Should you be an LLC, an S-Corp, a non-profit or an intergalactic planetary conglomerate? Learn what kind of legal structure you need to set up to protect yourself.Sign Up to Watch
[MUSIC PLAYING] business structure mentoring and time management tips like watching digitaltutors
-So on to the second type of business entity, the limited liability company. That is an LLC. It's designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. What is a limited liability company?
-A limited liability company is called an LLC, one of the most common types of entities for entrepreneurs or small business, because it offers a lot of flexibility. It doesn't have a lot of the formalities of a corporation. But, most importantly, you get all the liability protection. So, the owners, which are called members in an LLC, if they get sued, LLC, and important, you followed all the formalities, then you have asset protection for all your personal assets.
-You said follow-- follow all of the formalities. What are all of the formalities? They wear coats and suits?
-Well no. What's important is anytime you're talking about protecting your personal stuff, whether it's an LLC or a corporation, it's very important to keep up with your minutes, not treat it like your piggy bank. If you respect it, a court will respect it. If you treat it like it doesn't exist, a court can treat it like it doesn't exist.
-Should your attorney update your minutes and kind of be the person who does this for you? Or should you ever be an entrepreneur, being like, I need to update my own minutes.
-No, an LLC is-- one of the reasons it is easier, is because minutes aren't necessarily required, as a corporation. But it's important, well like with your bank account, make sure that you're not taking money out of your LLC bank account to go on vacation or go out to eat with your wife. You have to treat them as separate entities so you can keep that protection.
-Now, OK. So, we got this limited liability company here. We've kind of defined what it is. Why is it that a lot of business owners call their business Jerry's plumbing, LLC? Do you have to do that? Do you have to put on everything? Why do people do it? Why do some people not do it? Let's go.
-It's a way to put the public on notice. You out there, in the general public, that this is a limited liability company. So if you do business with me, you can't get my own stuff. You can only get what's in the business. itself.
-Well, if you look at any of the official documents, it'll either-- usually it will be Best Buy, comma, INC. But for branding, you don't have to do it. But on your contracts or deeds, things like that, branding, you don't have to put your commercial with Jerry's Flower Shop, comma, LLC.
-If you're watching this, and your company is called right now Door Services, LLC, take that LLC off that brand. Just for branding, not a legal perspective, just that branding. I'm just telling you, that's bizarre to the customer sometimes.
WES CARTER: Yes
-And I'm just telling you, one of the companies I do consulting with, they're always like, I thought I had to have the LLC on my website and on my logo, like right prominent on my logo. So, you're saying that puts the public on notice.
-Right. If you do a contract and you sign an official document, you put the LLC on there, so whoever you're getting into a business dealing with, they know.
-What are the mega benefits of an LLC, and what are the mega drawbacks, just kind of a high limit. Hit on some of them.
-Biggest ones, you get the personal asset production, you know, your stuff is off the table if you do it right. And it's easy to take care of an LLC, because it's an easy way to-- it's very flexible about how you run it, who runs it. There's a lot of ways you can do an LLC so it's less- that's why it's attractive to entrepreneurs.
-Very flexible, like a gymnast, an LLC. That's how I remember it. I don't know how that relates. Anyway, so moving on, now we're talking about a cooperative. This is the one that scares me. I've heard a lot about what went down in various other cults. So we start talking about a cooperative, I get a little scared of these words. So, let me read it-- let me read it to you. A cooperative is the business or organization owned by and operated for the benefit of those using its services. Profits-- profits and earnings generated by the cooperative are distributed among the members, also known as user owners.
Typically, the elected board of directors and officers run the cooperative with regular members having voting rights to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote. What are we talking about? It sounds like a communist corporation. Is the case? What is a cooperative?
-A co-op is usually a group of people who get together. They create-- it's very similar to a nonprofit organization. Let's say, we're all going to grow some fruits and vegetables, and we're all going to pitch our money in together.
-It sounds like a cult.
-The way the fruits vegetables grow, we're going to split them up evenly. Or you could-- that's a farming type of co-op. You could have electric co-ops if you're out in the rural city ever. A lot of times you'll see electrical co-ops where the citizens have gotten together and decided they're going to share their resources to create an electric company. So it's--
-You can all wear white robes. We can all live together. A lot of sharing. There's 1 wife. There's like 50 husbands, or it's the other way around. There's 50 wives, 1 husband. All right, so I got my cooperative mixed up with the cult. Sorry about that.
-Not very common for entrepreneur. Usually you're restricted on what you can do with your profit. Usually it has to be distributed back to the members, not the owners, so probably not the best choice.
-Just for the record, I'm going to sue myself after I watch this episode. That's what I'm going to
Thrive15.com provides more online traings that include sales, marketing, branding, accounting and time management tips.
-What are the benefits of a cooperative? Is there any benefits you can think of? Any drawbacks?
-It's a benefit for a very specific set of circumstances. If you want to have an organic market on a corner on Saturday morning or there is a nonprofit purpose that you want to get together and sell little bits and pieces after you've all made your products then that's-- it's a very, very niche kind of entity.
