What's the difference between different types of entities. I mean what makes a sole
proprietorship different than a partnership or a partnership different than a corporation
well it makes a big difference and a lot of things when it comes to your liability as well
as your ability to be able to get credit and financing for your business and in
this training we're going to talk about the difference between business entities and
all the information you need to know to choose the right entity for your business. We're going to talk
about which entities are looked at very negatively by lenders and credit issuers and must be avoided
at all costs, we're going to talk about the top entity type that you want to choose that lenders
and credit issuers love and that show that you are a really fundable credible business. We're going to
talk about other nuances of entities that a lot of people do not know about we're going to talk
about all the things you need to take into account when choosing the right type of entity and we even
talk about the ability to choose entity types if you got this wrong. And if you stick around to the
end of this training I'm going to get you access to our step-by-step business credit building guide
which even has even more information on other aspects of fundability you're going to want to
know to get maximum funding for your business we've got a lot to cover. So let's dive in.
So per the IRS, there's really three main types of business entities look first we look at being
a sole proprietorship we also have partnerships and we also have corporations. Now you're obviously
familiar with LLC's as well but they're not seen as an official entity type per the IRS
but don't worry we're going to talk about LLC's as well. So let's get started by talking about
sole proprietorship so a sole proprietorship you and the business are one and the same as a matter
of fact if you don't choose a DBA really your name is the business name and a sole proprietorship. So
a lot of problems here and definitely an entity type that you want to avoid at all cost first
of all sole proprietorships aren't really seen as real serious business entities by
anybody in the credit financial space even SBA themselves SBA refers to a sole proprietorship
as basically a business owner or entrepreneur experimenting with a business concept. So that's
how negatively it's looked at is that SBA even well this is somebody testing a concept not even
a real business and exactly seeing the same way with lenders and credit issuers that they see
that you're a sole proprietorship in a lot of cases you're automatically going to get
denied a lot of lenders and credit districts will not lend they will not issue credit
to a sole proprietor because they just don't see you as it really having an official
legitimate business. The other thing about sole proprietors that you want to know is if you're
a sole proprietor then that means that you're covering all the taxes the expenses for the
actual business so you and the business are one of the same the business isn't paying its own taxes
you're paying the taxes as well and the other thing to keep in mind is you are the business
so you are 100% liable for what happens in that business. Now don't get me wrong I'm not
an accountant and I'm not an attorney and this isn't legal or accounting advice matter of fact
it might make sense for you to talk to an attorney, or talk to an actual accountant for that kind of
advice but you need to know that being a sole proprietorship you are the business. So if anybody
comes after the business well they're suing you as well there's really no layer of protection
to prevent that. So a lot of reasons you want to avoid being a sole proprietorship it's way harder
to get access to credit and financing you are liable for what happens in the business and it's
not the best choice for tax purposes either, so this is definitely the one you want to make sure
that you avoid. Now let's talk a little bit more about partnerships. Partnerships aren't
necessarily frowned on by lenders and credit issuers but they're not looked at as the most
highly regarded entity type either we'll talk about what to choose here in a few minutes.
So partner entity types are some things you should know about first of all being a partnership is
sometimes necessary if you're going into business with one or more people then partnership might be
the right entity type to choose, now keep in mind that when it comes to paying taxes partnerships
don't pay taxes the actual taxes that need to be paid the profit or loss carried down
equally to the actual partners tax returns on the personal side and then they actually pay their own
share of those taxes. So when we look at a sole proprietorship versus a corporation for example
we'll talk about corporations later well then an individual the actual profit loss of the business
carries over the individual's taxes instead of the entity itself paying those taxes. Same thing in the
partnership from, so the partnership from the entity isn't paying the taxes the actual profit
loss carries down to the individual owners of that partnership and then based on whatever split of
partnership they have and then that those partners on their tax returns actually are reflecting the
profit the loss and actually covering the taxes there. Now when it comes to liability
well partnerships share in the equal liability of the business that means that if you're in a
partnership well then you're liable not only for your own actions your own decisions your
own debts that you're accruing but you're also equally responsible for the decisions the actions
and the debts accrued by another partner. So some things to keep in mind and partners debts can
be taken your stocks your bonds your house any assets you have can actually be taken
to make you responsible for other debts that other partners accrue, so sometimes even more
dangerous than a sole proprietorship because not only are you liable for what you're doing
you're liable for what your partners are doing as well, and you're putting your assets in harm's
way so something to think about sometimes like I said being an attorney if you have partners being
a doctor if you're going into a practice there sometimes you can't avoid partnerships but you
have to keep in mind you must really be aware of who you're choosing as a partner, because not only
are you taking on a lot of responsibilities for the debts that they may accrue but also decisions
