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Written by : Jeramy Heise |
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welcome back item number seven in the legal checklist for startups is to select your type of entity I'm mark Lyda from the laeta law firm let's get started this is one of those really crucial decisions for your business it's the fruit of all of the earlier decisions you made we talked about defining your who defining your where planning your funding all of those earlier decisions now kind of come to fruition with selecting your type of entity let's go through the basic entity types that are generally available in most states the most basic type of entity is called a sole proprietorship this is where it's just you and you have no limitation on your liability in other words if you get sued your personal money is on the line and there's really nothing protecting you but there's also no double taxation so in other words you don't get taxed at the business level and at the individual level it's all you for taxes and liability it's all you this is a very basic way to set up your business and it's becoming less and less common for even individual business owners it's kind of an old-fashioned way to do it the second common type of business entity is a corporation in many ways this is the polar opposite of a sole proprietorship you have liability protection meaning that if you are sued for negligence or breach of contract you generally have a level of protection of your own personal assets so in other words if you are sued your own money likely will not be on the line in that lawsuit however there are all sorts of corporate formalities and extra paperwork that you need to do as a corporation and traditionally corporate Asians are double taxed so in other words you are taxed at the corporation level and then you are also taxed at the individual level that traditional type of corporation is called a subchapter C corporation commonly known as a C Corp there is a more recent development called a subchapter S corporation which is like a corporation except that it has passed through taxation meaning you are generally taxed at the individual level and the IRS does not tax you at the corporate level so that's a little bit of the best of both worlds speaking of the best of both worlds there is also something called a limited liability company LLC this is a state law concept available in many if not all of the states now it gives you the liability protection so that if you get sued your personal assets are not on the line but it also has that passed through taxation it's considered a disregarded entity by the IRS we'll talk in our next video about how to select your tax treatment particularly if you are in LLC LLC's are becoming a more and more common way to organize your business they are not as complicated as corporations they do not have the double taxation that you see with a C Corp but they don't leave you completely vulnerable like a sole proprietorship would there are also partnerships the oldest traditional way of doing a partnership is the general partnership this is what you'd see if it's two people going into business together and saying okay we're 50/50 we're both doing all the work we're both taking all the benefit and we are both assuming all of the liability this is kind of the partnership equivalent of having a sole proprietorship there is also something called a limited liability partnership it is a like a general partnership in that both partners are in it to get there's no differentiation between the levels of responsibility and benefit the benefit of a limited liability partnership over a general partnership is limited liability of course so those are the two types of partnerships where all of the partners are generally equal in terms of their responsibilities and liabilities you may want to set up a partnership where the partners have differentiated levels of responsibility and benefit those are called limited partnerships in a limited partnership you have a general partner who is in front doing the work taking on the responsibility and you have a limited partner sometimes these are just investors backing the business but don't want to be involved in the day-to-day operations LP limited partnership is the basic way to separate the roles of the partners what it's lacking is liability protection so a new type of partnership has developed and that is called a limited liability limited partnership ll L P it's a limited partnership in the sense that you can differentiate between the partners but it's limited liability if the business gets sued your personal assets will not be on the line with exceptions but you do have that protection that you don't have with a limited partnership one last thing on partnerships just because you're going into business with a partner or a group of partners does not mean you need to choose one of these types of partnerships you can be an LLC LLC's offer either single member LLC's where it's just you or multi member LLC's where you have a group you're doing business with you can also become a corporation so just because you're going into business with a group does not mean you necessarily need to choose a partnership okay so just to review those basic types of business entities you have a sole proprietorship where it's just you and you have no double taxation but you also have no liability protection you have corporations which are more complicated but do offer some liability protection see Corpse are better for large businesses but do have double taxation s Corpse do not have double taxation then you have LLC's limited liability companies those can be single member or a multi-member and they're a great way to have your cake and eat it too they offer some liability protection without the double taxation and then finally you have the various types of partnerships that we discussed this is obviously a very crucial decision for your business and something that will require a lot of thought as always I suggest you do your homework and consult a licensed professional in your state next up we have step number eight in the legal checklist for startups register with your state thanks for watching and please remember to click like and subscribe to help keep legal education accessible I actually find this really interesting go on about it all day
Thanks for your comment Julius Suozzo, have a nice day.
- Jeramy Heise, Staff Member
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Thanks Reina your participation is very much appreciated
- Jeramy Heise
About the author
I've studied confucianism at Carlow University in Pittsburgh and I am an expert in clinical neuropsychology. I usually feel dark. My previous job was watch repairers I held this position for 5 years, I love talking about pressed flower craft and ice fishing. Huge fan of Chris Pratt I practice acrobatic gymnastics and collect bazooka joe comics.
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