What’s up, y’all. Welcome to The Shontavia Show, where my goal is to help you start a business based on your life’s vision. This ain’t gonna be your daddy’s business advice. I’m laser focused on entrepreneurship in the 21st century, vision and breaking the traditional mold. If you can get with that, you can get with me, be sure to visit shontavia.com for more episodes, blog posts, and other content. Thank you for listening. The show starts now.

What’s up everybody? This is Shontavia and we’re back with another episode of The Shontavia Show, where I help you start a business based on your life’s vision.

So today’s episode, it is all about business structures and business entities. And this is a question I get all the time from new and wannabe entrepreneurs, just how to start operating as a legit official business. So starting a business requires that you make all kinds of decisions, right?

And one of the most important decisions you will make is how you’re going to operate and structure your business. You have to consider all kinds of questions that are actually pretty foreign concepts to people who are new to the game of entrepreneurship and business. So you have to think about, you know, will you start making money right away before trying to register or incorporate a business or get legit in some kind of way? Will you just get like a DBA and do that for a little while? Will you choose an LLC or a corporation? Why does it even matter? What are the differences between all these things? And the crazy thing is is that even though this is one of the first decisions you make, most people don’t even know all the differences between some of this stuff and whether they’re doing it right. So the goal of this episode is to help you start to frame the business structure that you need to operate in as you start your business.

And then actually as you grow, you can make different choices or stay with the same choice.

So this decision has a huge impact on your business. There are financial implications, there are legal implications. Once you start hiring people, there could even be implications for how you go about hiring folks. This stuff gets really, really serious, really fast.

The taxes you pay actually depend on the type of business that you choose. Your liability, your exposure to risk. And so what I mean when I say that is if you get sued, the type of business entity that you actually choose determines how much risk you’re exposed to. So if you lose a lawsuit or you get into a ton of debt, you may have to give up money from your personal bank account. Maybe you could lose your house, your car, your 401k. So choosing the type of business entity that you choose can either expose you to liability, meaning you could lose all that stuff I just mentioned, or it could protect you and insulate you from liability, meaning you won’t have to give up those things, even if you do lose a lawsuit, even if you do get into a ton of debt.

And then also there are other implications. So if you’re trying to raise money, if you’re trying to attract angel investors or VCs, which we’ll do episodes about angels and VCs and that kind of thing, some of them will only invest in certain types of business structures. So again, this stuff gets serious pretty fast.

In this episode, what I’ll do is talk about the most popular types of business entities. I’m not going to go through all of them. In the United States alone, there are probably 15 different types, but the four most popular and the four that I get questions the most about are sole proprietorships, LLCs, those are limited liability companies, corporations, and then for my philanthropically minded folks, nonprofits and 501(c)(3)s. So, so there are all these different types, but I will focus on those four. If you have questions about the others though, let me know. Maybe we can do other episodes about some of the more specialty types.

So I’m going to walk through four things with each type of business entity in this show. So I’ll define each type first, talk about how you actually go about creating one. And then the pros and cons, the benefits and drawbacks of making one choice or another.

And keep in mind all this stuff is very, very high level. If you have questions about it, you really probably need a lawyer or someone you can talk to about how to make the right choice for you. Lawyers, accountants, those types of folks are critically important at this stage of the game.

So sole proprietor. If you just go out and hang a shingle, you start selling stuff today and you don’t file anything. Congratulations. You have made a choice about the type of entity you are, and you are something called a sole proprietor.

So a sole proprietorship is when you have one person that owns and runs a company. There is no legal distinction between that person and the business entity itself. So again, if you just hang out your shingle and start selling stuff tomorrow, you are a sole proprietor. A sole proprietorship is your business entity, and as a sole proprietor, you’re allowed to do business in your own name. If you want to do business in another name, if you want to call yourself something else, that’s a DBA. If you don’t go out and file anything you hear this term kind of thrown around a lot DBA doing business as you might also hear that called being called a fictitious name or a trade name or an assumed name. There aren’t any limits to how many DBAs you can use, but the law in some States is even if you’re a sole proprietor, if you’re going to call yourself something other than your name, you have to file a document with the state to let the state know.

