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Written by : Morris Qureshi
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hi everyone welcome back i'm lena i'm a certified public accountant if you are an aspiring business owner this video is for you we will go through a ton of information and hopefully this doesn't feel like a lecture but in a way i am going to try to share as much information as possible that will help you decide what type of business entity structure is right for you just like every business has an entity type yours will have to be one of the five business structures i'm about to walk you through your business structure is extremely important it will directly impact several key things such as the size of your business and your operations of course how your business is taxed your share of profits and your legal liability to name just a few at the end of this video i will share with you my personal recommendation about the service to use to establish your business entity legally so stay tuned for that and make sure you watch this video until the end first things first let's have a quick overview so that you know what to expect in this video there are five main entity types let's start with a sole proprietorship one person owns and controls the business the owner pays all taxes and debts personally they report profits and losses on schedule c on their personal tax return limited liability company llc this is a hybrid business entity owners can choose how they're taxed whether as a corporation or as individuals on their personal taxes next up partnership two or more individuals share control and ownership of the business partners file their taxes for their own share of profits costs debts and losses pass through to them equally c corporation one or more owners and the corporation is supervised by shareholders board of directors and management the business is a separate entity that pays corporate taxes usually this business structure is reserved for larger businesses as corporations similar to a c corporation except the income losses deductions and credits are passed on to its shareholders who file this and their personal income tax as you're watching this video and deciding what might be a good business structure for you there are several very important key points or questions i think you should keep in mind start by asking yourself a few questions to get a clearer picture of your short-term and long-term goals several questions you may want to ask yourself are will you be a sole leader with a few employees or would you rather work with partners board members or investors how large do you want your business to grow of course there are many more questions you should be asking yourself at this point but those are the main ones that will point you in the right direction all right let's start with sole proprietorship if you want to run your business solo this is the place to start in fact the minute you start running a business solo you are automatically a sole proprietor in the eyes of the government and the irs so let's talk about the benefits people who are successful in this role are comfortable making a hundred percent of the business decisions while also being accountable for any costs debts and legal responsibilities sole proprietorships are the easiest and most affordable structure to set up there's no legal paperwork involved apart from local licenses and permits so most likely you won't run into any issues setting it up at all many small businesses start out as sole proprietorship so if you don't have any prior experience running a business this may be a very good choice without having to pay fees to form an llc for example or a corporation with that said tax consequences present the biggest challenge here as a sole proprietor you're taxed as an individual which means having to pay a substantial amount of your profits and taxes unfortunately business earnings and losses are reported on owner's personal income tax return form 1040. you're also 100 liable for the company's finances legal liability is another fairly significant drawback of a sole proprietorship you're personally responsible for any debts and you could lose your personal assets such as your house or any other assets you have on top of it it's also much harder to get financing or raise capital as a sole proprietor banks and investors see it as a risky endeavor so if you plan to grow this may not be the route for you next up let's talk about limited liability companies i have an entire video comparing an llc to a sole proprietorship by the way i will link that video in the description below for you to watch next but for now let's cover the key facts a limited liability company can be best described as sort of a hybrid business entity owners can choose how they're taxed if they prefer to be taxed as a corporation then that's on the table as well but if it's more advantageous to owners and shareholders they can opt for the businesses profits losses credits or deductions to be processed in their individual tax returns just like in sole proprietorships partnerships and as corporations which of course is a big benefit because you have that flexibility to decide what works best for you and your business an llc does provide important advantages and llc is the front runner if you're looking for a legal structure that's relatively easy to set up and you want to give your venture some flexibility like a c or an s corporation an llc gives owners and shareholders limited liability protection so their personal assets are never at stake if the company is faced with any losses debts or even lawsuits an llc is treated as a separate legal entity you can be a sole owner or involve partners investors and shareholders if you're curious how your profit is calculated in an llc it is directly proportional to the investment percentage of each owner or through an agreement if you prefer something different now let's chat about partnerships partnerships rely on the collective resources talents and efforts of each partner two or more individuals share ownership of a business common examples of partnerships usually include law firms bars and restaurants creative agencies and family businesses with regards to taxes each owner files their own share of profits on their personal tax return the partnership also needs to file an annual information return form 1065. usually the partners equally share all costs debts and losses except in limited partnerships we should also mention here that there are two subtypes of partnership general partnerships and limited liability partnerships there are many nuances but if you plan on equally splitting all your contributions profits and losses with your partners then you're looking at a general partnership if one or two partners will be doing most of the heavy lifting but one or more partners will have limited management say and limited liability then you should be considering a limited partnership finally if you want to test out a new business idea with some friends or family for a set period of time you will be looking at a joint venture if you decide to keep the train going after its expiration date you must then commit to a general partnership the next business s
Thanks for your comment Rudy Randgaard, have a nice day.
