that you have no legal liability protections because as a sole proprietor you are personally responsible for all the debts and all the liabilities of the business so if someone sues your business they can try to claim your personal assets such as your car your home or even your personal bank accounts so that's a really big con okay another big con of a sole proprietorship is that it is harder to build business credit since there is no legal separation between you and the business it can be more difficult for lenders to get a full financial picture of your personal side in your business side and since it's harder to build business credit it is also harder to raise money or get a loan for your new business now i have a video breaking down how to build business credit that i'll link at the end of this video so you can check that out after you finish this one but anyway for these reasons you know the personal risk of your assets and the challenges of raising money many sole proprietorships convert into a single member llc or corporation but first let's talk about number two the general partnership or gp so in many respects a general partnership is very similar to a sole proprietorship with the main difference being instead of there only being one owner there are two or more owners in the business and just like it is with a sole proprietor if there are two or more owners in the business then by default under law it becomes a general partnership and of course the pros are very similar too right like a general partnership is easier to set up because there is technically no paperwork you need to file but of course you should still have a good partnership agreement in place you also get all the same tax deductions that you would as a sole proprietorship and other business entities however i do want to mention a unique pro of a partnership which is that there are lower business risks because now you have a partner where you are usually sharing in all the personal and business risks right like you would handle legal matters together you would split up business losses together so everything doesn't fall on one person however the major con of someone being able to sue your business and go after your personal assets still exist under a general partnership because there is still no legal liability protection okay another con of a partnership as well you still have a partner so there is less control in the possibility of internal disputes within your business like maybe you have a different vision from your partner that could cause some internal conflict which could cause the business to become more stagnant which again is why it is so so important to have a good partnership agreement in place also when it comes to taxes this could be a slight con as well because partnership returns require a separate tax return to be found and the last con of course is even after all this you still have to split the profits with someone else now another type of partnership you have to choose from is number three a limited partnership or lp now unlike the other two this is an entity that you must select and register with your secretary of state so in a limited partnership you have two types of partners okay you have a general partner and then of course you have a limited partner the general partner acts as the manager of the business so they will be the ones who operate and assume the personal liability of the company whereas the limited partner acts more so as a passive investor in the business so the pros and cons of a general partner in a limited partnership are similar to the ones that exist in a general partnership entity overall however limited partners are usually not held personally liable for the company's damages which makes it easier for limited partnerships to raise money from investors who just want to be passive however that major con still remains if you are the general partner in the limited partnership because you are still held personally liable for the company and now there are more costs associated with managing a limited partnership okay let's move into more advanced legal structures starting with number four a c corporation now it is my opinion that the c corporation is one of the most advanced business entities that exist because it is totally separate from individuals both legally and tax wise you see most business entities are known as pass-through entities which means they are still tied to individuals at the individual tax rate however what makes a c corporation unique is that it has total separation for tax purposes as well so for example let's say you have a single filing status and you have two hundred thousand dollars in business profits well if you owned a pass-through entity then on that two hundred thousand dollars you will pay taxes at the individual tax rate which is a marginal 32 percent tax rate however a c corporation's profits are taxed at a specific corporation tax rate which for 2022 is a flat 21 tax rate so if you had 200 000 in business profits you would pay 21 in taxes so that's a significant difference and there are so many circumstances where becoming a c corporation makes a lot of sense in fact most of the largest companies in america are set up as a c corporation so the major pros of a c corporation are you have limited liability protection you pay a flat 21 tax rate you're eligible for more tax deductions such as writing off charitable donations and you can offer stock options and shares which makes your ability to raise money much easier now the major cons of a c corporation are there is more administration there is more tax complexity and there's more costs associated with maintaining ac corporation c corporations also face double taxations when owners withdraw profits beyond the c corporation level now there are also a lot of government requirements such as maintaining shareholder meetings and creating bylaws and much more now i have an entire video where i break down the benefits of a c corporation which may be really helpful so i'll go ahead and link that video at the end as well so you can check it out after you finish this one okay let's go ahead and move on to the next type of corporation which is number five the s corporation some people will argue whether or not an s corporation is a business entity or simply a tax election but regardless of where you stand here's how an s corp works so an s-corporation is like a blend of a c corporation okay it offers limited liability protection to protect your personal assets it also can issue stock which makes it easier to raise capital for your company yet it is taxed as a pass-through entity instead of having a flat tax rate so it is a very very flexible business structure with the major pros of being an owner or shareholder are you have personal liability protection there is no double taxation or corporate tax rate to pay and there is no self-employment taxes applied to your