Sole Proprietor? LLC? Corporation? Which Should You Choose?

[Music] hi hey gang Jim Hart here from home on today I want to talk to you about the three main types of business entities that you can choose when starting your online business and and Before we jump into that I just want to tell you who I am and my background and what I've been doing so I started this channel about three years ago and had no idea that it was going to become as popular as it did and so I've a lot of you have really started following me and emailing me and asking me a lot of questions and so one of the things I'd like to do is start answering some of those questions again it's been a while since I posted I apologize that I am NOT posted a lot of videos but the ones that I have posted I've received a lot of great feedback on and so I thought I would start today with a pretty basic video to talk to you about the different types of legal entities that you can use when starting your online business this is a question that a lot of people send to me they don't know what to do and they're not sure what strategy they should use when in in terms of protecting their business from a legal standpoint a lot of people think that LLC is the way to go some people say S corporation some people have no idea what the difference is between those are and so hopefully today's video will help you with that so first of all there are three main types of beepin I don't know why I'm beefing alright so there are three main types of structures that you can use now let me just tell you before we start is that there's a lot of other structures you can use just because we're going to be talking about sole proprietors LLC's and C corporations today there's there's other things there's partnerships there's general partnerships there's limited liability partnerships there's nonprofits there's just a whole mess of business structures that you can use most of them are not relevant to you at all so you can just ignore them don't worry about them but here are the three main ones let's start with the sole proprietorship this is the default option this is what if you do nothing else you're going to be a sole proprietor and basically when you form your sole proprietor there is no distinction between you and your business if your business gets sued you're going to get sued personally because you are at the business when you file your taxes you're going to put all your business income and expenses are going to go right on your 1040 and so there really is no distinction when you're doing a sole proprietor however there's a couple things you do need to do or you may want to consider you may want to make sure that you've registered your name with your state or municipality wherever you're located you may also want to make sure that you have the proper licenses and permits to engage in your business in whatever state is where you're located let me just say another thing here where you're located is very important the state you're located in is is most important here we'll talk about that a little bit more here when we get to the LLC and the C corporation but for a sole proprietor of those that's the main things if you have if somebody joins you in your business and you're working with a spouse or another person there's a possibility you could also become a partnership my default but for most people that are in online business is just them they're gonna be a sole proprietorship and the benefits to a sole proprietorship it's informal you don't need to do anything you don't need to other than your trade name and maybe some permits and licenses you don't need to file anything with the state tell if the state know that you're in business so it doesn't cost any money you don't need any operating agreements or bylaws or anything like that you just you run your business and you keep track of your income and expenses and that's what you do drawbacks are you're going to need to pay self-employment taxes on your earnings when you file your tax return and you could be exposed to liability so if you give a product that if you sell a product that causes somebody harm whether it be a product or a service whatever it is you're offering to the public if you cost somebody harm you are going to be personally liable you have significant assets or house or things like that then those type of things could be taken if you were to get suit and somebody were to get a judgment against you so that's that is a sole proprietorship that is the default that is what most people choose when they're just starting out because let's be honest if you don't have any revenue if you don't have any income you don't have a whole lot of money to use to form a business entity and frankly you shouldn't be you should be focusing all your efforts on building your business and not worrying about this at the very beginning so a sole proprietorship is good unless you're in some sort of business that is a high high liability business if you are selling something that that could subject you to some sort of personal liability or injure the people that are using it you may want to consider something different the second option I want to talk about is AC corporation AC corporation is basically a corporation that's what most of the businesses that we deal with on a daily basis are if you go to a franchise that if you go to Starbucks down the street to get your coffee or do your work in the morning Starbucks is a corporation most of them are Delaware corporations which is something that that you may think should not be a Delaware corporation that means they were formed in Delaware and the answer to that is no I've talked about that before you should