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Sole Proprietor vs. LLC vs. S Corporation vs. C Corporation | Legal & Tax Differences - YouTube
Channel: Navi Maraj, CPA
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in this video I'm gonna explain the
difference between a sole-proprietorship
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and I'll see and a corporation from both
a legal and tax perspective
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my name is Navi Maraj I'm a certified
public accountant and we've got a lot to
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cover so let's get into the video all
right so no matter where you're watching
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this video whether it's on your various
social media platforms you can always
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find this video on my website which is
navimarajcpa.com a quick disclaimer
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before we get into the details I am NOT
an attorney however I am a certified
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public accountant so I can speak to the
tax implications of setting up these
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various legal entities but I have
consulted with attorneys across the
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nation and I'm pretty sure they would
agree with most of the things that I
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might touch on from a legal perspective
but you would want to consult with your
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business attorney to see if they agree
with what I'm saying here so as I
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mentioned when you form a business you
are actually making two decisions you
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are making a legal decision and a tax is
decision so let me kind of lay the
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foundation for this video and that will
kind of make a little bit more sense so
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when you form a business you are going
to be treated as the ways up above here
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from a legal perspective and then down
here are the different ways you could be
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treated from a tax perspective all right
so up here I have the different legal
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entity types and down below the
different tax types let's talk about the
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colors for a second the green is going
to indicate how this particular entity
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is taxed by default what I mean by that
is you know there's no box that says hey
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check here to be treated this way this
way from a tax perspective the blue
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represents how that entity type could be
treated from a tax perspective and I'll
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get into those details here in a second
now there are some less common
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structures that I didn't put on here and
you can also have an LLC treated as a
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c-corp but that's not very common and
this video is for your
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average small business owner so let's
get into the details so the sole
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proprietorship you can form a sole
proprietorship by simply walking into
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your bank and if your name is John Doe
for example you could talk to your
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banker and he or she will open up an
account call john doe's landscaping if
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you're in the landscaper and you could
just go out and start mowing people's
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lawns if you want now I don't
necessarily recommend that because that
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the sole proprietorship doesn't have
what's called limited liability
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protection so if someone Sue's your you
know john doe's landscaping your
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individual assets as john doe the
individual are also now at risk okay
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so how is this entity treated the sole
proprietorship treated from a tax
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perspective well its treated as a sole
proprietorship but what I mean by that
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is you are going to complete you or your
tax professional is going to complete a
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Schedule C and attach it to your form
1040 individual tax return what I want
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to help you understand is that there's
no separate set of tax documents that
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you're completing or having your
accountant complete when you form our
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sole proprietorship it's an additional
Schedule called Schedule C that's
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attached to your individual tax return
now let's for a brief moment talk about
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these entity structures on the
right-hand side so I mentioned that the
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sole proprietorship does not provide
limited liability protection these
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entity types may and I say me because
you want to treat them as though they're
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separate entities so you don't want to
come in commingled funds between your
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business and personal you want to use
your entity name on all your marketing
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documents you might if you're an LLC
have a articles of organization of
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course but also an operating agreement
maybe you have a Board of Advisors you
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take meeting minutes when you have
business discussions even if it's by
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yourself I know that sounds a little
silly but yes you want to record meeting
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minutes and all those things will help
you you know prop up and support that
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yes your LLC is actually different than
you as an individual but let's kind of
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break these down one by one so here I
have SM l ec LLC rather or s MP LLC this
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means that s M stands for single-member
so you're a one-man shop if you will and
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how this is treated is by default is as
a sole proprietorship so it's exactly
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the same as this entity type the sole
proprietorship so you are simply adding
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Schedule C to your individual tax return
a single-member LLC by default is taxed
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the exact same way a sole proprietorship
all it does is give you that limited
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liability protection let's move on oh
briefly let's touch on the P LLC so a
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lot of you are probably like what is
this P LLC I've never heard of it P LLC
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stands for professional limited
liability company so who should be
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forming a PLLC someone who holds a
license with the state that they're
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forming the entity in most of your
states across the nation support a plc
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so if you are a certified public
accountant or an attorney or a physician
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or a realtor or maybe a general
contractor holds a license you should be
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forming a professional limited liability
company if it's available in your state
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all right moving on mmm LLC that stands
for a multi-member LLC the owners of an
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LLC are called members now the default
tax classification for a multi-member
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LLC is a partnership and so you would
file a separate set of tax documents
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call its form 1065 and that's the tax
return a partnership completes or your
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account would complete for you there's
no sort of I mentioned this a moment ago
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there's no check the box when you're
