The WAY to WOW Shows
Common Business Entities
February 8, 2023
Automatically generated from YouTube captions; names and wording may contain errors.

[0:00] I'm your host Kevin demmel and we are here every Wednesday afternoon 12 30 p.m Pacific Time 3 30 p.m eastern time and an hour in for Central and mountain time and we are here to talk about the way how to improve our professional lives so you know you may say people making money that's kind of crass but in the end that's a lot of what our professional lives are about um hopefully we're we're doing well hopefully we're doing something we enjoy or or more than enjoy hopefully we're doing something good uh for you know Society Etc

[0:36] um and but you know we each have to come up with our own definition of success so last week I talked about sources of capital for getting your business started whether it's a you know one person uh small business a plumbing you know business or something like that or whether you have your eyes set on trying to become the next unicorns um you know the the financing uh streams don't don't really change although the ones available to you uh will Accord

[1:11] with the scale of of what it is that you are looking to accomplish with your business so today I want to talk about the types of entities most commonly used for starting a business now in in this case I'm for them going to be talking about for-profit businesses some of these would apply to non-profit businesses um but but in general that's a separate category there's a a different process for getting started as a non-profit and I'm not going to deal with that uh today perhaps I'll I'll deal with that in a

[1:48] future show if and if you're interested in that drop a comment in drop a note into the comment section and and I will put something together on that I I have formed non-profits in in the including having done the IRS filings and all that other stuff myself so I'm happy to sort of pass that knowledge along now before we go into the actual material I have to give you know the standard disclaimer I am I am not a lawyer I am not an accountant I am not rendering legal advice nor accounting advice I'm going to give you some basic information on

[2:23] the types of entities that are out there when they might be appropriate and and and the basics of how they work this is just to give you an idea so you have some some basic knowledge and and then you can talk to your accountant or talk to your lawyer or talk to whoever it is who's advising you uh in a more intelligent fashion and and decide what what it is you you want to do for your own business so let me go ahead and share my screen and here we go

[3:02] and okay here we go so let's see and uh move this over here and uh slideshow here we go and play from start so uh uh hopefully there we go business entity so here we are um you know an entity is is essentially the organization that you use to conduct your business and I'm going to talk about six of the most common um to the best of my knowledge they're

[3:37] available in all 50 states as as well as U.S territories um uh however the the rules around them will differ from state to state okay all of these entities are formed within a specific State okay there's there's no such thing as a quote unquote National entity entities can do business Nationwide but you don't form you know a corporation for example under federal law they're they're formed under state law okay unless you we're talking about something that's formed outside the United States which again I'm not

[4:13] getting into foreign business entities at all we're talking about entities for for use here in the United States okay so um I always like to show this just to remind folks um of of the three pillars of attainment This Is My overall um uh plan for um figuring out what do we want in life what does success mean to us and then executing on that mission so it helps us to form our identity and and and and and as you see relationships

[4:48] and Pursuits form the foundation on which we build ourselves our our self-image Etc so we're dealing today of course in the finances realm um but like like always um the other Realms play into this so when we become a business owner that impacts our identity it puts uh um uh demands on our mindset as well as our health and in building our professional life relationships are key they impact our families certainly and our friends or we might say friends and

[5:23] colleagues our clients our customers those are all relationship oriented um functions and and uh and so you know that's why overall this is a sort of a unified image okay so just with you know always keeping that in the back of our minds as we go forward so let's start with the fastest and easiest entity to form and and that is the sole proprietorship okay now the reason it's the fastest and easiest to create is

[5:59] you are a sole proprietorship in other words if you decide to go into business yourself um and and you know we'll we'll take it we'll take my name you know demo and let's say I want to start a plumbing company Bemo Plumbing okay I can do that and and it's essentially just me there's there's no separate entity what I would do is file something called a fictitious business name statement also known as a DBA doing business as and and what I would be is Kevin bemle doing business

[6:34] as demo Plumbing okay not bevel Plumbing ink that's something completely different or Vemma Plumbing LLC completely different okay um I'm I am the business entity okay now um you know tomorrow or today later today you could form a sole proprietorship and uh you can file your these days you can file a fictitious business statement online just do a search fictitious business name filing and you fill out a form the form uh gets

[7:09] submitted to um typically the County Recorder again that can vary from from state to state and then once the fictitious business name uh has been registered there's no such thing as approved really it's just registered so people know oh this you know demo Plumbing is actually Kevin bemel it's so they can find out who's actually running the business or who actually is the business okay and then it gets published in a newspaper of General circulation that's that's done in order to make sure people know you're operating under that business name and

