Sole Proprietor vs. LLC vs. S Corporation vs. C Corporation | Legal & Tax Differences

in this video I'm gonna explain the difference between a sole-proprietorship and I'll see and a corporation from both a legal and tax perspective my name is Navi Maraj I'm a certified public accountant and we've got a lot to cover so let's get into the video all right so no matter where you're watching this video whether it's on your various social media platforms you can always find this video on my website which is navimarajcpa.com a quick disclaimer before we get into the details I am NOT an attorney however I am a certified public accountant so I can speak to the tax implications of setting up these various legal entities but I have consulted with attorneys across the nation and I'm pretty sure they would agree with most of the things that I might touch on from a legal perspective but you would want to consult with your business attorney to see if they agree with what I'm saying here so as I mentioned when you form a business you are actually making two decisions you are making a legal decision and a tax is decision so let me kind of lay the foundation for this video and that will kind of make a little bit more sense so when you form a business you are going to be treated as the ways up above here from a legal perspective and then down here are the different ways you could be treated from a tax perspective all right so up here I have the different legal entity types and down below the different tax types let's talk about the colors for a second the green is going to indicate how this particular entity is taxed by default what I mean by that is you know there's no box that says hey check here to be treated this way this way from a tax perspective the blue represents how that entity type could be treated from a tax perspective and I'll get into those details here in a second now there are some less common structures that I didn't put on here and you can also have an LLC treated as a c-corp but that's not very common and this video is for your average small business owner so let's get into the details so the sole proprietorship you can form a sole proprietorship by simply walking into your bank and if your name is John Doe for example you could talk to your banker and he or she will open up an account call john doe's landscaping if you're in the landscaper and you could just go out and start mowing people's lawns if you want now I don't necessarily recommend that because that the sole proprietorship doesn't have what's called limited liability protection so if someone Sue's your you know john doe's landscaping your individual assets as john doe the individual are also now at risk okay so how is this entity treated the sole proprietorship treated from a tax perspective well its treated as a sole proprietorship but what I mean by that is you are going to complete you or your tax professional is going to complete a Schedule C and attach it to your form 1040 individual tax return what I want to help you understand is that there's no separate set of tax documents that you're completing or having your accountant complete when you form our sole proprietorship it's an additional Schedule called Schedule C that's attached to your individual tax return now let's for a brief moment talk about these entity structures on the right-hand side so I mentioned that the sole proprietorship does not provide limited liability protection these entity types may and I say me because you want to treat them as though they're separate entities so you don't want to come in commingled funds between your business and personal you want to use your entity name on all your marketing documents you might if you're an LLC have a articles of organization of course but also an operating agreement maybe you have a Board of Advisors you take meeting minutes when you have business discussions even if it's by yourself I know that sounds a little silly but yes you want to record meeting minutes and all those things will help you you know prop up and support that yes your LLC is actually different than you as an individual but let's kind of break these down one by one so here I have SM l ec LLC rather or s MP LLC this means that s M stands for single-member so you're a one-man shop if you will and how this is treated is by default is as a sole proprietorship so it's exactly the same as this entity type the sole proprietorship so you are simply adding Schedule C to your individual tax return a single-member LLC by default is taxed the exact same way a sole proprietorship all it does is give you that limited liability protection let's move on oh briefly let's touch on the P LLC so a lot of you are probably like what is this P LLC I've never heard of it P LLC stands for professional limited liability company so who should be forming a PLLC someone who holds a license with the state that they're forming the entity in most of your states across the nation support a plc so if you are a certified public accountant or an attorney or a physician or a realtor or maybe a general contractor holds a license you should be forming a professional limited liability company if it's available in your state all right moving on mmm LLC that stands for a multi-member LLC the owners of an LLC are called members now the default tax classification for a multi-member LLC is a partnership and so you would file a separate set of tax documents call its form 1065 and that's the tax return a partnership completes or your account would complete for you there's no sort of I mentioned this a moment ago there's no check the box when you're forming your multi-member LLC for you to know that hey it's going to get treated this way from a tax perspective this is just information that your accountant should advising you on and let's touch on the c-corporation a lot of you might have