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Business Structure - Choosing the right Structure for your Business - YouTube
Channel: TRUiC
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- Choosing a business structure
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is an important first step
when starting a business.
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Each business structure has
advantages and disadvantages.
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So which business structure
should you choose?
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In this video, we will go over each
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of the business structures
and give you an approach
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for how to decide on the
business structure right for you.
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Keep in mind this is not business advice,
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but a means to help you explore
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the different business structures
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and help you decide
which is right for you.
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If you are still unsure what
business structure to choose,
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consult with an accountant.
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The first thing we need to talk about
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are informal versus formal
business structures.
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Informal business structures
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are sole proprietorships
and general partnerships.
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Informal business structures
are simple to form
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and thus are a great way
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for testing a business in
a low-risk environment.
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They allow you to see if a
business will be successful
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before committing too much time and effort
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in creating a formal business structure.
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Informal business
structures are also great
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if most of your starting clients
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are people you are familiar with.
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However, informal business structures
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do not have asset protection.
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What this means is that,
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if someone sues you or you
default on a business loan,
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your house, your car or your
personal savings are at risk.
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Asset protection is important
when you are growing rapidly,
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have customers you don't know personally,
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when you are making a
significant amount of money,
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or your business is inherently risky.
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Formal business structures
provide credibility,
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personal asset protection, and
help build business credit.
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So, if you are planning
on having customers
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you aren't familiar with, or rapid growth,
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you'll probably want to choose
an LLC or a corporation.
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As mentioned before, one
of the biggest benefits
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to choosing a formal business structure
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is the personal asset
protection it provides.
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In addition, formal business structures
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also add credibility to your business
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that informal business
structures don't provide.
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Your two options for
formal business structures
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are corporations and LLCs.
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Corporations tend to be more
complex business structures
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and generally speaking
aren't what you want
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as a starting business structure.
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Corporations also have double taxation,
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which means that your
profits are taxed twice.
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Corporations are great if you are looking
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to raise money from venture capital
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or looking to list on the stock exchange.
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Corporations are also able
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to more efficiently carry money over
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between tax years to
reinvest into the company.
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If you need money from
professional investors
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or are looking to carry
money over more efficiently
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between tax years, a corporation
is the better choice.
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LLCs are a much simpler
business structure,
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have a lot less paperwork,
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and are easier to start and maintain.
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They have pass-through taxation,
which means your profits
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are only taxed once, and
they have all the benefits
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of a formal business structure,
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including personal asset protection
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and increased credibility as a business.
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In general, it's more
beneficial to start as an LLC
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when starting a small business
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due to the simplicity and
the pass-through taxation.
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You could always change
your business structure
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and tax classification at a later date.
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If you have decided that
you need asset protection,
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and that the simplicity and flexibility
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of a limited liability
company suits your needs,
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that might be all you need to do.
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You will have a strong, formal
business structure in place,
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registered with your state
and the federal government,
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and you'll be free to
go on and make a profit.
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A business structure is different
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than a tax classification, however,
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and an LLC has three options
for how it can be taxed.
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As your LLC grows and makes more profit,
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you may decide to use a
different tax strategy
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to save money and reinvest profits.
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As we discussed before,
the default tax status
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for an LLC is pass-through.
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For a single member LLC,
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the LLC is treated as
a disregarded entity,
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and the tax is passed
through to the member.
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If there are multiple members,
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the LLC is taxed as a partnership.
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Pass-through taxation
means all distributions,
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which is what payments to
LLC members are called,
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are subject to employment taxes.
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An LLC which elects to
be taxed as an S-Corp
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allows members to become
employees of the LLC,
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so they can be paid a salary
as well as a distribution.
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Both of these are taxed differently.
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It's a more complicated process
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that requires additional
professional accounting services
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and is typically more closely
scrutinized by the IRS.
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So it is only recommended
if you know ahead of time
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that you will be making a certain profit
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and can manage the administrative needs.
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You can watch our video on
the topic for more details.
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An LLC can also opt to
be taxed as a C-Corp,
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which is the default tax
status of a corporation.
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But the same general restrictions apply.
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You should really only consider it
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when you know you will be
making a large amount of money
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which you want to reinvest
back into the company
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in different tax years.
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At which point you should talk
with a licensed accountant.
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You have many choices when
forming a business in America.
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If you are just getting
started and don't have anything
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at stake, an informal business structure,
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like a sole proprietorship or partnership,
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may be sufficient.
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If you are doing business in volume
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or with anything at risk,
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you'll want the asset
protection that is provided
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by a formal structure, namely
an LLC or a corporation.
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Unless you are willing to deal
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with more complicated
administration and taxes,
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or are looking to reinvest money
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in your company or take in investors,
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an LLC is usually the best
choice for small businesses.
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If you know you are going
to make a surplus of money
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and want to save on employment taxes,
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an S-Corp tax classification
might interest you, as well.
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We have, for more information,
as well as tools and guides
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for the business formation
process for each state,
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at our website HowToStartAnLLC.com.
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If you found this video
helpful, give us a like
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and subscribe for more videos
like this, so we can continue
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to deliver useful
content to entrepreneurs.
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I'm Tony with The Really
Useful Information Company,
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wishing you good luck
for your small business.
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