Business Structures (Video)

by Joshua Botello

So, you want to start a business, but don’t know if you need a sole proprietorship or LLC? C-corp? S-corp? Whoah. (hands up) Don’t worry I’ll break it down for you to determine the right one for your business.


Here’s my disclaimer: I am not a lawyer or accountant. This by no means legal advice and is for education purposes only. All the resources for this video are listed in the description below.

Ok? ok.

SOLE PROPRIETOR

First up is a sole proprietorship. This is the cheapest and easiest to form. With this structure, you are the business. If someone decides to sue you for a bad product or service, since you are the business, they could go after your house, car, and any other personal property. In the eyes of the law, there is no separation. You can easily become a sole proprietor by filing a Fictitious Name Statement also known as DBA for about $100 dollars in the county the business is located.

Limited Liability Company (LLC)

The next formation is a Limited Liability Company or LLC. This is actually a newer type of structure that offers protection for the owners, now called “members” in the LLC. You can become a single-member LLC (in most states) and legally separate from the business. An LLC is a state statute business structure, so rules on how the LLC is formed will vary state to state. The initial costs can range from a few hundred to a few thousand dollars in filing and legal fees with an eight hundred dollars yearly annual tax here in California. While the LLC is more difficult to set up and may require a lawyer, it can be self filed if you are so inclined.

Corporations

Corporations are one of the oldest structures and generally offer the most protection under the law. Corporations do come in a couple of different flavors to choose from. So let’s take a look at each one. The default for filing a corporation a C-Corp. If you are looking for investors, a C-corp may be the way to go because you are allowed to offer preferred stock to investors and partners and regular stock for normal stockholders. You are also allowed to issue an unlimited amount of stock which is essential if you wish to be a larger corporation or wish to be traded on the stock market, but well save that for another video. The initial cost of filing and setting up the corporation can cost a few thousand dollars but can worth it from the protection the corporation offers.

S-Corp

The other flavor of a corporation is the S-corp. The biggest advantage of the S-corp is in how it is taxed compared to the C-corp. S-corps are slightly harder to form and require an added 2553 Form with the IRS to set it up. And like the corporation and LLC, there is an eight hundred dollars annual minimum tax especially here in California. Finally, there is a 100 member shareholder limit and shareholders must be citizens or legal residents.

While there are many different options in what structure to form as a business the best advice is to consult a lawyer and an accountant to find out what business structure is best for you. If you need one-on-one consulting help, contact us here at our office and check out our other free advice videos.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.