All right,
so now we're gonna start getting into some of the more technical aspects of the
course. Uh, talking about entity selection.
So if you have not already created or registered your business,
this will be very important. Uh, if you already have registered business,
depending on what type of entity you have selected,
we may have some things here that could help you out.
So the main types that we're gonna be looking at are, uh, C Corp,
an LLC or a sole proprietor.
And the three main differences we're gonna look at are number of owners.
You can have liability and taxation. Um,
I don't have s corp listed on here,
but we will talk about that in much detail shortly.
So the biggest difference, uh, as far as owner concerned,
pretty straightforward here. You can have an unlimited number of owners,
essentially in the corporation types, but only one as a sole proprietor,
obviously, as the name implies. When it comes to liability,
the corporation types will actually shield you personally from having business
liability, uh, not legal liability. So business liability means,
um, obligation to pre repay debt or financial things, um,
that are associated with the business. Meaning if your business goes bankrupt,
for example,
they're not able to come after your house or your car or your bank accounts,
your personal bank accounts in order to repay any outstanding debts or contracts
that you have open. That does not cover legal liability, like I mentioned.
So anything negligence, failure to fulfill contracts,
deliver products does not protect you from that. Um,
but hopefully that wouldn't be or won't be any issues. When it comes to,
uh, taxation, um, corporations are probably gonna get hit the hardest.
They're going to get taxed both at a corporate level, corporate tax rate,
and then anything paid out to you or any of your fellow business partners is
going to get taxed again. After that, the LLC and sole proprietorship,
uh,
the profits from the business are essentially passed right through to the owner,
goes on their personal, uh, tax returns. Um,
and the entity itself is not taxed at a corporate level.
So as we start looking into why we might choose one over the other,
if you're gonna basically take on business partners or trying to apply for
business loans, you may want to have an LLC or a C Corp.
Obviously if you need partners or bringing other people on investors, uh,
in your company, having a corporation, corporation is kind of a requirement, uh,
whether an LLC or a C corp, if you wanna start issuing shares of your business,
uh, profit sharing, that type of thing. When we look at, uh,
an l llc or if you decide to take an S corp election, uh,
now an S corp is not an entity type, it is just a taxation status.
Uh, and we'll talk about that here. Uh, so in an S-corp,
an owner can take a salary from the business and it is taxed differently than if
they were just taking or being paid, uh,
income from the company if it's still registered as an llc, uh,
for tax purposes, right?
So the owners will still pay a self-employment tax on
top of anything that they are given from the business.
So the way this breaks down,
business income is passed through to the owners either way. Um,
but salary paid through an llc, considered profit distribution,
not technically a salary. Um,
if you pay a salary in an S corp that, uh,
salary paid is actually deducted from the taxable income for the entity,
and then you don't get paid self or you don't have to pay self-employment tax on
top of any additional profits paid to you on top of your salary.
So we'll go through some examples here to hopefully make that make more sense.
So just recapping taxation C Corp's gonna get double taxed.
Your biggest benefits for the C corp,
obviously if you're gonna start issuing shares, taking on loans,
business partners, that type of thing, LLCs and sole providers,
they're gonna pay self-employment tax.
And then an S corp actually helps you kind of potentially minimize some of that,
uh, that tax exposure. Um,
by deducting salary expenses from the business income,
if you decide you want to switch over to an S corp,
you will need to file IRS form 25 53,
and they require that that's done within the first two months of the start of
your fiscal year. Um,
so you can't wait six months into the year and then file it or, you know,
file it, you know, the day before and try to switch your taxes.
You'd have to wait till the next, uh, year.
Also have to have less than 75 existing shareholders if you have an LLC or a
C Corp in order to do that. And all the shareholders must be you a citizen.
So if you have a business partner that lives in a different country or you know,
not, not a US resident,
you may not be able to take that election with them listed or with them as an
owner in the company. So,
quick recap and then we'll go through some numbers,
examples to just kind of sum this all up for you. So the llc,
self-employment tax, there is an adjustment. So you're not, uh,
or so when you get, when you pay your income tax rate,
you get to deduct some of that to adjust your net income. Um,
but in the S corp,
you're gonna pay your regular income tax on the salary that you pay yourself,
but that and any of the employment taxes are deducted from the net business
income.
And then the remaining net business income that is paid to you is not subject to
an additional self-employment tax.