probably when you're just starting out form your business in the state where you're located that's going to be the safest bet because even if you go filing it somewhere else like Nevada or Wyoming or Alaska or who knows where it doesn't matter because you still have to register as a foreign entity in your own state and so IC corporation that's where you're going to file now there are some benefits and drawbacks to C corporations as well a C corporation is expensive to file you need bylaws you need articles of incorporation you need to make regular filings with the state it can become cumbersome you may need an attorney to help you with that and so these are all some of the drawbacks the benefits to a C corporation are that you do get limited liability so if somebody were to sue your business are going to be suing the corporation and not you in particular and so there is a benefit to doing it that way the other main benefit to a c-corporation is with this recent tax law that was enacted you get a 20% tax on all the income from the corporation however you're also going to have to pay taxes on any money you pull out of the corporation as well so if you pull money out in form of salary or a dividend you're gonna be paying taxes on that as well as the 20% income tax rate so if you're keeping all the money in the business and you don't plan on taking it out then a corporation a C corporation might be a good option now we're not going to talk about S corporations that is a tax election that you can make with either the C corporation or the LLC that is not a separate corporate entity so you need to be clear on that the last entity I want to talk to you about today is what's called an LLC or a limited liability company I've talked about this a lot in some other videos a limited liability company is kind of a hybrid between the sole proprietor and the corporation it is a business entity that you can choose it's regulated by state law wherever you live there's different formalities to form an LLC depending on which state you live in and some states make it really easy to form other states make it more difficult to form again you're probably going to want to form that and to the in the state where you live and where you do business just because you live if you live in New York and there's no reason to form one in Wyoming if you live in North Carolina where we practice there's no reason to form one in Florida you form the entity will in the business where you live or you work or you do your your business that's where you're gonna form it that's gonna be the best choice in almost I would say 99% of cases there are some exceptions but that's typically what we're going to do so the main benefits to an LLC are it provides you with a limited liability protection and the liability protection goes two ways so if somebody Sue's your business because the business did something then you're protected personally also it protects you because if somebody were to sue you purse milene because let's say you're driving down the street and you hit somebody and killed them then they would be able to sue you personally and get it on your assets but they're not going to be able to get at the assets of the LLC so there's protection both ways this is different than if you have AC corporation because you own in a C corporation you're gonna own what's called shares of that corporation when you go buy stocks on the stock market you're buying shares same thing here you own shares of your C corporation if somebody were to sue you personally they get they can attach your shares of your corporation then they can get all the assets in the corporation so that is a drawback to a C corporation versus an LLC all they can get as a charging order and the effect of that is going to be different based on the state where you live so that's another big benefit to an LLC the drawbacks to an LLC are very similar to the corporate drawbacks are number one you need to file articles of organization for an LLC you're going to need to have an operating agreement you're going to need to adhere to that operating agreement you're gonna have to make annual filings the the tax return you can either do a tax return as a separate entity or you can do a tax return on your 1040 if you don't make an S election or some other type of election with your taxes on a federal level also all the income from the LLC is going to flow through to your personal tax return which is a benefit however with the new tax law you are going to get a deduction I believe it's 20% of the income from the LLC you're gonna be able to deduct on your tax return so there is a nice tax benefit to operating an LLC as well so those are the three main corporate entities that you're going to need to know about for your online business so again we're talking about sole proprietorships LLC's and corporations for most people we're gonna recommend the LLC it offers the most flexibility there's a lot of other benefits we didn't talk about here today because this is a broad overview very simplistic video of these different entities but LLC is probably going to be the best bet for most people if you have any questions again my name is Jim Hart I am the owner of Hawthorne law we are we operate in North Carolina I'm licensed in North Carolina and Florida and that's it for today so hopefully I'll be doing more videos here soon I hope you have a great day folks and catch you on the flipside [Music]

Channel: Jim Hart

Views: 74,359

Keywords: LLC, Corporation, Hawthorn Law, Sole Proprietorship, Business Entity, Online Business, Legal Tips, bilbo, llc company

Id: E6eQLY1Befw

Length: 11min 26sec (686 seconds)

Published: Mon Sep 03 2018