Hi, this is Lee Phillips.
Welcome to my YouTube video on whether or not
you should start your little business
as a sole proprietorship or as an LLC.
They have advantages and disadvantages.
Anybody can be a sole proprietorship--
it's real easy, all you have to do is say, hey, I'm
in business today, start making money,
and file a Schedule C on your 1040 form.
If you do that, you're a sole proprietorship.
The problem with a sole proprietorship
is you're liable for whatever happens in that company.
There is no asset protection.
But it's easy, it's simple, it's cheap-- no set up costs.
In fact, the LLC in a lot of states, just the state fee's
$1,000.
I ran onto a guy recently who had paid his lawyer
$25,000 to start his LLC.
Problem is, the guy went broke before he ever
opened the business-- never made any money.
So if you are in a state where it's
expensive-- California, New York, New Jersey, those types
of-- foreign countries-- then you
may want to just start as a sole proprietorship--
unless there is a high liability to what you're doing.
In that case, you need the asset protection.
And if you have employees-- employees always get you
in trouble-- then it probably tips the scale
in favor of the LLC, even in the expensive states.
High liability, employees, yeah, let's go to the LLC.
The LLC is unique in that it not only gives you
protection from what happens in the company-- anything happens
in the company, you get sued.
Well, your personal assets are protected
by the corporate shield.
It has the same corporate shield as a corporation-- I talk
about that in another video.
Additionally, though, the LLC has an aspect to it
that protects the company assets from what happens to you.
And what could happen to you that
might threaten the company?
Well, somebody in the family gets sick.
65% of all bankruptcy-- or actually, I
think it's 56% of all bankruptcies in the United
States are a result of somebody in the family getting sick.
It's a big deal.
You don't have to do anything wrong.
But the question is, you, your spouse, your kid gets sick,
are you going to lose the assets in your company?
If it's an LLC, the answer is no.
If it's a sole proprietorship, the answer
is yeah-- everything over there, all the equipment, everything
in the company, that's subject to your personal problems.
In fact, a corporation-- if you have a corporation,
all of the corporate assets are subject
to your personal problems also.
And by the way, that's another video
that we have on charging orders-- is what's
that protection is called.
So what's the cost, what's the liability,
and then what's the tax?
A sole proprietorship is you as far as the IRS is concerned.
No tax advantages to speak of.
And yeah, you can write off stuff
that you couldn't do as an individual
and that sort of thing.
But there's another issue with it-- any auditor--
any one of the 60 trillion auditors in the IRS
can audit a sole proprietorship return.
It takes a special auditor to audit an LLC return if it's
taxed as a partnership, an S Corp, or a C Corp.
So you substantially cut down your chance of audit
if you are taxed under one of those.
Now, if you're a partnership, you've
got to have at least two people, but you
can choose to have it taxed as if it were a partnership, an S
Corp, or a C Corp. Or if there's only one guy,
you can have it taxed as a sole proprietorship
or what we call a disregarded entity--
and that's another of my YouTube videos,
taxation choices in an LLC.
Depends on how you make your money.
There are a bunch of factors as to how you want it taxed.
But with a sole proprietorship, not many tax advantages.
I can get more tax advantages with the LLC.
Depending upon what I'm doing, you
could actually save 15%, 20% of your taxes-- that's a big deal.
So we've got the tax aspect, we've got the liability
shielding aspect, we've got the simplicity and cost
of setting it up and operating it-- oh, we haven't talking
about operating.
Operating in an LLC or a corporation, that's
another three videos on the list here.
But those are the considerations you're
going to take in forming a little business,
deciding whether you want to go to the trouble of having an LLC
or you just want to set it up as a sole proprietorship.
This is Lee Phillips, hope that helps
you make that determination-- sole proprietorship, LLC.