Speaker 1: Choosing a business structure is an important first step when starting a business. Each business structure has advantages and disadvantages. So which business structure should you choose? In this video we will go over each of the business structures and give you an approach for how to decide on the business structure right for you. Keep in mind this is not business advice but a means to help you explore the different business structures and help you decide which is right for you. If you are still unsure what business structure to choose, consult with an accountant. The first thing we need to talk about are informal versus formal business structures. Informal business structures are sole proprietorships and general partnerships. Informal business structures are simple to form and thus are a great way for testing a business in a low-risk environment. They allow you to see if a business will be successful before committing too much time and effort in creating a formal business structure. Informal business structures are also great if most of your starting clients are people you are familiar with. However, informal business structures do not have asset protection. What this means is that if someone sues you or you default on a business loan, your house, your car, or your personal savings are at risk. Asset protection is important when you're growing rapidly, have customers you don't know personally, when you're making a significant amount of money, or your business is inherently risky. Formal business structures provide credibility, personal asset protection, and help build business credit. So if you are planning on having customers you aren't familiar with or rapid growth, you'll probably want to choose an LLC or a corporation. As mentioned before, one of the biggest benefits to choosing a formal business structure is the personal asset protection it provides. In addition, formal business structures also add credibility to your business that informal business structures don't provide. Your two options for formal business structures are corporations and LLCs. Corporations tend to be more complex business structures and generally speaking aren't what you want as a starting business structure. Corporations also have double taxation which means that your profits are taxed twice. Corporations are great if you're looking to raise money from venture capital or looking to list on the stock exchange. Corporations are also able to more efficiently carry money over between tax years to reinvest into the company. If you need money from professional investors or are looking to carry money over more efficiently between tax years, a corporation is the better choice. LLCs are much simpler business structure, have a lot less paperwork, and are easier to start and maintain. They have pass-through taxation which means your profits are only taxed once and they have all the benefits of a formal business structure including personal asset protection and increased credibility as a business. In general, it's more beneficial to start as an LLC when starting a small business due to the simplicity and the pass-through taxation. You can always change your business structure and tax classification at a later date. If you've decided that you need an asset protection and that the simplicity and flexibility of a limited liability company suits your needs, that might be all you need to do. You will have a strong formal business structure in place registered with your state and the federal government and you'll be free to go on and make a profit. A business structure is different than a tax classification, however, and an LLC has three options for how it can be taxed. As your LLC grows and makes more profit, you may decide to use a different tax strategy to save money and reinvest profits. As we discussed before, the default tax status for an LLC is pass-through. For a single-member LLC, the LLC is treated as a disregarded entity and the taxes pass through to the member. If there are multiple members, the LLC is taxed as a partnership. Pass-through taxation means all distributions, which is what payments to LLC members are called, are subject to employment taxes. An LLC which elects to be taxed as an S Corp allows members to become employees of the LLC so they can be paid a salary as well as a distribution. Both of these are taxed differently. It's a more complicated process that requires additional professional accounting services and is typically more closely scrutinized by the IRS, so it is only recommended if you know ahead of time that you will be making a certain profit and can manage the administrative needs. You can watch our video on the topic for more details. An LLC can also opt to be taxed as a C Corp, which is the default tax status of a corporation, but the same general restrictions apply. You should really only consider it when you know you'll be making a large amount of money which you want to reinvest back into the company in different tax years, at which point you should talk with a licensed accountant. You have many choices when forming a business in America. If you are just getting started and don't have anything at stake, an informal business structure like a sole proprietorship or partnership may be sufficient. If you're doing business at volume or with anything at risk, you'll want the asset protection that is provided by a formal structure, namely an LLC or a corporation. Unless you're willing to deal with more complicated administration and taxes or are looking to reinvest money in your company or take on investors, an LLC is usually the best choice for small businesses. If you know you're going to make a surplus of money and want to save on employment taxes, an S Corp tax classification might interest you as well. We have for more information as well as tools and guides on the business formation process for each state at our website howtostartanllc.com. If you found this video helpful, give us a like and subscribe for more videos like this so we can continue to deliver useful content to entrepreneurs. I'm Tony with The Really Useful Information Company wishing you good luck with your small business.