[7:45] and essentially you're done now in most municipal qualities they're going to require that you get some kind of business license um and and and you'll file the business license under you typically again typically varies I'm sure from from jurisdiction to jurisdiction but you're going to file it under your legal business name which in the case of a sole proprietorship is your name doing business as you know in this case Kevin bemel doing business as Bemo Plumbing okay that would be the legal name of my business all right now a couple of

[8:22] um aspects of a a sole proprietorship first of all you have no inherent liability protection from The Entity itself because you are the entity so whatever assets you have could potentially be subject to uh paying off a lawsuit if you were to lose okay if you don't pay your taxes the IRS can can come after your personal asset so there's there's no liability protection at all

[8:57] in terms of the entity itself now of course you can you can purchase insurance and that insurance can help protect your assets um and can if it like if it's professional liability insurance uh your Eno insurance is Arizona emissions insurance so that can provide you funds uh to hire a lawyer to defend yourself if you get sued which is a good thing to have in fact it's um in in some businesses real estate real estate appraisal Financial Services it's it's crucial to have you know

[9:34] insurance or professional liability insurance okay but it's the in that case it's the insurance that's helping protect your assets the The Entity itself has no gives you no liability uh protection okay because it's still just you it's not separate from you okay and then in terms of filing your tax return your income tax return so you'll file what's called a Schedule C on on your regular uh tax return okay so if you're used to filing the the the one of the short form returns like you know the

[10:12] um I forget what it's called but anyway um you won't be able to do that if you have a sole proprietorship because you're going to have to file a Schedule C okay now by the way I do recommend if you even if you if it's just a sole proprietorship you have a separate checking account for the business that'll make it much much easier to um pull your records together come tax time okay because you won't have to go through your personal account and figure out okay what was a business expense what was personal expense you don't have to do any of that stuff you just have a

[10:47] separate business account and the business account can be in the name of your business it'll be Kevin bemel DBA uh bammal Plumbing okay and that that will be the the vesting on the checking account for the business and perfectly acceptable um you know different banks will have different ways that they'll you know want to do the paperwork but but even as a sole proprietorship you can have a separate bank account and that'll be very useful when it comes time to do your tax returns and prepare that schedule C and then whatever profit you make from the business okay so in a

[11:22] schedule see in a sole proprietorship you may pay yourself a salary but it's going to show up as net profit from the business okay because it's still just you so salary won't be deductible in the sense of reducing your net income it's just that net income from the business then becomes part of the income you report on your own tax return okay and and and that's how you end up paying taxes on your sole proprietorship business okay so it's it's very you know

[11:57] very simple very straightforward if you're just getting started in business it may be the way to go that's again I'm not giving you any advice on what you should do but this is a fast easy way to get going in business okay so that's a sole proprietorship the next business entity I'm going to talk about is called a general partnership now there are different kinds of Partnerships but the two I'm going to talk about are a general partnership and a limited partnership or a GP general partnership limited partnership and LP okay so

[12:32] um as as you might guess a general partnership has at least two members if it only had one member it's not a partnership it's it's just one person okay but in a general partnership you have at least two partners okay you can have more but you have minimum of two okay now like with a sole proprietorship you do not have liability protection from the partnership itself because as a general partner you are personally liable for all of the acts and omissions

[13:09] Etc that the partnership conducts okay so if there's two general Partners you're both you're both liable for whatever the partnership does okay so a general partnership is sometimes called a pass-through entity meaning the partnership itself is now a separate entity it's a separate what's called person so wait wait the partnership is not alive right so there's two types of people under the law there's a flesh and blood person like we are and then there's something called a legal person it's a person formed under the laws in

[13:44] this case of of a state and a general partnership is is a legal person it it stands as an entity apart from the partners themselves okay however that entity provides no liability protection for the general Partners okay having said that though because the general partnership is a separate entity it will have to prepare its own tax return okay so let's say we have a partnership

[14:20] called um fantastic plumbers General Partners okay or fantastic plumbers and it's a general partnership however how are we you know actually stated okay so fantastic plumbers will file a tax return for itself okay and that tax return will be separate from the tax returns for the partners let's say there's two partners so the two partners have to each file their own tax return but the general partnership will file its own tax return however it will not pay taxes it will