heard this this is your you know Amazon's of the world or C corporations but if you are a professional just like I mentioned here the P LLC if you're a professional and forming a C corporation you're a corporation is actually called a professional association so again your attorney your realtor let me touch on the Realtors for a second many Realtors have some you know top producers in their office who have pas but you know the corporations have been around and existence much longer than the LLC's have and that's why they may be doing so it may not be right for you you might prematurely create a PA if you're if you don't have a conversation with your attorney or CPA so how is the corporation treated for tax purposes well it's subject to double taxation which means that the profits from the corporation are going to pay tax when they form file file form 1120 and then the shareholders the owners of a C corporation our cars are called shareholders and they will then again pay tax when they receive distributions from the C corporation or the professional association so how can these entities be treated as S corporation so quick point I want to make is you can't go to your state and say I want to form an S corporation these are the entity types that you would form with your state from the single-member LLC on this way I mentioned that there's no documents with the state that you would file for the sole proprietorship and so why would you even want to form an S corp well I have a whole nother video that I'll make on that topic but in short if the profits of your business so you have your revenue or your sales minus your expenses if that number is greater than about 40,000 or so forming a S corporation or electing to be treated as an S corporation can save you thousands of dollars in self-employment taxes not hundreds of dollars thousands of dollars it's a very powerful thing and so again once you cross that 40 another threshold you may want to have your entity instead of receiving its default tax treatment be treated as an S corporation so a single-member LLC can be treated as an S corporation a multi-member LLC can also be treated this way and your C corporation or professional Association can be treated this way it's very rare that you know if you kind of jump the gun and you're not sure what you're doing and you form this type of entity you would probably you would likely never have it treated the default way you would have to treat it as an S corporation so it's not subject to double taxation but if you're new in business and you do that prematurely you might have additional fees so that your accountant might charge you an additional fee to prepare that tax return there is also payroll that you must institute because you must pay yourself a quote-unquote reasonable salary salary when you have it in S corporation so you know you need to consult with your tax or legal professional and you know try not to prematurely do this this is not a recommendation that I'm making but a lot of entrepreneurs world especially if they're a one-man shop form a single-member LLC or P LLC and be treated as a sole proprietorship and then once they cross that $40,000 in profit threshold where they can save thousands of dollars in self-employment tax that's when they'll make this S corp election and have their LLC treated as an S corporation for tax purposes now I want to touch on something that's very important that a lot of new entrepreneurs don't understand when are these different tax documents do the sole proprietorship is due at the same time you're forming your sorry filing your individual tax return so typically that's April 15th and you can form an X file an extension to have that do you know six months later and that's so due April 15th all of these other entities so if your business is taxed as an S corporation or a partnership or a C corporation those tax returns must be filed by March 15 a month earlier the penalty for not doing that is pretty hefty the IRS will charge you approximately two hundred dollars per month per owner that you don't file these tax returns on time so let's use the example of a multi-member LLC so by default treated as a partnership well you don't file that on time you'll have two people so that's $400 per month that you're late in filing that return so that covers the major topics I wanted to touch on on this video how are these treated from a legal perspective and these different legal entities and what is the tax perspective there is a ton of misinformation out there from you know youtubers and bloggers and I wanted to clear up all those misconceptions that are out there you know the goal was to sort of create that definitive guide for the entrepreneur to use on you know what they should form on when creating their business but I would urge you to contact either an attorney or CPA or both to make sure that they are an agreement with what you're about to do because you could cost yourself potentially thousands of dollars after the fact after you've formed your LLC and it might be too late if you have a comment please or a question please leave it in the comment section below perhaps I'll create another video answering your question thanks so much for listening and I'll see you in the next video

Channel: Navi Maraj, CPA

Views: 155,124

Keywords: LLC, Sole Proprietor, Sole Proprietorship, Corporation, S Corp, S Corporation, C Corporation, Tax Difference, Single Member LLC, Multi Member LLC, What is the difference between an LLC and S Corp, What is the difference between an LLC and S Corporation, PLLC, What is a LLC, What is a Limited Liability Company, What is a S Corp, What is an S Corp, LLC vs Corp, Sole Prop vs LLC, Start a business, How is a LLC tax, Legal difference between LLC and Corporation

Id: 33ItOdBeWTQ

Length: 12min 43sec (763 seconds)

Published: Wed Mar 25 2020