 Understanding business types. Which legal structure is best for you? Okay, so you've started a business and you have to get a business license and you don't know what to get. Well, you're gonna want to watch this video to the very end because I'm gonna go through each legal business structure so that you'll know exactly what will fit your situation. I'm not a attorney, you should consult your employer. I'm not giving you legal advice, I'm just gonna explain what each one of these are and you can make your own decision in the end and I think you're gonna be a little surprised when you hear the last one. All right guys, let's get started. And don't forget, don't forget, make sure you hit the subscribe button down there, turn it from red to gray, hit the bell, turn on all bell notifications so you're notified every time I go live or I upload a new video. All right, let's get into this. Legal structure, oh my God, we don't wanna get into this, do we? We have to, it's something we have to do, but once you figure it out, you can move forward and that's what you need to do. Now keep in mind guys, you can change your legal structure down the road, it's not like you have a certain legal structure and you can never change it again. You do have the ability to change it. I've started off with one type and switched over to other types and I'll talk about that also in this video. Let's check it out. Now first off, why are there other legal structures? Why isn't there just one? Well, because they serve different purposes and based on your business, you're gonna wanna check these out. Let me put a few pointers up on the screen here real quick. First thing, there's plenty of benefits of incorporating your business. Some of the most important being protection of your personal assets, transferable ownership, potential for lower taxes. It's easier to secure business funding and separate credit rating regardless of owner's personal score and of course simpler to create retirement plans. So let's talk about the different types of legal structures so you can decide which one's best. Now the first one that comes in mind, the simplest and easiest one is just a sole proprietorship. Basically a sole proprietorship doesn't distinguish between the business and the individual that owns it. It's just all one thing. So whatever affects the business affects the individual. Whatever affects the individual will affect the business. A sole proprietorship is probably one of the most popular type of businesses in the US. They account for 40% of all small businesses but a lot of sole proprietors will tell you they only depend on it for about 60% of their income. Now I wanna throw some of the advantages up on the screen here real quick. Let's check these out. First one is lower taxes. With a sole proprietorship, you only have to do your taxes once whereas a LLC requires that you file state and federal taxes separately. The company doesn't file taxes but the owner does. Now complete control of your business because you don't have any partners or investors to consider, it's all you. You get to make every business decision the way you wanna make it. It's also easy to change the structure in the future. So if you start off as a sole proprietorship and you're not stuck with that company structure, you can change to a different type of business at a future date whenever you're ready to do so. Now the disadvantages of course are personal liability. With a sole proprietorship, taxes need to be filed under the individual who owns the business. This adds risk because there's no distinction between the individual and the company. So the individual is personally liable for everything that the company does. Thus the individual's personal assets are on the line. You could lose everything in a sole proprietorship but if you don't have a lot of risk, then you don't have to worry about it. But if you do have some risk, you may wanna look at some of the other alternatives. Next one I wanna look at is a partnership. Now let me throw up on the screen the two different types of partnerships so you can decide which one may be best for you if you choose to go this route. The first one is a general partnership, a GP. A general partnership assumes the business is either evenly divided or split into percentages that have been documented and agreed on beforehand. The next one is a limited partnership. A limited partnership can limit both control and liability for specific partnerships are based on the pass through method of calculation of income. So whatever the individual's tax are calculated on, so is the business, it's a pass through tax. Now let's look at some of the advantages of having a partnership. The first part is you share the responsibility. There's a saying about power in numbers and you could say it applies to partnerships. Rather than bearing all the burden yourself, you can share it with your partner. This also grants you more access to capital in many cases. Next one, it's simple to start and manage. It's relatively easy to establish an official partnership and in terms of ongoing management, you have fewer tax forms than other business structure. But there are a couple disadvantages I want to bring to the forefront. So let's check those out real quick. Partner conflicts, okay, here it is. In most partnerships, both parties don't always agree on every single decision. Many compromise, but over time, this can cause conflict between owners and within the company. It's important to make sure that you and your partner are on the same page when you enter into this agreement. Now keep in mind also, if it's a husband and wife or relatives, brother, sister, mom, dad, whatever, and you have a conflict, you also have a business conflict here too. So keep that in mind when you're setting this up. The other thing is personal liability because taxes for partnerships don't include a distinct separation of the business from the individual. Owners assume more personal risk, plus owners pay individual taxes instead of the business paying taxes, and this can result in a greater amount owed. The next one up is a corporation. Now the corporation is considered its own entity, okay? So that protects the individual from any liability that the corporation may have. None of those problems will pass through to the individual unless it's some rare, rare case. But for the most part, it's a separate entity altogether. Now the other advantage to corporations is that if you were to sell the business, it's a whole lot easier to transfer it to a new owner. It's very simple to do so, but you're also gonna be responsible for filing local, state, and federal taxes on a corporation, which other business types don't have to. Now keep in mind corporations may or may not pay lower taxes than an individual. It's a good idea to check with an accountant to see what it's gonna be like in your state, but it could actually save you money on taxes. Now let's look at some of the advantages. I'll put that up on the screen here real quick. The primary benefit of forming a corporation is that regarding the corporation's assets or debts, a shareholders' personal property is protected. For example, if a customer sues a retail corporation wins, the corporation could be forced to pay. If the corporation doesn't have enough money to pay, the liability isn't passed onto the shareholders so they wouldn't have to make up any of the difference. That person who sued them just doesn't get all their money. Here's the next thing that is kind of an advantage. Raise capital through