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