forming your multi-member LLC for you to
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know that hey it's going to get treated
this way from a tax perspective this is
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just information that your accountant
should
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advising you on and let's touch on the
c-corporation a lot of you might have
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heard this this is your you know
Amazon's of the world or C corporations
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but if you are a professional just like
I mentioned here the P LLC if you're a
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professional and forming a C corporation
you're a corporation is actually called
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a professional association so again your
attorney your realtor
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let me touch on the Realtors for a
second many Realtors have some you know
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top producers in their office who have
pas but you know the corporations have
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been around and existence much longer
than the LLC's have and that's why they
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may be doing so it may not be right for
you you might prematurely create a PA if
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you're if you don't have a conversation
with your attorney or CPA so how is the
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corporation treated for tax purposes
well it's subject to double taxation
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which means that the profits from the
corporation are going to pay tax when
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they form file file form 1120 and then
the shareholders the owners of a C
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corporation our cars are called
shareholders and they will then again
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pay tax when they receive distributions
from the C corporation or the
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professional association so how can
these entities be treated as S
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corporation so quick point I want to
make is you can't go to your state and
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say I want to form an S corporation
these are the entity types that you
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would form with your state from the
single-member LLC on this way I
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mentioned that there's no documents with
the state that you would file for the
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sole proprietorship and so why would you
even want to form an S corp well I have
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a whole nother video that I'll make on
that topic but in short if the profits
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of your business so you have your
revenue or your sales minus your
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expenses if that number is greater than
about 40,000 or so forming a S
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corporation or electing to be treated as
an S corporation can save you thousands
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of dollars in self-employment taxes not
hundreds of dollars thousands of dollars
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it's a very powerful thing and so again
once you cross that 40
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another threshold you may want to have
your entity instead of receiving its
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default tax treatment be treated as an S
corporation so a single-member LLC can
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be treated as an S corporation a
multi-member LLC can also be treated
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this way and your C corporation or
professional Association can be treated
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this way it's very rare that you know if
you kind of jump the gun and you're not
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sure what you're doing and you form this
type of entity you would probably you
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would likely never have it treated the
default way you would have to treat it
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as an S corporation so it's not subject
to double taxation but if you're new in
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business and you do that prematurely you
might have additional fees so that your
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accountant might charge you an
additional fee to prepare that tax
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return
there is also payroll that you must
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institute because you must pay yourself
a quote-unquote reasonable salary salary
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when you have it in S corporation so you
know you need to consult with your tax
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or legal professional and you know try
not to prematurely do this this is not a
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recommendation that I'm making but a lot
of entrepreneurs world especially if
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they're a one-man shop form a
single-member LLC or P LLC and be
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treated as a sole proprietorship and
then once they cross that $40,000 in
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profit threshold where they can save
thousands of dollars in self-employment
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tax that's when they'll make this S corp
election and have their LLC treated as
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an S corporation for tax purposes now I
want to touch on something that's very
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important that a lot of new
entrepreneurs don't understand when are
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these different tax documents do the
sole proprietorship is due at the same
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time you're forming your sorry filing
your individual tax return so typically
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that's April 15th and you can form an X
file an extension to have that do you
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know six months later and that's so due
April 15th all of these other entities
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so if your business is taxed as an S
corporation or a partnership or a C
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corporation those tax returns must be
filed by
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March 15 a month earlier the penalty for
not doing that is pretty hefty the IRS
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will charge you approximately two
hundred dollars per month per owner that
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you don't file these tax returns on time
so let's use the example of a
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multi-member LLC so by default treated
as a partnership
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well you don't file that on time you'll
have two people so that's $400 per month
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that you're late in filing that return
so that covers the major topics I wanted
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to touch on on this video how are these
treated from a legal perspective and
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these different legal entities and what
is the tax perspective there is a ton of
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misinformation out there from you know
youtubers and bloggers and I wanted to
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clear up all those misconceptions that
are out there you know the goal was to
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sort of create that definitive guide for
the entrepreneur to use on you know what
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they should form on when creating their
business but I would urge you to contact
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either an attorney or CPA or both to
make sure that they are an agreement
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with what you're about to do because you
could cost yourself potentially
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thousands of dollars after the fact
after you've formed your LLC and it
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might be too late if you have a comment
please or a question please leave it in
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the comment section below
perhaps I'll create another video
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answering your question thanks so much
for listening and I'll see you in the
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next video
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