[14:57] issue something called a schedule K-1 and that schedule K1 will uh will document the amount of taxable income that each of the partners received from the partnership in the year in in that particular tax year okay and so and then that K1 it gets reported on the partner's individual tax returns so again the general partnership does not pay taxes it it passes through all

[15:33] of the profits to the partners and then the partners pay taxes on their on the income that they got from the partnership and again that it's the same kind of thing um salary is well I mean you can set it up so that you take salary from the general partnership and then you pay taxes on your salary you'll get a um a W-2 from the partnership um like you would from any other uh you know business um and then then you may also get some profit it depends there's lots of ways

[16:08] that that can be worked out and that's something for you to talk about with your accountant okay um but in any event um the partnership itself is not going to pay income taxes okay now they may pay payroll taxes by the way that's a again that's a separate issue I'm not talking about I'm not talking about payroll taxes and unemployment insurance and all that kind of stuff that's all completely separate okay um what I'm talking about is income taxes and the general partnership will not pay income tax taxes the partners will pay any taxes on income that they either took a salary or that they got as

[16:43] because there was a distribution of profits from the general partnership to the partners okay so a general partnership two or more partners and it's a separate entity a pass-through entity okay it provides no liability protection okay and and as a result you'll have a separate tax return that the partnership have the general partnership has to prepare now like with a sole proprietor the general partnership can carry Insurance to protect the partners okay that that that all still holds but the entity itself does not provide liability protection now let's contrast that

[17:20] with a limited partnership okay now you you'll obviously you see it's a different name and because it's a different name it ha it works in a different way to in certain respects so you see in a limited partnership still need two or more people two or more Partners in order to form a limited partnership you cannot have a limited partnership with only one partner because that doesn't make sense right partners are two or more now in a limited partnership

[17:56] there must be at least one General partner and that General partner is liable for all the acts of the partnership okay so just like General Partners in a general partnership have no liability protection from The Entity General Partners in a limited partnership also do not have liability protection from the limited partnership entity itself okay it must also a limited partnership must also have

[18:31] at least one limited partner now that limited partner does have limited liability and in general a limited partner's liability will be limited to what they invest in the limited partnership okay so let's talk about my Plumbing business we've been fantastic plumbers right and let's say I decide to form a limited partnership because I have a friend who wants to help me get going in business okay so in that case I'll be the general

[19:06] partner okay and I receive no liability protection from Fantastic plumbers a limited partnership okay and my friend he'll be the limited partner and let's say he gives me fifty thousand dollars in order to get the business up and running and going so that it's really generating income Okay so first of all his liability is limited to the fifty thousand dollars he invested so if I let's say I do something wrong in in in in the plumbing of the house

[19:41] and it causes you know two hundred thousand dollars in damage and the owners of the house sue me the most The Limited partner can lose is fifty thousand dollars okay now I'm talking you know it it's a typical case I'm sure you can come up with situations where someone was able to pierce the limited partnership and The Limited partner got hit for greater liability some of those things happen sometimes I'm sure but in general The Limited partner in this in the example I gave his liability would be limited to fifty

[20:16] thousand dollars okay now because his liability is limited his participation in the business is also limited so as the general partner I run the business on a day-to-day basis as a limited partner he may not be involved in the day-to-day running of the business and if he were that could potentially take away his limited liability because he's acting like a general partner do you see that

[20:53] okay so the limited partner can have certain limited say in what happens with the business so for example let's say um we have a clause that says if we decide to terminate the business okay the limited partners get a say on whether the business can be terminated or not maybe they're you know it's a vote of um a majority of the partners limited and otherwise or something like that okay one of the things about a limited uh partnership is in I I don't know if

[21:29] this is true for every single state but I know it's true here in California there has to be a written limited partnership agreement and that's so that the limited partners know what are their rights what are their responsibilities and and and they know what they're getting themselves into so what are the um important aspects of the business on which they get a say and they're going to be fairly limited they're going to be typically major issues like whether the partnership is going to be what's called wrapped up which means the businesses is terminated and the partnership is

[22:06] wrapped up and it ceases to exist okay so you actually don't need to have a written agreement for a general partnership although I suspect if you talk to your lawyer your lawyer is going to tell you it's a it's a very very good idea or your lawyer might say no no you got to have one but not in here in California for example not by law okay as a good business practice you should probably have a written general partnership agreement but with a limited partnership by law you must have a written agreement okay