owner distributions the cons are you are required to pay yourself a reasonable salary and although you can issue stock there are limits to how much stock you can issue and you still need to comply with government requirements such as creating bylaws and holding meetings so s corporations at least in my opinion are the second most powerful business entities followed by a c corporation but that doesn't mean you should just rush and set up an s corp or a c corp because depending on where you are in your business you may not be able to take full advantage of all the benefits associated with having these entities and they can actually cost you now there is another type of corporation that we haven't talked about which is a non-profit corporation but because that's an entirely separate category i'm gonna leave that off the list for now but hey if you want me to make a video on the benefits of starting a non-profit corporation just tell me down in the comment section below okay the next business entity i want to mention and you've probably already heard of it is number six the limited liability company or the llc so if you've done any research on starting a business then you probably heard people suggesting that you should start an llc and rightfully so because i would consider llcs to be the most flexible business entities that you can have okay going through this list you probably notice all the different pros and cons associated with each entity but an llc is like a mixture of the best pros such as having limited liability protection for your personal assets you can also choose how you want your business to be taxed whether you're being taxed as a corporation or as a pass-through entity and there are less government requirements associated with having an llc and there are hardly any cons outside of the fact that you have to register your business with the secretary of state and pay some additional annual fees so now let's put all this together and talk about the fourth part of this video number four how to choose the best entity for you now there are two important things i want to mention here first you should know the vision and plan for your business operations more than anyone else so i implore you to do your own research and think deeply about all the pros and cons associated with having a certain business entity secondly i'll be going over my list and my tiers that i help guide people towards making their own decision of which entity structure to choose so in tier number one i have sole proprietorships and general partnerships so this may be great for people who are worried about having liability protection and they want to get going quickly without having to file a lot of paperwork as well as they don't forecast having over 250 000 in income for example if you are self-employed and you are working underneath a large company or a corporation as an independent contractor then well they may offer some additional liability protections as a company as well as require you to have insurance policies to protect you as well like uber drivers okay in tier number two i have limited liability companies and partnerships which are great for entrepreneurs who are starting to step out on their own and now they need some limited liability protection and this is an entity that you can grow with so as you start making more income you can elect to be taxed as a corporation later on also this is a great place to start building up some business credit and raising some small initial capital for future business projects in tier number three i have s-corporations because after you've started to gain some traction then your business may need to do a couple of things right like for example you may have a product or a service that is in strong demand and you may be struggling to keep up so maybe you will require some additional growth capital from a shareholder and you can issue stocks as an s corporation or maybe your business profits are really good and you have enough money to put yourself on payroll so that you can start avoiding self-employment taxes in other words i think s-corporations are great for companies that are growing and they have a need for additional capital or reducing their tax burden finally in tier number four i have c corporations which are great for companies that project having a significant amount of revenue or raising a significant amount of capital from investors or shareholders and at the same time you are willing to make more aggressive investments back into the company while maintaining a positive growth trajectory so that's my take on it okay i think many people will fall in tier two and then they can grow from there now since you made it this far i have one bonus section for you which is number five who should set up your business entity now sometimes i get questions about hey sean how should i actually set up my business entity should i do it myself should i hire a tax attorney should i hire an accountant what and those are usually the three options that people are looking at right like deciding to set up your business entity yourself hiring an experienced accountant or hiring an experienced attorney so of course you know yourself and you know how much knowledge you have around the subject so let's quickly talk about the major difference between a tax accountant and a tax attorney so for the most part when you go to a tax accountant to set up your business entity they're more than likely going to be looking at the tax outcomes and the financial outcomes of having that structure so you may get questions like how much money are you putting into the business or how much revenue you do you project making or how many partners will there be will there be investors or just operators in order for them to get a complete grasp on how your entity selection may impact your taxes on the other hand most tax attorneys are going to be looking at the legal outcomes associated with having various business entities so they're gonna ask you stuff like okay what personal assets do you have and you need to protect or do you plan on transferring your personal assets one day or what are the legal risks associated within your business to get a full understanding of how your entity selection may impact you and your assets now each party of course will know a little bit about the tax and the legal outcomes but of course they each have their own individual area of expertise okay so i hope all this was helpful today if it was don't forget to like this video and then let me know in the comment section below if you have any questions coming up next i have two more videos that i mentioned i would link at the end so make sure you check those out if you haven't already and i'll see you over there

Channel: LYFE Accounting

Views: 28,661

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Id: sg0x06sHTIY

Length: 20min 2sec (1202 seconds)

Published: Thu Apr 21 2022