- Choosing a business structure is an important first step
when starting a business. Each business structure has
advantages and disadvantages. So which business structure
should you choose? In this video, we will go over each of the business structures
and give you an approach for how to decide on the
business structure right for you. Keep in mind this is not business advice, but a means to help you explore the different business structures and help you decide
which is right for you. If you are still unsure what
business structure to choose, consult with an accountant. The first thing we need to talk about are informal versus formal
business structures. Informal business structures are sole proprietorships
and general partnerships. Informal business structures
are simple to form and thus are a great way for testing a business in
a low-risk environment. They allow you to see if a
business will be successful before committing too much time and effort in creating a formal business structure. Informal business
structures are also great if most of your starting clients are people you are familiar with. However, informal business structures do not have asset protection. What this means is that, if someone sues you or you
default on a business loan, your house, your car or your
personal savings are at risk. Asset protection is important
when you are growing rapidly, have customers you don't know personally, when you are making a
significant amount of money, or your business is inherently risky. Formal business structures
provide credibility, personal asset protection, and
help build business credit. So, if you are planning
on having customers you aren't familiar with, or rapid growth, you'll probably want to choose
an LLC or a corporation. As mentioned before, one
of the biggest benefits to choosing a formal business structure is the personal asset
protection it provides. In addition, formal business structures also add credibility to your business that informal business
structures don't provide. Your two options for
formal business structures are corporations and LLCs. Corporations tend to be more
complex business structures and generally speaking
aren't what you want as a starting business structure. Corporations also have double taxation, which means that your
profits are taxed twice. Corporations are great if you are looking to raise money from venture capital or looking to list on the stock exchange. Corporations are also able to more efficiently carry money over between tax years to
reinvest into the company. If you need money from
professional investors or are looking to carry
money over more efficiently between tax years, a corporation
is the better choice. LLCs are a much simpler
business structure, have a lot less paperwork, and are easier to start and maintain. They have pass-through taxation,
which means your profits are only taxed once, and
they have all the benefits of a formal business structure, including personal asset protection and increased credibility as a business. In general, it's more
beneficial to start as an LLC when starting a small business due to the simplicity and
the pass-through taxation. You could always change
your business structure and tax classification at a later date. If you have decided that
you need asset protection, and that the simplicity and flexibility of a limited liability
company suits your needs, that might be all you need to do. You will have a strong, formal
business structure in place, registered with your state
and the federal government, and you'll be free to
go on and make a profit. A business structure is different than a tax classification, however, and an LLC has three options
for how it can be taxed. As your LLC grows and makes more profit, you may decide to use a
different tax strategy to save money and reinvest profits. As we discussed before,
the default tax status for an LLC is pass-through. For a single member LLC, the LLC is treated as
a disregarded entity, and the tax is passed
through to the member. If there are multiple members, the LLC is taxed as a partnership. Pass-through taxation
means all distributions, which is what payments to
LLC members are called, are subject to employment taxes. An LLC which elects to
be taxed as an S-Corp allows members to become
employees of the LLC, so they can be paid a salary
as well as a distribution. Both of these are taxed differently. It's a more complicated process that requires additional
professional accounting services and is typically more closely
scrutinized by the IRS. So it is only recommended
if you know ahead of time that you will be making a certain profit and can manage the administrative needs. You can watch our video on
the topic for more details. An LLC can also opt to
be taxed as a C-Corp, which is the default tax
status of a corporation. But the same general restrictions apply. You should really only consider it when you know you will be
making a large amount of money which you want to reinvest
back into the company in different tax years. At which point you should talk
with a licensed accountant. You have many choices when
forming a business in America. If you are just getting
started and don't have anything at stake, an informal business structure, like a sole proprietorship or partnership, may be sufficient. If you are doing business in volume or with anything at risk, you'll want the asset
protection that is provided by a formal structure, namely
an LLC or a corporation. Unless you are willing to deal with more complicated
administration and taxes, or are looking to reinvest money in your company or take in investors, an LLC is usually the best
choice for small businesses. If you know you are going
to make a surplus of money and want to save on employment taxes, an S-Corp tax classification
might interest you, as well. We have, for more information,
as well as tools and guides for the business formation
process for each state, at our website HowToStartAnLLC.com. If you found this video
helpful, give us a like and subscribe for more videos
like this, so we can continue to deliver useful
content to entrepreneurs. I'm Tony with The Really
Useful Information Company, wishing you good luck
for your small business. (pleasant music)