And the thought behind that is, if you’re doing business and you’re not doing business in your name, the state has an obligation to protect its residents to people doing business in the state. People have a right to know who they’re doing business with. But even if you do that, even if you do file a DBA, you have not made any kind of election about your business entity. You’re still a sole proprietor. And so as you say here too, that the word sole actually has a legal meaning. It means you’re only one person. I won’t talk a lot about partnerships today, but if you, uh, or in this episode, but if you start a business with more than one person and you don’t file anything, you’re not a sole proprietor anymore. You’re called a general partnership. But that’s a little bit of a digression. If there are questions about general partnerships, like I said, maybe we can do future episodes about that.

So how do you create a sole proprietorship? And the answer to that is really don’t do anything other than start selling stuff. This happens automatically. Now, depending on what state you live in, you might need to get a business permit or a license or you know, some other things depending on your industry. So where you live and what you’re doing makes a huge difference in what else you have to do. But in terms of choosing an entity, that’s all. That, that’s all you have to do to become a sole proprietor. Just start selling stuff. Now there are pros and cons to this approach. So the pros are it’s easy. There are no real requirements, there are no papers to file. You can generally deduct your business expenses on your personal tax return. Again, talk to your tax professional about this, but generally you can deduct your business expenses and filing taxes is also comparatively easy.

I mean filing taxes ain’t never easy really, but it’s comparatively easy because all you do is fill out this form called a schedule C form 1040 and that just says how much profit you’ve had and how much loss you’ve had from your business. And this is only for sole proprietorships and then you just attach that to your personal income tax return. The same way you’re going to file taxes otherwise, and all of the income you’ve made are just taxed to you as an individual business owner.

So what’s the danger in this approach? What’s the danger in being a sole proprietor? Number one, you are personally liable for any debt or liabilities. So if you start running up credit cards or you lose a lawsuit, you are going to be personally responsible for paying. That could include, again, if you lose, if you end up in a really bad situation, that can mean your money in your personal bank accounts, your 401k, your house, your car, all that kind of stuff.

Also, if you’re a sole proprietor, it’s going to be really, really tough to get funding from any source, really. Banks, venture capitalists, venture capital groups, uh, angel investors. Its going to be a lot more difficult if not impossible to go that route. In part because they want to see an official structure. They want to know that you are not personally liable for debts and liabilities incurred, and there are ways for investors in particular to get pieces of the business. If you actually have a different structure that’s not a sole proprietorship. It’s also harder to get business credit. So it’s hard for me to think of a situation where it’s actually even a good idea to opt to operate as a sole proprietor. Maybe if you’re in a business where people don’t get sued, I can’t think of any business where people never get sued or an industry on this planet where they’re not disagreements.

So operating as a sole proprietor, it’ll get you started, it’ll get you out of the gate, but it is a dangerous way for you to operate, particularly when there are some actually pretty good and relatively inexpensive alternatives. So that’s the sole proprietorship.

The second type of business entity that you could choose, the most popular four that I mentioned are corporations. And corporations are like the historical traditional way to incorporate and operate a profit seeking business, in the United States at least.

So a corporation is an organization, so that can be one person, it could be a group of people, it can actually be a group of other companies or any combination of all of those that act as a single entity. A corporation exists separate and apart from its owners and founders.

So I don’t know if y’all remember a few years ago when Mitt Romney was running for president, he got a lot of flack for saying corporations are people too, but he was actually right about that. As a matter of law and the way that the IRS and our laws treat companies, we treat them like people, particularly corporations.

Corporations are tax paying entities just like me and you.

The owners of a corporation are called shareholders and corporations have a couple of different groups of people that keep the wheels moving within the business. Corporations have a board of directors and so that’s a group of people that make the big picture vision, strategy, direction, decisions. They are officers, so people like the president of the corporation, the treasurer, the secretary. These are usually the people who manage the day to day business. Those are the folks who control the corporation, the board of directors and the officers, and then the shareholders. They’re the owners. They’re the ones who have shares in the company.

We usually call those shares stock. One person can fulfill all of these roles in just about every state. So you can create a corporation and you can be everybody, the board of directors, the president, the treasurer, the secretary. You can be all those people. So one person can create a corporation and fill all of these different roles. Investors like angels, venture capital groups, VCs, they like to invest in businesses that are structured like corporations because corporations have shareholders and shareholders can sell their interest in the company through things like stocks.

So that’s why you hear people say, if you’re going to create a company where you’re going to be seeking investment, it is better in many instances to elect to become a corporation as opposed to maybe like an LLC or a partnership or a sole proprietorship.