- Morris Qureshi, Staff Member
if you're starting a business in the united states you have several different types of business entities you can choose from if you're by yourself and meaning you don't have any other investors it's just you starting the company and you don't create an llc in your state you don't file articles of incorporation to create a corporation then you are a sole proprietor okay you have a sole proprietorship even if you haven't filed any paperwork or anything like that if you start a business you're selling products or providing services and you don't have an llc you're not incorporated you're by yourself your sole proprietor so if you're a sole proprietor then what you're going to do is you're going to track the the profit of your business you're going to file it on this thing called schedule c which is going to be filed along with your 1040 so your personal income tax return basically when you are a sole proprietor the irs treats you and the business as one in the same okay so you're gonna file the schedule c along with your normal tax return so that's a sole proprietor now if you have two or more persons and they are entering into business together then you have a partnership unless of course you've created an llc or a corporation which we'll get to but let's just say no llc no corporation you just have two or more persons they're entering into business together okay so let's say you got two friends or three friends okay they have a partnership okay there are different types of partnerships we can have a general partnership where everyone is a general partner we have a limited partnership limited partnership is there's someone one of the partners just puts up some capital but they're not going to be involved in managing the business okay so that's a limited partnership someone's not there's at least one partner who's not actively managing the business they just they just made an investment either you even have limited liability partnerships which are like some of the larger accounting firms now i put persons in quotation marks here when i said two or more persons uh is a partnership because it doesn't have to be an actual person for example you could have a corporation you could it could be you and then some corporation that together start a partnership so it's very flexible when it comes to what does it mean to have persons and then there's usually what you really want to do is create a thing called a partnership agreement to outline like how the profits of the partnership would be split up and so forth so and then it would be form 1065 would be the form that's uh filed for the for the partnership in terms of with the irs to report the profit or loss to the partnership and then whatever your partner so let's say you're a partner in the partnership your share of the profit or loss will end up being reported on your 1040. now let's skip before we get to llc let's go to corporations okay let's go to corporation and we'll start with at c corporation a c corporation is the default corporate type and what i mean by that is this if you go in your state okay let's say you live in delaware and you file articles of incorporation to create a corporation okay you create this this this it's a separate legal entity it's not like the sole proprietorship where you and the business are one in the same it's a separate thing okay so you create this corporation you file the articles of corporation if you just file that and you've got a corporation you have a c corporation and as corporation you have to make an election so you basically create a c corporation first and then say i want to elect to become an s corporation okay so now the c corporation one of the the biggest disadvantages is double taxation and i'll talk about this more in the videos to come but basically the seep corporation the profit or losses so let's say c corporation is 100 million dollar profit that would be taxed and then when the c corporation if they issue dividends to the shareholders the shareholders will be taxed on those dividends so there's two layers of taxation now a corporation a c corporation files form 1120 to report their their tax profit or or loss now in s corporation as i said is so you filed the articles of incorporation you have a corporation you have the c corporation and then you say you know what i want to elect to be treated as an s corporation so you make this election there's a form 2553. now there are a lot of restrictions on who can be a shareholder in an s corporation how many can he sharehold for example you can just have 100 shareholders you can't have like you know 10 000 shareholders so if you're thinking about like a large publicly traded company like microsoft or something it's not going to be an s corporation because it's going to have a lot more than 100 shareholders and microsoft so you've got to limit on the number of shareholders and then also who can be a shareholder for example uh a c corporation cannot be a shareholder of an s corporation so you have a lot of restrictions on an s corps there's there's rules about who can become an s corp and there's rules to remain an s corp okay you can lose s corp status potentially if you violate the rules now form 1120s is the tax return filed by the s corporation and long story short you said well why would someone have an s corporation 7c corporation and s corporation does not have the double tax there's no double tax with an s corporation because even though the corporation files form 1120 s the s corporation uh it's not actually taxed on its profits basically this is called a flow-through entity where the profit or loss of the s corporation flows through to the shareholders okay and then the shareholders are taxed on their share of the the company's profits okay so basically c corporation is the only entity type is subject to double taxation all these other entity types are flow through so that leaves us with the llc okay so we've got the llc llc can be a single member llc because it's just one person it's basically like a sole proprietorship only you have actually created a formal entity so this llc it's not the same as a corporation you're not filing articles of a corporation but there is paperwork there are things you have to do to get registered with a state you can create an llc in any of the 50 states okay so you've got a single member llc or you can have a multi-member members are just just like you have partners in the partnership you have members in the llc so the members are the owners so you can have multiple members or just one member llc typically a multi-member llc uh so in terms of what to be taxed you see how i said like form 1065 for partnership form 1120 for c corps i don't have a form here for llc and the reason is that the llc can be taxed a number of different ways okay it can be taxed so a multi-member llc is typically choose to be taxed as a partnership okay but it could also elect to be taxed as an escort i'll talk about that more in videos to come but typically multi-member llc taxes a partnership and single member llc it could be taxed as a sole proprietorship okay now you say we
Thanks Exie your participation is very much appreciated
- Morris Qureshi
About the author
I've studied business studies at Michigan School of Psychology in Farmington Hills and I am an expert in neuroscience in space. I usually feel geeky. My previous job was hazardous waste management analyst I held this position for 26 years, I love talking about deltiology (postcard collecting) and collage. Huge fan of Douglas Urbanski I practice rope jumping and collect petroliana.
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