[22:42] now like the general partnership the limited partnership is a pass-through entity meaning it has to prepare its own tax return and the partners will get k1s okay each partner will get a K-1 okay so the limited partnership does not pay any taxes itself okay all the income of the partnership that is distributed to the partners is is in the case of the general Partners maybe they're taking a salary so they'll pay just regular taxes like they would on any salary they get

[23:17] and then any profits that are passed through to the partners well let me let me rephrase that any profit that the limited partnership has at the end of the year will be taxable to the partners actually whether they are paid that money or not because the limited partnership does not pay any income taxes okay so the partners are going to pay income on whatever profit the limited partnership made okay now they're probably going to get a distribution so at least they can you

[23:52] know cover their tax liability for the profit and and that again that's an issue to discuss with your accountants to discuss with your partners if you're forming a limited partnership um how how you're going to work all those kind of things those those are all the you know details of forming this kind of entity um and there's there's no one way to do it okay there are certain things you have to do according to the law but there are are you know lots of ways to make decisions about how to comply with the law that's what your lawyer and your accountant are there for okay all right so that's a limited partnership again

[24:27] two or more Partners at least one General partner who has no liability protection at least one I don't want to use that finger at least one limited partner who has limited liability okay it's a separate entity a pass-through entity And So It prepares its own tax return and then the partners get their K ones okay so that that was the third one limited partnership oops went backwards I don't know how it did that that was weird okay the fourth type of entity for your business is The Limited liability company otherwise known as an LLC these

[25:05] have become very popular they are a relatively new type of energy I say relatively new they have been around for gosh I know 20 or 30 years maybe but compared to Partnerships and corporations which have been around forever it seems like although not literally forever but much longer than llc's it's it's a fairly new um type of of entity so one of the things about an LLC is you have to file a registration of the LLC with the state

[25:42] in which it's being formed okay and there with whom you file it'll differ from state to state here in California you file it with the Secretary of State for California you can do it all online nowadays um and it and it's pretty simple excuse me and it's fairly inexpensive to form okay it's less expensive generally than forming a corporation for example okay now the thing about a limited liability company is first of all you only need to have one what's called member okay so you have members of as

[26:17] opposed to Partners in a partnership you have members and a limited liability company so you need at least one member to create the LLC one or more members it doesn't matter how many they are they all have limited liability that's one of the great benefits of a limited liability company so unlike even a limited partnership where there's still a general partner who who gets no liability protection from The Entity with a limited liability company all the

[26:52] members get protection from liability generally speaking the extent of their financial investment in the company now having said that if you recall I think it's about two three weeks ago we talked about two of the easiest kind of businesses to start and one of them was a business based on a professional license so for example like a real estate agent or a financial services professional so anytime you are a licensed professional okay

[27:29] and you form an entity a corporation an LLC whatever okay you you become the person supervising or well I shouldn't say you do you may be considered the person supervising the professional conduct of that business and if so you will have personal liability even though in this case you're you're the member of a limited liability company so those are two separate things

[28:04] okay so as a member of the limited liability company you you would be protected um you would be somewhat you would you would be limited on your liability you'd be somewhat protected but as the person with the license that allows the limited liability company to pursue its business you would have no liability protection so then depending on what you got sued for that would determine whether you were held personally liable or not if if you were

[28:39] sued for some issue that has to do with the professional conduct of the business so then you you you're not going to have a limited liability because as the person with the license you're on the hook okay but let's say um I don't know you were you were driving somewhere and and and you got into an automobile accident so again I'm not giving legal advice but perhaps in that case that's not going to be considered a professional activity because you're just driving maybe you're driving to a meeting

[29:14] um that was unrelated to a client maybe you were drawing driving to a meeting to meet with your insurance broker okay um so that's not a a matter that relates to the professional conduct of the business that's a matter that relates with the operation of the business itself so in that case potentially okay and again you got to talk to your lawyer about this but potentially you might have liability protection afforded by an LLC so you can see it gets more complicated as we go on with these different entities okay and that's the reason why I wanted to do this show so

[29:49] you can understand these various things and as you think about what kind of entity you want to form you you're equipped to ask some questions to understand what you're really getting yourself into Okay so so again with the limited liability company the LLC all the members have limited liability now um if you were forming an LLC uh for the purposes of um I don't know you know running a bakery or owning a bakery um there's no professional license to be a baker at least not that I'm aware of I mean you have to have health licenses

