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do I need to form an LLC for my business do I even need an LLC to start a business in this video i'll be super simplifying how to choose what type of business to form and when to form it Amanda here from the business finance coach where I'm simplifying the tools of business so that you can succeed if any of this sounds like stuff you could use in your life you can join us here in this community by clicking the watermark in the bottom right corner of your video screen and subscribe while still watching this video back to do I even need an LLC when to form what type of business and why to four-bit what does it do for you and when why which one to choose all of it super simple in a few minutes so first things first do I need an LLC to start a business no you do not need to form any type of business you can just start a business you can sell something to someone and you can just do it you don't have to form a business at all you can just be you and you can sell something and when you do that you are a sole proprietor without forming anything you are automatically a sole proprietor unless you're working with someone else and you guys are partners then you have a partnership which can simply be based on a verbal agreement even though you didn't form any business now that being said what you don't have to actually form a business you will just be a sole proprietor or a partnership you still may have requirements to register with your state also if you've thrown up a name Amanda's accounting services for example you would need to register that name under what's called a DBA or a trademark with your state and you can just search your state website you don't need to use all these LegalZoom and different websites see you're just giving them the same information and some extra money to do the same thing you could do on your state website save yourself a few dollars that's what I do for you here head on over to your state website so we covered that you do not have to ever form a business a legitimate business you automatically do that by selling things and starting a business you're either a sole proprietor or a partnership that being said you can also form a business entity through a state government this is a legal entity just like you are a legal person under legal law you can create a separate entity from yourself this makes your business separate from you so what does it mean to go form an actual business entity with a state government your state government presumably where you're working that's where you want to form to answer this question when to form the business we first need to look at what types of businesses can be formed through state governments because it's going to depend on what type of business structure you choose as to when you should form it we are gonna come back around to the LLC as being the primary recommendation in this video but this will help you understand why and understand so much more about the business we have a few different options okay the LLC a formal partnership for which there are many types limited liability partnership general partnership corporation or a non-profit those are kind of the basic types of businesses that you can form so which one of these businesses would you choose this comes down to two things it comes down to primarily your business model how your business is structured for example if you're one person just providing a service as a contractor you would never want to form a corporation and you're not allowed to form a partnership because you're one person so your only other option is the single-member LLC and the LLC really is the go-to for any small business that's because a corporation is a very complex structure you have to use a Board of Direct and you have owners that buy stock in the company and are the owners who are separate from the managers so when would you use a corporation you use a corporation if you are going to get funding in the business and typically that's a general rule you're gonna get a lot of funding into the business and you're doing something where you need a lot of people involved in the business mind you this is also how many founders get fired from their own business ie Steve Jobs remember Apple so for most small business owners the corporation is out of the picture I see way too many small businesses going out there and forming a corporation because in the past that was the only option and so yeah you had to do it if you wanted to be a legitimate business you're making legitimate money these days the LLC the recent innovation of the LLC has declared the corporation irrelevant for us small business owners you don't need it and it really complicates things you have to be willing to spend seriously 10 grand to start a corporation so for most small businesses the LLC makes a lot of sense and generally if you have two or more members you would still do the LLC over the partnership for what I'm gonna talk about next but the LLC really is the replace all its much easier to maintain operate form and so it's really replaced the corporations and partnership structures especially for the small business owner okay so the big question when do you form an LLC for your small business from the technical standpoint if you have a lot of assets house retirement plans those sorts of things the whole entire purpose of legal business entities was to protect your assets and allow the business to take out loans that you aren't responsible for now that's no longer the case for small businesses because no one gives you a loan without you personally backing it anyways so that's pretty much irrelevant to the conversation however you still have assets that you want to protect you also might be interested in protecting your future earnings because if you mess up if you are sued and they look at the money you have and say oh you don't have any they say well you're gonna earn some in the future and so we can attach to your future earnings so that brings me to the second consideration of when to form an LLC if you're in a high soo industry which I mean if you're doing things right you really it really shouldn't matter you shouldn't be sued either way but there are certainly some industries that are higher sued and this is kind of the legal recommendation if you have assets and things you want to protect or if you're in a high soo industry maybe medical related or construction actually I think is pretty high then you would want to consider forming the LLC right out the gate to protect you what happens the LLC you sued as long as you've maintained it properly which I will talk about next then you would just close the business if they attach to the LLC's future earnings it's a very semantic system but you got to check your boxes and dot the t's and eyes so in reality though I find most people form an LLC because they want an LLC on the name of their business and they want to be like look I'm legitimate and it is true that it does give you a little bit of you know you've done the steps you're here to stay you're around but I don't really recommend forming an LLC before getting some clients becaus
Thanks for your comment Ralph Whyne, have a nice day.
