In this video, I'm going to tell you why LLCs are the best structure for the majority of
entrepreneurs, why sole proprietorships offer no protection whatsoever, and why corporations
are complex and subject to double taxation.
What exactly is an LLC?
An LLC is a Limited Liability Company.
It's a legal entity also known as a business structure and it can be used to run a business,
or it can be used to hold assets such as real estate, boats, or aircraft.
The owners of an LLC are called members.
An LLC can be owned by 1 person called a Single Member LLC, or an LLC can be owned by 2 or
more people called a Multi-member LLC.
An LLC is a business structure, designed specifically to protect your personal assets from the liabilities
of the business.
What is a corporation?
A corporation is also a legal entity and it is most often used to run a large company
with shareholders and investors.
The owners of a corporation are called shareholders.
After you form a corporation, you must also elect a board of directors to oversee the
company and you must elect corporate officers to execute and run the day-to-day business.
Corporations are what we typically think of when we hear Microsoft, Apple, IBM, McDonald's,
et cetera.
What is a sole proprietorship?
A sole proprietorship is when a person does not form a business entity and they operate
their business as themselves.
In the eyes of the law, you are your business in a sole proprietorship.
This is a very risky setup because if your business is sued then you are personally responsible
for all of the debts and the liabilities.
This means that your personal assets like your home, your cars, and your bank accounts
are at risk of being used to cover those debts and liabilities.
We'll save you some time right off the bat.
A sole proprietorship is a bad idea.
A sole proprietorship offers you no protection whatsoever.
A sole proprietorship is typically set up when someone is unaware of the options that
they have when it comes to setting up their business structure.
In essence, a sole proprietorship is not protecting anything, not you and not your personal assets.
What about a corporation?
In short, a corporation is not a bad business entity but they are not for everyone.
They are best suited for companies that want to go public on the stock market via an IPO,
an Initial Public Offering.
Again, think Google, IBM, Microsoft, et cetera, or corporations are best suited for companies
that need to raise large amounts of money.
Additionally, corporations are required to hold annual meetings, record all meeting notes
and issue shares to the stockholders.
Since most entrepreneurs just want to get their business off the ground, a corporation
is usually not the best bet as it will be too complex and costly to maintain, so that
brings us back to the LLC.
An LLC is a hybrid between a corporation and a sole proprietorship.
It harnesses the advantages of both while leaving behind their disadvantages.
Let me explain.
The disadvantage of a corporation is what's called double taxation.
The corporation must pay taxes at the federal level and then the owners must pay taxes again
on their dividends, on their individual tax returns.
Corporations, again, they're also tedious and expensive to set up.
You'll need to create a board of directors, issue shares, as well as elect corporate officers.
The advantage, however, of a corporation is liability protection.
The owners are protected from the debts and liabilities of the business.
The disadvantage of a sole proprietorship is unlimited liability.
This means the owner is completely responsible for all of the debts and liabilities of the
business.
The advantage of a sole proprietorship is what's called pass-through taxation.
Sole proprietorship income pass this through right to the owner's individual tax return.
This means no corporate tax return and no double taxation.
Sole proprietorships are also a lot easier to set up and they have flexible management.
You're not required to hold meetings, elect corporate officers, or issue shares of stock,
so back to the LLC, it's the best of both worlds.
LLCs provide liability protection.
Your personal assets are protected against creditors.
LLCs offer pass-through taxation and may avoid the dreaded double taxation.
Again, the LLC harnesses the advantages of both corporation and the sole proprietorship
while leaving behind their disadvantages.
LLCs were adopted by state law and all 50 states nearly 30 years ago to entice more
small business growth.
LLCs are the most popular and the most flexible business structure for entrepreneurs, business
owners and real estate investors.