So if we look at the example here, and I gave a little,
I'll give you guys a resource link that you can check on your own,
put in your own numbers. If you already have a business, uh,
that's running as an LLC or C corp and maybe you want to take an S-corp
election, you can check that resource out and see if it makes sense for you.
And I've rounded some of these numbers, of course, uh, just
For the sake of the example. So in this example,
we have a hundred thousand dollars of net income in the S-corp.
We're gonna pay $50,000 to ourself as salary,
and then the remainder will be paid as a distribution. In both cases,
we're just dealing with one owner here. So we'll look first at the llc,
a hundred thousand dollars business profit.
Your self-employment tax will be about $14,000. Uh,
keep in mind that's not the 15,300 because we get to, uh,
have a little bit of an adjustment, uh,
for half of that self-employment tax before calculating our adjusted gross
income. Just tax stuff, don't worry about it.
So your total tax will be about $14,000 for the S corp,
because we're paying ourselves a $50,000 salary,
we get to deduct that from the listed business profit.
We also get to deduct the employer portion of the payroll tax,
which is about $4,200.
So now the business profit is $45,775.
And then we also have our employee payroll tax, um,
which is what we would pay out of pocket.
We don't get to deduct that from the business profit itself,
but it's still taxes we're paying because we're the only owner.
So in that example, uh, basically your, uh,
employment taxes are going to be $8,000. So right there in that example,
as a single owner,
you're saving yourself a little over $6,000 in taxes by taking an
S-Corp election. Now, of course, in both of these cases,
you'll still be paying your regular income tax rate on that a hundred
thousand dollars or about that, right? So keep that in mind.
That's not factored in here because that's gonna be almost identical between the
two. But again, your big, your big difference here is $6,000 in taxes.
So check that tool out, see if this makes sense for you.
If you already have an LLC or you're considering, uh,
trying to pick which business to uh, register as, um,
this could be something that's very valuable or could save you a lot of money.
As always, I will suggest that you, uh, confer or, uh,
confirm this with a registered tax specialist in your area who can
help you walk through all these steps. And then the last step,
once you decide which type of corporation you would like to be or like to
become, we'll get into actually registering for it.
So I would suggest, um,
if you're going to need a registered agent to receive some of these
documents, to file paperwork, all that kind of stuff, you can do it yourself.
Um,
but what I would might suggest is using something like incorporate.com,
um, you simply go on there. You pay them like a small yearly fee. Um,
they are the registered agent,
they will take care of the paperwork and management, all of that stuff for you.
Um, if you decide you want to incorporate in a certain state,
they can take care of that. Um,
you'll still need to register with your local government most likely,
especially if you're a actual physical, um, you know, personal trainer, gym,
that type of thing. Um, if you're online,
you have a little bit more flexibility, um,
but that's a topic for another time. Um,
you will need to go through the steps to register with your local government,
um, so secretary of State Department of Revenue to file your, uh,
your sales tax, state income tax, all that kind of stuff. Um,
and then selecting the actual name of your company. So you'll need to go, uh,
most likely through the Secretary of State to look up, uh, you know,
what you plan to name your business, make sure it's not already taken,
or that it's too similar to another business, which can sometimes cause issues.
So sometimes they'll have a database that you can search through just to make
sure the name is available before actually going through the whole registration
process with something like incorporate.com. Um, once you do that,
you can actually acquire your e i n your employer identification number, um,
which is like your social security number, but for businesses,
you'll have to go directly to the IRS to get that.
I will include the link that you can apply for that down below so you don't have
to go hunting for it. Um, and then lastly,
you'll want to have a sales tax tax license, most likely.
Um, I say if necessary because, you know, if you're offering a purely, uh,
service-based, um, uh, service-based company,
uh, you may be tax exempt.
We'll talk about taxes in more detail in a later module. Um,
but it's certainly if you are selling, uh, like online courses, PDFs, um,
digital goods, things like that, you'll want to have a sales tax license. Um,
or obviously if you're planning to sell clothing or you know,
supplements through your company, you'll need to have that available.
Once you're registered and have your e i n you can go through the Department of
Revenue and apply for your sales tax license and you will be all set.
So also be sure to check out the PDF that I put, uh,
in the resources section below. This kind of gives you a checklist, uh,
as you're going through this. Um,
it usually doesn't take too long to run through this process if you're going
through something like incorporate.com. Um, once they have actually, you know,
created the business and you get the e i n,
you're basically just waiting for them to do things.
It takes a very little time on your part if you follow the steps.
So that'll be it for entity registration stuff,
and I will see you in the next unit.