and actions they take on can carry down to you as well. So some things to consider if choosing a
partnership again sole proprietorship definitely want to avoid partnership not looked at really
favorably by lenders and creditors and definitely some traps you may fall into with that entity type
but still way better than a sole proprietorship. Now let's talk about the next type of entity
corporations. A corporation is seen as the most highly regarded entity type you can choose when it
comes to a lender or credit district perspective look they love corporations and just because the
fact that you are a corporation goes a long way to helping you become very fundable and helping you
get the most money at the best terms. So you really if you can choose choose a corporation is what
gives you the most credibility. Now there's two types of corporations you can really choose from
there's an S Corp or a C Corp well there's others as well we'll talk about the main types that you
really want to look at. So an S corporation really has to do with the profit or loss of the business
carrying over to your personal taxes that means if the business makes a profit well that profit
carries over your personal taxes and you will pay taxes on the personal level for the profit
of that business. Now on a C corporation side the business pays its own taxes and then it pays you
and you pay taxes on that income as a matter of fact this is why a lot of business owners don't
usually start as a C corporation because a lot of accounting professionals see this as you being
double taxed. And what I mean by that is the actual entity comes in and let's say the corporation
makes a profit well the corporation pays taxes on that profit usually the tax rate is higher on that
level than you would on the personal side. Then that corporation pays you and then you
pay Income taxes on what you get paid. So you have to pay typically more taxes with a
C Corporation which is why most business owners don't start this way but typically as the business
grows into a 7 or 8 figure business you really want to potentially choose to be a C Corporation
because at that point you might not want the profit or loss from a 7 million-dollar
company or a 1 million or 20 million-dollar company carrying over to your personal taxes.
Again it makes sense to talk to a tax professional to talk to an accountant as well this is a legal or
accounting advice but from a lending perspective choosing a corporation is the best way to go
whether it be S Corp or C Corp doesn't matter from a lender's perception that really has to do more
with how you want to pay taxes. Now when it comes to liability a corporation is also your best bet
because what happens is you and the business are separate from each other and your personal assets
have a layer of protection there. So that means that if the business gets sued if the business
defaults on its debt there's a layer of protection there for you where your personal assets are
somewhat protected in large part protected because they're separate from the actual business.
So from a corporation standpoint it's looked at as a highly most highly regarded industry from
lenders and credit insurance perspective you have a choice on how your taxes are actually paid and
it also reduces your liability and creates a layer of protection, so if you can a corporation
is definitely the entity type you want to choose it gives you the most protection and gives you
also the best perception from lenders and credit insurance helping you get the most amount of
money at the best terms. But LLC's are still out there what about LLCs let's talk LLCs.
An LLC is also looked at it's highly regarded by lenders and credit issuers so again if you
choose another entity type you might want to layer it with an LLC it can provide you a better
perception from lenders and credit insurers now as i mentioned in the beginning of this training
an LLC is not seen as an official entity type per the IRS as a matter of fact if I go to set up an LLC
it's going to ask me what entity type I want to choose. So for example if I set up a LLC in Montana
one of the first questions in the checkout process is what entity type do I want. Do I want an S Corp
do I want a C Corp with an LLC there. And an LLC will give you some limit of protection as well
it's called limited liability for a reason but it does offer you some kind of asset protection it's
a layer of protection between you and the business. So by going with an LLC then it makes it
easier for your personal assets to be protected because the business is responsible for its debts.
The business is responsible for its actions you're not so it does give you limited protection and make
easier for your personal assets to be protected in case your business ever defaults on its debts or
again if it's ever pursued legally. So LLC seen credibly by lenders and credit issuers and also
because there's another entity type you choose the tax control that you have there how you actually
want to pay taxes business or personal and the other nice thing about LLCs is again you're
protecting your personal assets so another good way to go if you don't actually choose
a corporation an LLC can help you get a lot of the same similar benefits and again make it easier to
get credit and financing from the actual financing system. And there you have it that's the different
entity type, so what you need to know about each entity type now you know what type to choose or
have some guidance of which type to choose to be able to control those three areas the perception
that lenders and credit issuers have. How taxes are handled and liability and again don't forget
you want to probably talk to an attorney talk to an accountant and get their perspective of which
ones might be the best but definitely without a doubt from a lender and credit insurance
perspective a corporation gives you the most credibility just by choosing that entity type
it's easier for you to get most maximum funding at the best financing terms. Want to learn more about
fundability entity type is only one of 125 factors that control your fundability. So if you want to
learn more grab our free business credit building guide at creditsuite.com/ein that's
creditsuite.com/ein that gets you access to a step-by-step business credit building
guide and even more training on setting up your business where it's fundable. Also, if you got
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next training where we're talking about more cool ways to get money to start and grow your business.