-If you're watching this and you have a cooperative and you feel like I'm mocking you, it's because I am. But I do respect you. You can mock me, too. We have that mutual win-win, I mock you, you mock me. We sue each other online. That's what we do.
What kind of entr-- is there any kind of entrepreneur in your mind-- can you think of one kind of business right now where you're like, yes, that was someone I told you. You can't tell me if they're specifically, obviously, but is there any situation where you've ever met with someone and you say, you should be a cooperative. Does that happen very often?
-If your motive is profit, then no.
-OK. And so you should probably subscribe maybe to a different website, if your motives are profit. Maybe, I don't know.
So, moving on. So a corporation-- a corporation, sometimes referred to as a C corporation, as an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and the debts that the business incurs. Corporations are more complex than other business structures, because they tend to have costly administrative fees and complex tax and legal requirements.
Because of these issues, corporations are generally suggested for established, larger, big, lots of employee, organizations. The problem is, is that 90% of the people watching this have 10 employees or less. So in America today a little over 90% of all the new jobs that are created, according to the Small Business Administration, have 10 employees or less, but the goal is to grow. So at some point, you hit 22 employees or 23. At what point does it become a benefit to open up a corporation, in your mind?
-I think you choose from the very beginning. LLC or corporation most time are your two most popular options. And either entity can handle very small businesses or billion dollar businesses. It just depends on what kind of structure fits better for how you want to run the organization.
-If I'm saying, I don't know right now. I'm kind of-- and again we encourage everybody watching this, as stated at the beginning of the video, to talk to your local attorney before you make a legal decision.
WES CARTER: Please.
-But if you're thinking about forming an LLC or you're thinking about forming a corporation, how you make the decision right there? What are some of the factors that play in?
-Generally, one of the bigger factors is investors. If you're going to have a lot of investors, sometimes it's easier to do that in a corporation. Because you have shareholders who own the company and then a separate group, the board of directors, the board that actually run the company. So sometimes it's easier to do investors if you're going to go public in the future that's-- as a small business that's kind of hard to envision that far. But if you're going to go public, a corporation is usually required.
-I want to make sure that I never assume that anyone knows something. Because I didn't. Until about 10 minutes ago, I probably didn't know what this was. But the word when you say go public, can you explain what you mean by that?
-Well, if you want that have your company your corporation traded on the stock exchange, one stock exchange or another where people, the general public can invest.
-So, big idea. What are the big benefits of a corporation from a legal perspective? And what are the drawbacks of a corporation from a legal perspective?
-Well, similar to an LLC, corporation protects your personal assets. So you have that shield that what's in the corporation's fair game, what's my personal assets I own in my name those are off the table.
-Can I real quick just show a little diagram, to see if I'm getting it?
-So if this is my stuff, this is all my money I have, and it's represented by this beautiful pen, if I have a corporation does it protect it so that used as a shield.
-So that no matter what you can't take my personal stuff, is that how that works?
Well, it's possible. But it's much more difficult.
-How is it possible?
-Well, there's something they call piercing the corporate veil, which is just a big fancy word for ignoring the corporation and go into your personal stuff. And usually that's because, especially the corporation. The corporation you need to have minutes at least once a year. You have the shareholder minutes, the people own it, the board minutes, the people who run it, and that's one of the downsides to a corporation. There's a lot more formalities, technicalities you have to do.
-When you say minutes, what are the minute?
-Minutes is when you have your meeting. So all the shareholders have to get together have a meeting once a year. They elect the people who are going to run the corporation, you keep minutes of that. The people who run the corporation they have meetings at least once a year, they have their own minutes. So even if it's just you and I are the only shareholders. And we elect ourselves directors. We have to get together and have a meeting.
-OK. Well, it-- OK. OK, so we have a corporation and, in your mind, if a business owners' watching this, what kind of business owner watching this right now would be the kind of person who may want to consider forming a corporation?
-If you're not going to own real property or that's not one of the major purposes of it, then a corporation could be a viable option. Or if you plan on getting a lot of investors, If you're getting a lot of investors or you think you're going to have to need a lot of venture capital coming in to make your idea work. Then a corporation's probably something you can consider.
-OK, now we're moving onto a thing called a partnership. This is number five, a partnership. A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor, or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process, it's important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide the profits, resolve disputes, change ownership, how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended, and it is considered extremely risky to operate without one.
So let's just break into all that. A partnership. When would I ever want to form a partnership?
-Partnerships are one of the rarer things for a small business just starting out. It's basically just two people or two businesses agreeing that they're going to go into a business together and do something. Now there's drawbacks because there's lots of kinds of partnerships. You have general partnerships, limited partnerships, limited liability limited partnership.
-And that's where you probably want to get the attorney involved to get into those details.
-Right, and they have varying levels of personal asset protection. Usually in just a regular partnership-- what they call a general one-- if you and I disagree here's what we're going to do, then we both still have to put our personal stuff in the pot if we get sued.