shares. Corporations can sell shares to raise capital. This makes corporations more attractive to some workers because it signifies stability and reliable compensation. If the corporation runs out of cash, it can always sell shares. Now of course, there are disadvantages. Let's check out some of the disadvantages real quick. There is more work to incorporate and maintain. Generally speaking, corporations are more difficult to form and manage than other business entities. There's more setup and you have to carefully maintain the business as a separate legal entity every step of the way. Personal liability isn't completely eliminated. If the corporation's records are improperly managed, you could be more personally liable than expected. When attorneys sue corporations and prove the corporate records weren't maintained and the corporation wasn't acting as a separate legal entity, they've pierced the corporate veil, they call it. In other words, you lose protection for your personal assets. Next up is an LLC that's a limited liability corporation. These are actually a form of a corporation but it's a little bit different. I'll put my best explanation up on the screen here real quick. Owners frequently called members pay taxes on LLC profits directly. The LLC itself doesn't file taxes as a separate legal entity. LLCs with at least two members get the option to be taxed like partnerships or corporations if they prefer. This taxation election eliminates the separation of business and personal taxes. Now, LLCs are a new type of formation and since the 80s, the other types of corporations have seen a decline whereas LLCs have actually grown in popularity. Now, depending on the state, LLCs may have a limited lifetime and what I mean by that is a member of an LLC, they can dissolve that actual corporation as soon as they actually leave the company. Let's check out a couple of the advantages real quick. I'll put them up on the screen. A simple management LLC require a lot less record keeping and have fewer profit sharing requirements than corporations in particular. It's a relatively simple and straightforward business structure that works for small, medium and early stage businesses. Personal protection with an LLC or personal assets have a level of protection that reduces your liability but of course, there's going to be disadvantages. Let's check those out. I'll put them on the screen here real quick. They're not available for all businesses. Each state has parameters around which types of businesses and industries are eligible for LLC status. Commonly prohibited businesses include banks and insurance companies. Special rules also apply for foreign LLCs. Also, state and federal taxes, LLC members will have to file additional forms for both federal and state taxes depending on the number of members, local laws or even the LLC's articles of organization. Often, the member of an LLC pay payroll tax too. Now, what's the best structure for you? That's not an easy question. I will say most online retailers, people who are selling online, generally start with a sole proprietorship. As they grow and they have more and more liability and possibility of somebody suing them, then they switch over to a corporation. So it really depends on your individual situation. You've also got to look at your personal liability. If you don't feel like you have a lot of personal liability in the beginning, that's cool. Do a sole proprietorship. But as your liability and as your risk increases, as your business increases, we sell food, so we're a corporation. We sell food, so that could be dangerous. If somebody gets sick, they never have, not going wood, but if anything happened like that, we have to have product liability insurance and all these other things that protect our corporation. Now keep in mind, if you're a sole proprietorship, you can't handle hiring employees. They won't let you do that. So you can't have any employees because it's called a sole proprietorship. So as soon as you decide you need to start hiring people, you're gonna have to change your business structure. And of course, likewise, if you have a sole proprietorship and you bring in another partner, somebody who's gonna work with you and own part of that company, you're no longer gonna be a sole proprietorship. So you're forced into a partnership or a corporation. You also wanna think about business funding. If you incorporate your business, you can build business credit, which is separate from your personal credit. And they don't get hooked up at all, okay? So it doesn't matter what your personal credit is. It doesn't matter what your business credit is. They don't affect each other. And you can establish business credit even if you had bad personal credit by people loaning money or you having credit extended to your business. Now we'll add to this. It's really gonna be dependent upon your state. So you're gonna wanna search your state for the state incorporation rules and what they require and what they don't require and see what's available to you. Sometimes narrowing down what's available to you will tell you exactly what type of business you need to be. Now, this video is important. It's really important, you know? It's not the most exciting, sexy stuff in the world, but it's stuff that you need to know, guys. And if you're running a business online, then you need to get the right type of licensing, the right type of business. The funniest question I always get is with an online business, do I need a business license? Yeah, it's called an online business. There's no difference. The only difference is you're selling online. It is a business. So don't think that because you're selling stuff online, you don't need a business license. You need a business license most definitely, 100%. You gotta have that. If you're taking money from other people and selling them stuff or products or digital products or services, you need a business license. Now, I hope this helped you out a little bit. I hope you understand it a little bit better. For more information on this, I would check with an attorney. Before you do any of this, just get an attorney, get a consultation, say, hey, this is what I'm thinking about doing. What are your recommendations? Make sure when you're talking to an attorney that you talk to an attorney that knows about this. Be very careful. There's some attorneys that will do anything, anything. You don't want those attorneys. You want the attorneys that specialize in setting up business structures. That's super important. Now, if you're not big right now, you're just starting off your business, go grab you a sole proprietorship if it's just you and start your business. Not a problem. And that's not legal advice. I'm just telling you the easiest thing to do. I actually own sole proprietorships and I also own corporations. So it really depends on the business that you have too, which one is gonna be more suitable. Thank you so much for watching this video. I hope you got something out of it. If you did, give me a thumbs up down there. I would greatly appreciate it. I also have a $97 course that's below in the description. All you gotta do is click and learn. No credit card required. Did you hear that? No credit card required. What could be a better deal than that? Matter of fact, it's free. That's a, free's good. Free is good. You gotta grab it. Get that course down there. Thank you so much for listening. Don't forget, subscribe below. Hit that button if it's red, turn it gray. 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