[30:24] and that kind of stuff separate issue okay so in that case as the baker um you're going to have liability you're gonna have limited liability on under the LLC as a member and most likely again I'm sure we can come up with situations where you know someone will find out try and find a way to pierce the limited liability right that's that's what lawyers are there for if they're suing a company is to to get where the money is okay um now the limited liability company like Partnerships are a separate entity they're also a pass-through entity and I

[31:01] I see I I have a typo here I said Partners get k1s again they're not Partners they're members members will get a K1 just like Partners in a partnership do okay and now again the the if if you're employed by the LLC and you might get it you'll you know and you're getting a salary so you'll get a W-2 just like you would as any employee even though in essence you're working for yourself but you're still an employee and so you'll be paid typically on a W-2 okay and then any profit that the LLC has at the end of the year that

[31:36] will get reported on the K1 one of the k1s that are distributed to the various members okay um and you can have managing members and you can have in essence non-managing members of an LLC um that doesn't necessarily change the limited liability nature that the members have okay um but um like with a limited partnership or I'm sorry like with a general partnership although I don't believe you're required to have a written LLC agreement it's a very very good idea especially if there's more than one

[32:12] member so the rights and responsibilities of the members to themselves and to the business are spelled out and everybody knows how things are going to work okay so um this is something to consult with your lawyer on I know I'm saying that and a lot I just I want to keep emphasizing that these are not decisions you want to make on your own especially if you're new to business okay because I you know people say oh I'm just going to form an LLC blah blah I said well why are you doing that uh that's you know that's what I I've heard is the best thing to do well it it may be but you

[32:49] ought to have someone who who can advise you look at your specific situation okay before you just go and do something okay understand the ramifications of your decisions before you execute on those decisions okay so uh limited liability company fairly inexpensive to form okay but it does require registering with the state limited liability for the members it's a separate entity a pass-through entity and so the members will get k-1s to report the profit from the business okay so that's the LLC

[33:24] all right now we're going to talk the last two types of entities we're going to talk about are corporations there's there's basically I'm going to talk about the two most common which are s corporations and C corporations okay there are other types uh you know look all this stuff there's lots of esoteric stuff I don't want to get into that it's it's just it's too confusing I'm sticking with just the real Basics so you can have an uh you know a worthwhile overview and get a sense of what kind of uh issues are out there um what kind of questions you should ask

[33:59] um and that sort of thing okay so an S corporation like an LLC like a partnership it is a separate entity it's a legal person okay so it's apart from any of the people who work for it any of the people who manage it any of the shareholders the corporation is its own person just like the other entities okay it's what's called a pass-through entity as well meaning that although um the so that so that although the the

[34:36] court well not all though so the corporation will um will um uh prepare its own tax return okay but it does not pay taxes itself any profit it makes is reported on k1s to the shareholders and the shareholders pay taxes on the profit from the corporation okay so in the in this case an S corp is is fairly similar to an LLC now there are differences um and and and and this is again this is

[35:12] one of the reasons why you want to speak to your accountant and your lawyer is an LLC the right decision is an S corp the right decision they're the way they appear to um uh act if you will looks pretty similar right um all the shareholders um of the corporation all the officers and directors have limited liability okay that's the corporation provides that to them okay however how it does it why it does it is different than an LLC okay and so these are the kinds of

[35:47] things you want to discuss with your advisors before you may take a make a decision okay also the types of business in some in some states the types of activities that different entities can be involved in May Vary okay so you may have in mind to do a particular type of business and think well I'm gonna I'm gonna do an S corp and you then you say well whoa wait I can't I can't use an S corp do that or an S corp may not be the right type of entity for what I'm doing so um if you're going to be investing in real estate okay and you want an entity

[36:23] that's going to own the property okay is an is an S corp the right thing to do that or is an LLC better is a partnership better that those are questions to ask your advisors so that you can make sure you're doing the right thing especially with respect to the people who are investing with you or or are involved in the business with you okay these are not simple straightforward questions necessarily now for your advisors they may be because maybe they've answered the questions you're going to ask you know a thousand times before you and so they they know they know the

[36:59] responses to the issues off the top of their head um that that's why you're paying them the money because they have the knowledge and the experience right um but for for especially for new business owners um these are not decisions you want to take lately you want to investigate them okay so with the S corporation again it's a pass-through entity okay it limits the life everyone involved basically has limited liability now by the way if you have directors of your corporation directors have a liability to owners okay because they're given the

