The Different Types of Business Entities in the U (Video-Text).docx

\[00:00:00\] 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, 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\'...

\[00:00:00\] 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, 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, you\'re a sole proprietor. So if you\'re a sole proprietor, then what you\'re going to do is you\'re going to track 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 \[00:01:00\] 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 you 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, uh, 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. Okay. Do you even have limited liability partnerships? There\'s 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 be, 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 \[00:02:00\] 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 filed for the, for the partnership in terms of the IRS to report the profit or loss of the partnership. And then whatever your partner, so let\'s say you\'re a partner in the partnership. Uh, your share of the profit or loss will end up being reported on, on your 1040. Yep. 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 a 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 got a \[00:03:00\] 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 biggest disadvantages is double taxation. And I\'ll talk about this more in the videos to come, but basically the C corporation, the profit or losses. So let\'s say C corporation has a hundred 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, a corporation, a C corporation files form 1120, uh, to report their, their tax profit 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 \[00:04:00\] of restrictions. on who can be a shareholder in an S corporation, how many, for example, you can just have a hundred shareholders. You can\'t have like, you know, 10, 000 shareholders. So if you think 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 a hundred shareholders in Microsoft. So you\'ve got a 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. You have a lot of restrictions on an S corp. So 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, if you violate the rules. Now, Form 1120 S is the tax return filed by the S corporation. And long story short, you said, well, why would someone have an S corporation instead of a C corporation? An S corporation does not have the double tax. There\'s no double tax with an S corporation. Because even though the corporation files \[00:05:00\] form 1120 S, the S corporation, 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. And then the shareholders are taxed on their share of the company\'s profits. So, basically, C corporation is the only entity type that 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 with 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 \[00:06:00\] one member LLC. Typically, a multi member LLC. So in terms of what to be taxed, you see how I said like form 1065 for partnership form 1124 court 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 like 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 could be taxed as a sole proprietorship. Okay. Now you say, well, what is the difference? What is it? What is with this, uh, LLC versus, uh, you know, why, why would you have an LLC? If you\'re just gonna say, I just want to be taxed as a partnership, why wouldn\'t you just have a partnership? Because, LLC, the LL stands for Limited Liability. Okay, limited like legal liability. So if you are a sole proprietor, so let\'s just take a single member LLC versus a \[00:07:00\] sole proprietorship. If you are basically, let\'s say you just created a sole proprietorship, uh, let\'s say you\'re selling dog food. Okay. You\'re selling dog food to people and, uh, somebody\'s dog gets your dog food and dies. Uh, you know, they\'re, they\'re basically, uh, the, the food, there was some kind of issue, some health issue. Right. And you killed this dog, right? Not intentionally. Let\'s hope it was an accident, but this, this dog owner is not going to be happy about this. They\'re going to try and sue your business. Okay. But with sole proprietorship, you and the business are one in the same. Now you might say, well, hey, hopefully I have some insurance here, uh, for the, you know, that I foresaw that I might accidentally kill a dog, but in any event, when you\'re a sole proprietor, Your personal assets could be at risk. If they sue you for millions of dollars, they could potentially take your house. So in LLC, if you have a single member LLC, even though you\'re being taxed as a sole proprietorship, you basically get this legal protection where you say like, okay, well they can\'t come after my personal house. They can just \[00:08:00\] come after the assets of the business. And we\'ll talk about all the different tax implications and non tax considerations and choosing different business entity types in the videos to come.