-So who in your mind needs to get a-- I guess what are, in your mind, what are the big drawbacks of forming a partnership, right? And what are the benefits and who should do it?
-The majority of the time, when I counsel people, partnerships aren't the best option. If you're just starting out and you're a run of the mill entrepreneur-- even though nobody's run of the mill--
-I'm a run of the mill entrepreneur, I've run right out that mill.
-Most of the time, the partnership's not going to be the option for you. It's going to be an LLC or a corporation.
-Is there any major benefit of why I'd want to be a partner, and can you sell me on it?
-No, OK. Well we're moving on there. It's fine if you don't want to open up, it's fine. OK. All right. So now we're moving on to this S corporation.
-S'corporation, sometimes referred to as an S corporation. It is a special type of corporation created through the IRS tax election. An eligible domestic corporation can avoid double taxation-- once to the corporation and again to the shareholders-- by electing to treat their company as an S corporation.
An S corporation is a corporation with the Subchapter S designation from the IRS. To be considered an S corp, you must first-- wow-- you must first charter a business as a corporation in the state where it is headquartered.
I don't know we're talking about, so let's talk about an S corporation. First off, why would I want to form an S corporation?
-All right, well let's back up a second. You talked about C corporations.
-C corporations, S corporations, are the exact same thing other than taxes. So a corporation is a corporation. What happens with a corporation is that usually, if you're a C corporation, you haven't taken steps to become an S corporation, then you get taxed twice.
-C corporations get taxed twice.
-Yes. The corporation makes money, pays tax of that money. The corporation pays its owners, then the owner pays money on income to the owners.
-I'm not a huge math guy, but why would I want to be taxed twice?
-You usually don't.
-What if I'm really patriotic?
-Well then, you can make a donation to the United States government.
-Who does want to be a C corp, though, versus an S corp, in all sincerity? Who would want to do that?
-Well, there are limitations to who can elect to be an S corporation. There's a limit to the number of shareholders you can have, and also the type of shareholders you have. They usually have to be individuals, or certain types of entities can only be shareholders in S corporations.
-So we caught a Subchapter S.
-What does that mean? What's the Subchapter?
-That just means when you look at the huge tax law and you get to the tax code, there's a little paragraph there that's paragraph S-- right before T, after R--
-Are you serious?
-Yeah, and that's where the rule is for how that's going to be taxed. So it's an S court because that just happened to be the letter it fell under.
-How big is this tax code you're referring to? Is it like seven pages?
-That's why CPAs have jobs.
-OK. This just in, the root of the whole-- if you want to create jobs right now for CPAs, you want to pass more tax law?
-OK, that's why CPAs have jobs. OK. What are the drawbacks of an S corporation from your perspective, and the main benefits there?
-There are very few drawbacks because of that only getting taxed once. The tax comes straight to you as the owner, so that's a big benefit. You get all of the asset protection that we talked about with a corporation.
The only drawback is if you have certain kinds of investors-- especially other big corporations-- that are going to come invest in you-- maybe venture capital guys or just benefactors-- then it might not be available to you.
-Now just to review here-- because if you're watching this, I know it can be overwhelming, and the idea here on Thrive is that if you want to watch this again or pause it or take notes, we want you to have a mastery of this.
So just to review, there's six different types of business structures that we all conform as entrepreneurs. You have the sole proprietorship, you have the limited liability company, you have the cooperative-- my personal favorite-- you have the corporation, you have a partnership, and you have an S corporation.
If somebody right now is going, you know what-- because there's a lady, her name is Rebecca, and Rebecca emailed us. And Rebecca, if you're watching this, this is for you. She says, I've always wanted to start a business for years but I just don't know what kind of company to start.
What advice would you have to the Rebeccas of the world right now, if they don't know what kind of corporation to form? They have kind of an idea now, what do you recommend they do?
-There's two things. First, I think you'd probably go online and educate yourself a little bit about each kind of organization, and then you need to go find someone who is in your area or someone who does it in your state, that's knowledgeable, that can help you. Which one's better for your particular circumstances?
-When you say somebody, do you mean an attorney?
-An attorney, or a CPA can help you with the tax stuff as well.
-So a CPA or a tax professional. Or I guess a CPA is a tax professional. A CPA or an attorney is who you'd want to talk to.
-What about a dude? Like I know a dude.
-Only if the dude is a CPA or an attorney.
-Because a lot of times I meet entrepreneurs that are like, I had a dude, he helped me do it online. It was just like, bam. How do you know the dude? We worked at Best Buy together.
-I know a lot of those guys. They said, oh, I know a guy that's had his own business for 20 years, this is what he told me to do, and that's the exact wrong thing to do.
-OK, you heard it here. Wes, I appreciate you being here today more than you know, and I appreciate just everything that I said to you off-air that's resulted in the lawsuit that we're going to file against each other in just moments. So until we square off again, thank you for being here.
-Thank you, Clay.
Send us your email address, and our team of elite minds will get right on it.