[37:35] responsibility to direct the activity of the corporation so they may have personal liability in that respect so you you may need to look into what's called dno Insurance directors and officers Insurance okay because also the officers of the corporation they may have liability to the owners of the corporation otherwise known as the shareholders that's what a that's what a a corporation essentially issues shares and people who own those shares they own the corporation now the officers and directors may be

[38:10] shareholders too okay and they're probably not going to sue themselves all right um but you could you might have shareholders who are neither officers nor directors okay and so in that case you know if they don't think the business is being run correctly they they you know in in consultation with their advisors may decide to sue the officers and directors okay and by the way um if you look in the news right now you may see there's a guy by the name of Norman Peltz who has bought a lot of Disney stock the Walt Disney Company

[38:45] stock and one of the things he's looking to do is get a seat on the board of directors for himself or his son and Disney is pushing back on him they don't want him on the board they're saying he's not qualified I'm not opining on whether that is the case or it's not the case that's not why I brought up the the example the reason I bring up the example is Mr Peltz is saying that the current members of the board did not thoroughly enough handle the question of who would succeed

[39:23] Robert Iger as CEO when Bob chappick took over from him I think now it's about a year and a half ago or so around that okay because Bob chappick didn't last very long the company and Roger Iger came back and took over his interim CEO after Bob chappick was fired okay and um Nelson Peltz is saying that among other things employees at Disney have been paid too much and and and they bought uh um I forget Which business it was and overpaid for it right so potentially I'm

[39:59] not saying this is is what he's doing but potentially he's building up a case that the officers and or directors have not protected the shareholders interests properly and so he may he may launch us a lawsuit against them okay now in a case like that generally the corporation will defend pay to defend their officers and directors okay but in the end if the corporation loses I I don't know in the case of Disney um I I don't think I own their stock anymore um but I don't and I so I don't know if Disney has directors and officers

[40:34] insurance dno coverage they might if not they made what's called self-insure which means if they lose the company pays um you know for whatever damages they're liable for okay but you can see how these things happen now of course Disney is one of the biggest companies in the world um you know but the same thing can happen on a smaller scale to a small business that is a corporation and and people think well I'm just gonna have my family's members involved so I don't have to worry about such things even among family members okay when money is involved sometimes family ties are not

[41:10] nearly as strong as we think they are okay and and sometimes the fact that they're we they are family members and then they're sort of you know um on unresolved business shall we say between family members that then gets dragged into the business okay and that's really the reason why you know one family member is suing others who are directors or officers of a corporation all that stuff gets thrown into the mix so again for the what 50th time in this presentation this is why it's important to get good advice good accounting advice good legal advice

[41:45] before you make the decisions on what kind of entity you're going to form because all of these questions well as many of these questions as possible should be addressed up front so that your advisors know what the issues are can properly advise you and then if something does go so wrong right they know the context and can be well prepared to handle those matters for you in in the way that will be most beneficial okay so an S corporation a pass-through entity limited liability

[42:22] um and and a separate tax returns shareholders get a K-1 okay last entity we're going to talk about is a C corporation so I've used this term before a C corporation is a legal person so is an S corp so is a partnership okay so it was an LLC um although C corporations were were kind of the original legal well I shouldn't say that um Partnerships have been around longer than C corporations but when people think about legal persons typically they're thinking about a corporation

[42:58] because the corporation is an entity separate from anyone else who's involved in it any of the officers any directors any shareholders Corporation is is a separate person okay so a t Corp is a separate person from all of the people involved with at T Corporation okay um like with the S Corp it has limited liability okay although again the the officers and directors could potentially be liable um for for mishandling the business with respect to the shareholders who aren't

[43:33] officers and directors and in fact Disney company is actually a C Corp it's it's not an S corp it's a c chord okay um now like with all other legal people a C Corp has to prepare its own tax return here's the difference the corporation will pay taxes on any taxable income that has not been distributed to the shareholders okay what's sometimes called retained earnings

[44:08] okay now there are ways corporations can sometimes shelter those earnings but a C corporation is an income tax paying entity whether it does or does not pay taxes has to do with how it handles its business okay but unlike a C Corp which which passes through all of its uh uh well whose I don't say they don't necessarily literally pay out all their profits to the shareholders but their shareholders are responsible for all the profit that the C Corp makes I'm