- Janette Lohry, Staff Member
are you thinking about starting a business in 2020 well today I'm going to teach you the five things that you need to know to help you decide whether or not an LLC is the right entity choice for your business let's do this hi my name is Jim Hart and I am your online business lawyer I'm here to teach online entrepreneurs and small business owners what they need to do to protect their business so they can focus on what they do best and that is building something that truly matters in the world today we're gonna be talking about five things that you need to know about LLC's to help you decide whether or not an LLC is right for your business so let's get into it number one let's start with the historical context behind LLC's so LLC's were started in Wyoming way back in 1977 and they were started as a way to bridge the gap between the traditional corporation and the partnership there's a lot of benefits to both of those entities but sometimes the things that you get from a corporation are not necessarily the things that are helpful and some of the disadvantages to a partnership are things that you would need a corporation for so so basically the Wyoming legislature decided to merge those two things into an entity called the limited liability company now when this was initially formed the IRS didn't know what to do with it because they didn't know how to tax this entity because it was something completely new and unique that nobody ever seen before and so for a while they tried to tax them as corporations then they had some tests that they evolved to decide well maybe we'll tough to tax them as a partnership or a sole proprietorship we weren't really sure what to do up until about twenty years later in 1996 the IRS figured out that we'll just say you know what you decide how you want to be taxed and at that point there have been a couple other states that enacted statutes for their own limited liability companies by 1996 all 50 states have enacted statutes that allow for the creation of a limited liability company now the one thing you need to know is a limited liability company is a state specific entity which means it's not a federal thing this is a state specific thing so each state is different each state is unique and I've talked about this before in other videos but it's really important that you understand that in most cases I would say in 99% cases you're gonna want to form your business entity if you do decide to go with an LLC in the state where you live now if you have questions about the specific requirements in your state you're gonna need to direct them to an attorney who is licensed in your state but today's video we're just gonna talk a big-picture the things that you need to know that are generally specific to pretty much all 50 states when it comes to limited liability companies alright so number two let's talk about what is an LLC well let's talk about what an LLC is not it is not a corporation it is a company that is organized to provide limited liability to its members who in the case of an LLC are not considered shareholders they're called members those are the owners of the LLC that is a really important distinction that you must be aware of if you decide that an LLC is the right entity for your business in general LLC's are much more flexible than corporations this is in large part because you can draft an operating agreement that dictates how you're going to run your business and all the rules that you're going to follow and this operating agreement can supersede the state statute that the govern how LLC's are to be run so basically what this means that is if you do not have an operating agreement then your LLC is going to be governed by your state statute wherever you have formed your LLC those are gonna be the default rules and I would tell you nine times out of ten those default rules are not going to be sufficient for you with a little water today so where was I basically if you do not have an operating agreement in place then the default rules in your state are gonna dictate how your LLC is going to be governed and how it needs to be run as I was saying nine times out of ten those default rules are not going to be sufficient for what you're trying to do with your LLC so in most cases you're gonna want to have a rock-solid operating agreement in place that is going to be the bedrock of your limited liability company because it's gonna be basically the foundation that can provide all the rules procedures and things that you need to know to run your business effectively alright so number three let's talk about how an LLC differs from a corporation and there's a number of different ways it differs we've already talked about flexibility an LLC is much more flexible than a corporation we've talked about the names of the people that own the business with an LLC we're talking about men with a corporation we're talking about shareholders or stockholders when you're talking about an LLC the officer director of the equivalent of that so for time I'll step back for a corporation you have officers and directors those are the the officials that run the business that are separate apart from the shareholders so you have centralized management that's one of the core fundamental principles of a corporation with an LLC you don't necessarily need to do it that way but you can and if you do decide to have centralized management what you would have our managers and so that would be a manager man managed LLC versus a member managed LLC and that is a core distinction that a lot of people don't really understand and don't really consider when they're setting up their operating agreement so when you form an LLC you get a membership interest in the LLC or a certificate of membership versus a stock certificate or a stock in a corporation if you have a corporation when you distribute profits those are called dividends with an LLC and you distribute profits they're gonna be called distributions now some people will call them dividends and things like that but the the legal term will be a profit distribution when you have an LLC when you form a corporation you file with the Secretary of State's office in your state what are called Articles of Incorporation when you have an LLC you're going to file articles of organization that are telling the state that you're organizing your company as a limited liability company we've talked a great length about the importance of having an operating agreement when you when you have an LLC if you have a corporation the the similar document that you're going to have that are called the bylaws of the corporation now finally one big thing that an LLC has that a corporation does not have is what is called charging order protection this is really important and something that a lot of people miss and what that means if you if you have an LLC and you have this charging order protection that is going to protect the LLC from the member creditors in other words the people that a member of the LLC might owe money to they can sue the LLC to get it that membership interest but all they can get is what's called a charg
Thanks Chaya your participation is very much appreciated
- Janette Lohry
About the author
I've studied linguistic typology at Western Washington University in Bellingham and I am an expert in computational fluid dynamics. I usually feel drained. My previous job was school plant consultant I held this position for 4 years, I love talking about card games and mountaineering. Huge fan of Joseph Gordon-Levitt I practice surfing and collect first day covers.
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