So how do you create a corporation? It requires paperwork. You have to file documents to incorporate your corporation with an office called the secretary of state. In most States, in some States it’s called something else, but generally called the secretary of state’s office. And each state has its own rules about how you do this. And each state has different fees for how you do this. So it might be $50 in one state. It’s $110 for example in the state where I live in South Carolina. Or it can be up to $500 in some other States. So the basic steps are you select the corporation’s name and I have some episodes on how you go about thinking about a name because you want to choose a name that won’t get you sued. Number two, you have to file with the secretary of state to incorporate your corporation. This is usually done by a form that most States call articles of incorporation.

You have to create corporate bylaws. And the bylaws are basically just the rules about how the corporation is run, operated, managed all the ins and outs. You might also want something called a shareholder agreement and that’s the rules for the owners, for the shareholders, their rights, their obligations, that kind of thing.

And then finally make sure you look at your state’s rules. So what I’m talking about is generalities, but we’ve got, you know, 50 States in the United States and different States have different requirements. So like some States say you have to announce that you’ve incorporated a business. Some States require licenses, permits, that kind of thing. The other thing you should note about corporations is that they are really two different types of corporations. Theres C Corp’s – C corporations – and then S corps – S corporations. And I’ll give the pros and cons for each because they are a little bit different.

C corporation refers basically to any corporation that pays taxes and is separate and apart from its owners. So corporation is taxed separate and apart from the owners, the shareholders. The C Corp pays its own taxes.

And what are the benefits to being a a C corporation or incorporating a C corporation? Number one, you are insulated from personal liability. That’s frankly for you as a new company, an entrepreneur , or startup, that’s the most, one of the most important things – that you are shielded from personal liability for anything that happens that the business could, you know, be sued for and lose a lawsuit for or debt. So liabilities or debts. You’re protected from those things. So if the C Corp gets sued and loses, the shareholder’s personal money, personal bank accounts and all that stuff are generally protected. Now you can mess that up and break some rules and you won’t be protected.

But generally speaking, C Corp insulates you from liability. Also C Corp’s get more tax deductions that just about any other type of business entity. C Corp’s often pay lower self employment taxes, or owners of C Corp’s pay, lower self employment taxes, and it’s easier to raise money with investors.

What are some of the cons? So it’s pretty complicated stuff there. A lot more rules, more paperwork, more fees. Um, there are more complicated tax considerations. And there’s something called double taxation if you’ve ever seen that term. Basically what that means is the money made by a corporation can be taxed twice. So the first time was when the C Corp pays its own taxes. And then again, if the shareholders get things like salaries, bonuses or dividends, and dividends of when you get more shares of stock instead of like cash. And so the final kind of con is that owners can’t deduct business losses in their personal tax returns because a C Corp is paying taxes by itself.

S Corps on the other hand refer to corporations that don’t pay taxes as a separate entity. This is called pass through taxation. So when the corporations make money, so if they have income, losses, deductions, credits, whatever, those are passed through to the shareholders and the shareholders pay taxes instead.

And again, that is uh, the S Corp, the S Corp is not the tax paying entity. The shareholders are. And the S Corp has just filed by — you file a form with the IRS. So the S Corp is not something you do with the state. That’s something you do with the IRS. There are some benefits and drawbacks to being an S Corp. So the pros of having an S Corp are that owners, again, are insulated from liability or debt of the S Corp. So they are protected from those things. There’s no corporate taxation. So the shareholders are paying instead and there’s not that double taxation problem like you have with C Corps.

The cons are that there’s some very complicated tax considerations and more rules, more paperwork, more fees, and there are more regulations on issuing stock.

So if you’re going to issue stock in a C Corp, they’re much mores rules and stuff that you have to follow. But you should consider a corporation, even though they’re more complex, you should consider corporation if you’re going to seek business loans, if you’re going to try and get funding from somewhere, or once your business really starts to grow if you’re thinking about selling or whatever, you may want to become a corporation or incorporate as a corporation. T.

he third type of entity I want to make sure I mentioned in this episode because they really pretty popular for people starting out, are LLCs, limited liability companies. So the LLC is a business entity that is relatively young in the United States.