[44:45] sorry let me let me rephrase that with an S corp the shareholders are responsible for paying taxes on all the profit that the S Corp makes with a C corporation okay well they're going to pay all their employees and their employees are going to get W-2s or if they have Consultants they'll pay them a they'll they'll issue a 1099 whatever that's all you know income to those people the profits that the corporation makes will either get distributed to the shareholders as dividends and those shareholders will pay taxes

[45:20] only on the dividends that are distributed to them they'll get what's called a 1099 div okay any profit that is not distributed the C corporation itself pays taxes on okay see how that differs from all the other entities none of the other entities Partnerships LLC C Corp none of those entities pay income taxes themselves okay the owners of those entities end up paying income tax on any profit they have okay and of course with a sole

[45:56] proprietor the the person is the entity it's the same thing so of course they're they're paying their their own taxes okay with a C corporation the corporation pays taxes on any undistributed profit okay now that being the case so that that's why by the way you'll hear the the phrase corporations are subject to double taxation okay with that what they're talking about generally when they say that is a C corporation because that's generally

[46:33] not true of an S corp okay with a C Corp though so if a company retains earnings they can pay uh they can pay income taxes on that okay and then if they later distribute those earnings to the shareholders maybe the following year the shareholders are going to pay dividends on it as well I mean sorry they're going to pay taxes on the dividends as well so income profit to a corporation C corporation generally gets taxed twice okay that's that's where that phrase comes from okay and that that's why

[47:08] you'll you'll hear people talking about well you know dividends shouldn't be taxed because the corporation already paid taxes on them well yes that's true um but that's that's currently how the law works okay and whether it'll always work that way or not um you know get out your crystal ball I suppose I I I don't know all I can say is that's how it currently works and again this is why um you you you know want to get proper advice on the type of entity to start um before you form one okay now I will say that if you're gonna form an S corp

[47:43] initially you will form a C corporation and then you will do what's called elect or choose S corporation status okay so the way an S corp and a C Corp initially are formed is the same and then the S Corp gets uh elected and the C Corp becomes an S corp basically okay now to the best of my knowledge you cannot switch back so once something is an S corp that's it it's an S corp you know in perpetuity okay so that's why you want to again you want to be careful do I want to make that election or not

[48:19] that's something to talk to your advisors about before you make that decision okay now you might also notice as I've talked about the six different entities the cost to maintain the entities basically goes up with each one okay so generally speaking it's more costly to maintain a c chord than it is an S corp which is more costly to maintain than an LLC which is more costly maintained than a partnership which is which is more costly to maintain than a sole proprietorship however the amount of liability protection you

[48:56] get generally gets higher as as you go down so as you go from sole proprietorship partner a little bit more protection especially with a um with a a limited partnership LLC more Protection Corporation more protection Okay so which entity is right for you I can't tell you that that's it's not my place and to to do that what I can say is whatever you start out with when you start your business that doesn't mean that you're going to be that entity for all time so when I started my real estate company back in the mid 80s I

[49:33] started as a sole proprietorship and I operated as a sole proprietorship for many years and then talking to my lawyer one day um my business was getting more successful and and he just out of the out of the blue asked me he said he says by the way uh are you Incorporated I said no I operate as a sole proprietorship this is before the days of llc's or maybe they were just starting at that time but um and he said you know I would advise you to form a corporation right and then we went through the different reasons why that's where I learned some of this information um and in the end I followed his advice

[50:10] um I mean I talked to my accountant too my accountant agreed and so I followed their advice I that's why my advisors were there to help protect me now fortunately I've never been sued food I'm glad about that right knock on wood as they say um but you know um there are there are reasons other than limiting liability to form a corporation or to form an entity I should say and some of those things have to do with um so a corporate if you God forbid were to die a corporation is going to continue to exist so the business won't

[50:45] die with you whereas if you're of sole proprietorship and you die that's it the business is dead too right so there's aspects like that to the entity that you choose that need to be considered as well um other things are how people perceive the business so um to be a corporation people that well that's a real business um now you may say well that's kind of nonsense but but it is the way people look at things you know LLC oh that's a real business right so these other factors may come into play okay and depending on what kind of business

[51:20] you're in that may dictate what kind of vanities are available for you to form so if you're a doctor there are certain types of entities that you can form because of your medical because you're operating under a medical license so that's a specialty need to talk to um to need to talk to your advisors same is true of a lawyer and an accountant okay so presumably as a lawyer an accountant you know these things but if that's not your area of the law then I would encourage you to talk to someone whose area of the law is their specialty

