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Written by : Leonel Cittadino
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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 our informal versus formal business structures informal business structures are sole proprietorships and general partnerships informal business structures are civil 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 to 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 Sue's you or you to fault on a business loan your house your car or your personal savings are at risk asset protection is important we are growing rapidly have customers you don't know personally when you're 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 corporation as mentioned before one of the biggest benefits is 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 LLC's corporations tend to be more complex and 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 LLC's are much simpler business structure have a lot less paperwork and are easier to start and maintain they have passed 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 passed through taxation you could always change your business structure and tax classification at a later date if you've decided that you need an 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 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 passed through four single-member LLC the LLC is treated as a disregarded entity and the taxes 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'll 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 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're doing business and 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 raishin unless you're willing to deal with more complicated administration and taxes or are looking to reinvest money in your company or take on investors and LLC is usually the best choice for small businesses if you know you're 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 offer more information as well as tools and guides in the business formation process for each state at our website how to start an LLC 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 Toni with a really useful information company wishing you good luck with your small business you
Thanks for your comment Joseph Levatino, have a nice day.
- Leonel Cittadino, 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 Mohammad your participation is very much appreciated
- Leonel Cittadino
About the author
I've studied green economics at Bethune-Cookman University in Daytona Beach and I am an expert in structural mechanics. I usually feel crazy. My previous job was occupational therapy assistant I held this position for 25 years, I love talking about quizzes and juggling. Huge fan of Ray Romano I practice bowls and collect scouting memorabilia.
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