Legal Basics and Business Entity Formation: Crash Course Business Entrepreneurship #5

CrashCourse
11 Sept 201914:56
EducationalLearning
32 Likes 10 Comments

TLDRThe video explains the different legal business structures entrepreneurs can choose from when starting a company, like sole proprietorships, partnerships, corporations, B-corps, LLCs, co-ops, and nonprofits. Each structure has tradeoffs regarding liability protection, ability to raise money, paperwork requirements, and taxes. The video advises planning for the future when picking a structure, as your path may change over time. It recommends consulting attorneys and accountants for advice catered to your specific business idea and goals.

Takeaways
  • 😀 You legally need to register your business so the government knows you exist and you can get licenses, permits and pay taxes
  • 📝 Choosing a business structure opens up different futures with unique implications for liability, taxes, investment and decision making
  • 💰 As a sole proprietorship, your personal and business assets aren't separate so you have lots of liability but filing taxes is easier
  • 👥 Partnerships share ownership and liability but allow you to tap into multiple skillsets and potentially access more funding
  • 🏢 Corporations have the most protection from liability but lots of paperwork, record-keeping and get taxed twice on profits
  • 🌎 B-Corps focus on social good while still making a profit but face even more reporting requirements
  • 💼 LLCs give flexibility to pivot as a partnership or corporation later as your business evolves
  • 🤝 Co-ops give each owner one vote but the democratic process means slower decisions
  • 🙌 Nonprofits don't pay taxes but have to submit detailed reports on activities to the government
  • 😊 Get advice from attorneys and accountants tailored to your specific business needs and future goals
Q & A

  • What are some key factors to consider when choosing a business structure?

    -Key factors include liability protection, ability to raise funds, tax implications, paperwork and regulations, decision-making control, and ease of adding or removing owners.

  • What is the difference between a C-corp and an LLC?

    -A C-corp is a separate legal entity from its owners, offers liability protection but double taxation, while an LLC offers pass-through taxation but makes it hard to raise investment.

  • What are some advantages of starting as a sole proprietorship?

    -Advantages include complete control, easy taxes with pass-through status, and the ability to write off valid business expenses. However, there is unlimited personal liability.

  • What is a B-corp or benefit corporation?

    -A B-corp aims to provide social or environmental benefits, not just maximize profits. They attract impact investors but have extra reporting requirements.

  • What are the key steps to legally registering a business in the US?

    -Key steps include: obtaining an EIN, registering with the state's Secretary of State, getting local licenses, and reviewing tax requirements.

  • What is the difference between a general and limited partnership?

    -In a general partnership all owners share control and liability. In a limited partnership there are general partners with control and liability as well as limited partners with less control and no personal liability.

  • What are some ways a nonprofit corporation can raise funds?

    -Nonprofits can raise funds through grants, donations from individuals or corporations, and fundraising events. Their donors can write off donations on their taxes.

  • What happens if a business owner in a sole proprietorship faces a lawsuit?

    -With a sole proprietorship there is unlimited liability so the owner's personal assets are at risk if they lose a lawsuit related to the business.

  • What are some key disadvantages or risks when using an LLC structure?

    -Disadvantages include pass-through taxation requiring owners to pay self-employment tax. Also, adding or removing owners may require reforming the LLC.

  • Why might some entrepreneurs decide to initially form as an LLC before transitioning to a C-corp?

    -Starting as an LLC provides flexibility and liability protection. Transitioning to a C-corp later on raises the prospects for investment if they decide to go public.

Outlines
00:00
📝 Defining and Registering a Business Structure

This paragraph discusses the different legal business structures like sole proprietorships, partnerships, corporations, B-corps, LLCs, co-ops and nonprofits. It compares aspects like liability, taxes, funding and paperwork. It also talks about the government registration process like getting an EIN, registering with the state and local licenses.

05:02
🚀 Choosing a Path for a Tutoring Business

This paragraph depicts a scenario of someone starting a solo online tutoring business. They consider different structures over time - sole proprietorship, LLC, potentially incorporating. It shows possible paths based on decisions around liability, investment needs, hiring employees, developing a tutoring app. Some paths lead to going out of business while others could lead to becoming a large tutoring organization.

10:05
📋 Next Steps for Registering and Planning

This paragraph discusses next steps after choosing a business structure - registering with state and federal governments, getting licenses, making tax plans. It emphasizes defining your 5-year vision and building infrastructure to support future growth. It mentions getting feedback before launch and adapting if your idea falls flat.

Mindmap
Keywords
💡liability
Liability refers to legal responsibility. The video discusses different business structures and how they differ in terms of owner liability. For example, sole proprietorships do not separate personal and business assets, so owners have unlimited liability. Corporations and LLCs provide owners with limited liability protection.
💡taxes
Taxes are mentioned frequently in the video as an important consideration when choosing a business structure. Different structures have different tax implications, like pass-through taxation for partnerships and sole proprietorships versus double taxation for C-corps.
💡funding
The video discusses how different business structures impact funding options. For example, corporations can sell stock shares to raise funds, while co-ops may struggle to get loans from traditional banks.
💡paperwork
Registering and maintaining different types of businesses involves extensive paperwork and record-keeping. This is especially true for corporations and non-profits, which have many regulatory requirements.
💡profit
A key difference highlighted between C-corps and B-corps is their focus - C-corps prioritize maximizing profits for shareholders, while B-corps balance profits with social responsibility.
💡stockholders
Owners of shares in a corporation are referred to as stockholders. Their powers and benefits differ across corporation types - silent partners in limited partnerships, voting rights in co-ops, profit sharing in C-corps, etc.
💡investors
External people or organizations providing funding to a business in exchange for partial ownership or returns are called investors. Certain business structures are better suited for attracting different types of investors.
💡grants
Grants are a common source of funding for non-profit organizations. They are sums of money provided by governmental or private organizations for specific projects or operational costs.
💡sole proprietorship
A sole proprietorship is a business owned and operated by one individual. This simple structure has easy tax filing but exposes owners to unlimited liability since business and personal assets are intermingled.
💡limited liability company (LLC)
LLCs blend elements of partnerships and corporations to provide owners limited liability protection while retaining pass-through taxation. Their flexible structure allows LLCs to transform into corporations later if desired.
Highlights

Legally, you have to register your business. And depending on where you live, your government might have certain requirements to do that.

Registering can create some legal and financial protection, specifically liability protection and potentially using helpful tax structures.

There are lots of different options to pick from when you register your business, so it’s time to choose a path.

If you provide a service or product by yourself and get paid without registering, you’re considered a sole proprietorship.

Partnerships are helpful for tax reasons. General partners have pass-through status, everyone splits the profits and deals with their own taxes.

Corporations can sell stock to the public, making funding easier. And if stockholders leave, you can keep operating instead of restructuring.

Benefit corporations focus on social good while still giving liability protection. Decisions can be for social good even if less profitable.

LLCs offer flexibility to transform into a corporation later and attract investors with private stock that could go public.

Co-ops are owned by the people using them. Every stockholder-owner can vote on decisions so they have a real voice!

Nonprofits do charity, education or other public service work that isn’t taxed. Owners have limited liability.

There's no “best” business structure. Every business is different, your path may change, and success involves determination and luck.

Registering your business is exciting because you get to define your own path. Where do you see your business in 5 years?

Get an Employer Identification Number from the federal government to help with taxes and banking.

Register your business through your Secretary of State’s website. There are often small filing fees.

Review state and federal tax requirements and make a plan. Stick to the plan. File your taxes.

Transcripts

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