[51:55] to get their advice on what kind of entity you form okay so this is it's an important decision not one to be taken lightly um but but then again do keep in mind you could start out as a sole proprietor and and and incorporate later or form an LLC later there's lots of ways to do that okay but but the main thing is think about these issues talk to your advisors before you make a decision that's the key takeaway I hope you will get from this presentation okay because

[52:30] everybody's circumstances are at least a little bit different okay how what your plans are for your business May differ from somebody else's and so that being the case you want to make sure that you're making the proper decision for you and your business and the P other people who are who are going to be involved with it okay so there we go I'm going to stop the sharing that's and the thing froze there for a minute so that's that's our show for today business entities again I'm going to just quickly review the six types of

[53:06] business entities we talked about sole proprietorship uh general partnership limited partnership LLC C Corp and I'm sorry S Corp and C Corp those were the six that we talked about they all have their um advantages and disadvantages if you will so as you think about starting your business that's an important question to consider there are of course lots of other things you'll have to deal with in starting a business I mentioned a couple of them um uh a city business license maybe something you have to be concerned with if there's any kind of food involved you

[53:43] may have to have health licenses all kinds of things like that but this this issue of What entity are you are you going to operate your business as is a very very fundamental question and it's something to give you know consider thought to get advice on and then you can proceed confidently knowing that you're making you've made the best decision that you can okay well so we're actually uh I think a few minutes short of of an hour the show normally goes an hour but we'll wrap things up a little bit early today and if you have any

[54:18] questions about anything I talked about today feel free to drop those questions into the chat whether it's on social media whether you're viewing it on our YouTube channel if you are not a subscriber to the YouTube channel I hope you will consider subscribing we are looking to build up our subscriber base and that way you will get notified each time a new uh show posts to to the to the uh to our Channel page so it's the way to wow show on YouTube and um uh if you if if you I do have some

[54:53] guests coming up by the way um I've started booking guests for for the fourth season here so they'll they'll be coming up uh in in the near future and if you um have an interesting way of making a living or you know someone who has an interesting way of making a living contact me um my email address will be in the show notes or contact me through social media I'd love to hear about you or the person that you know to see if they would be interested in being a guest and what what their story is first and if they'd be interested in being a guest because I think it's very instructive for us to see how other people achieved there's

[55:29] first of all what their success is how they Define that and how they achieved it so I encourage you to to let me know about that and let's see anything else oh yes um uh uh next week um we I will be launching a second show and it's going to be called or it is called the way to wow business lessons from the military okay and what I'm going to do is take military Doctrine and show you how to

[56:04] apply it to your business life so one of the most famous books on Military Doctrine is it's Sun Tzu's The The Art of War now I'm not going to be talking about the Art of War at least not initially um but you will find a lot of business people have read that book and and they apply those principles to their business lives even though uh Sun Tzu is is basically talking about how you deal with you know combat and and and and War so uh obviously war and business are not the same thing although I some people I

[56:39] think treat it that way I I I do not uh you know War for the most part is an existential um human endeavor dangerous um and and and and should be considered as so in my opinion um business is not the same thing while business is important um I I would hope no one would ever you know kill for their business having said that many of the principles in military Doctrine strategic and tactical and operational can be applied to improving how we uh manage and run our businesses

[57:15] how we lead in our businesses and so that's what we're going to be talking about each week so I invite you to tune in on uh Tuesday and you know you're going to want to know the time and at the top of my hand I don't remember the schedule time is so I will put the schedule time uh for that in the show no notes and and and it will go out on social media so that so that if you are um uh following uh the way to wow show on LinkedIn or you're following you're you're following me on my Facebook page um uh Rabbi Kevin bemel is my Facebook page for the show

[57:51] um or or on Twitter there's a way to the way to wow show uh Twitter feed um and there's also a way to out the way to wow show um Instagram feed so feel free to connect with any or all of those again there's links in the show notes so you can do so and that way you'll know when each show is starting um the way to wow uh business lessons from the military will be a half hour format so shorter than uh people making money and uh so I I hope you will tune in for that I hope you will enjoy it and that just leads me to say as I always do

[58:26] in ending uh each show to my my dear dear friend uh Marie who made um many things in my life so much better Marie darling southern belle that you are you are still and ever will be my bell so thank you very very much for joining me and look forward to seeing you next week