They were created in 1977 so they’re pretty new and they were created to offer flexibility to business owners and they’ve been really, really good for startups and entrepreneurs. So in an LLC you get kind of a hybrid, a hybrid between the sole proprietorship, general partnership and corporation.

So in the LLC, the benefit is you get treated like a corporation on one hand because you do get that personal liability and debt protection. The owners of LLCs, the members within an LLC are not personally liable for the corporations, debts and other liabilities. If the LLC gets sued, the owners of the LLC, the folks within the LLC are protected in general unless you break some rules. And there’s not as much paperwork. So on the other hand, so corporations require a lot of paperwork and that kind of thing. There’s not as much with the LLC. There’s some documents need to be filed, but they are less complicated.

So with LLCs, the owners are members. The LLC can be run by an individual member or they can be run by a person who’s designated — and that person is called the manager.

So how do you create the LLC? LLC is actually pretty similar to creating a corporation.

Remember you’ve got kind of a hybrid of the sole proprietorship and the corporation to form an LLC or limited liability company.

So what do you have to do? Choose a name that won’t get you sued. File some documents with your secretary of state’s office. These are usually called articles of organization. You don’t incorporate an LLC, you organize an LLC and register the LLC with a state with the secretary of state. Then you create something called an operating agreement — and it’s just like the rules of how the LLC will operate.

In most States is not mandatory to file the operating agreement with the secretary of state. There are a couple of States that do you to do that, but most don’t. The operating agreement is mostly an internal document, but it is definitely good to have, especially if you have more than one member, if you plan on growing to more than one member within your LLC.

But if you’re going to get a bank account, most banks are going to want to see an operating agreement. So do think about creating one.

And then the fourth and the step is look at your state’s rules and make sure you are getting all the appropriate licenses and registrations and that kind of thing. And that is how you create an LLC.

And the benefits of creating an LLC are very similar to the benefits of creating a corporation. You’re not personally liable for any incurred liabilities or debts. Um, there’s not as much paperwork as with a corporation.

You can choose how you want to be taxed. You can be taxed as a sole proprietor or taxed as a corporation and they’re relatively inexpensive to run.

There are some cons though. The cons are that you do have to file paperwork and some States you actually also have to pay like a regular maintenance fee. Same with corporations.

And then also investors at least historically have not invested as much in LLCs because LLCs don’t have shares of stock. I mean there’s some nuances there, but generally LLCs don’t have shares of stock that you can like buy and sell. So those are LLCs.

And then the final type of business entity. I’d like to mention are nonprofits, because they are so many people out here with socially conscious minds who want to create nonprofits. And so the nonprofit is a company whose goal revolves around some social benefit, some social goal, and like the name says, not to make a profit.

Now that doesn’t mean nonprofits don’t make money. Salvation Army makes more money than just about any other entity on this planet. So a nonprofit can make a ton of money, raise a ton of money, but the nonprofits goal has to be socially beneficial purpose.

And a nonprofit has to benefit somebody. It can benefit a group of people or a general community, but there has to be some social benefit to someone.

And States typically outline what kind of entities can become nonprofits within their state. There are a couple of different categories. You can have public benefit, nonprofits, religious nonprofits, mutual benefit nonprofits.

Depending on where you live, there can be any number of different legal structures to choose from. Though the nonprofit corporation is the most popular.

Then there’s some other nuances, but a lot of that depends on where you are going to register, incorporate your nonprofit. How do you create a nonprofit, not that difficult from some of the other things.

At least to start, you select the nonprofits name, you file articles of incorporation with a secretary of state and do whatever else your state requires.

Most folks, if they’re going to create a nonprofit also want something called 501(c)(3) status. That is something that the federal government gives to you, the IRS.

And if you’re interested in 501(c)(3) status — so I’m saying 501(c)(3) but there are actually lots of different designations within 501(c)s.

But if you’re interested in that, what it does is give you tax exempt status, and you know, allows people to give you money and also, you know, reduce the amount that they give you when they pay taxes.

So what do you want? What do you need to do if you want 501(c)(3) status. This is actually pretty complicated, but at a high level you have to get a tax ID number, then fill out a form. The form is called form 1023 which is a 501(c) status form and then do whatever your state requires.

The States often have registration requirements that you have to meet if you’re going to solicit funds from people.

Benefits to being a nonprofit, the directors and the officers of a nonprofit are shielded from personal liability. If you have tax exempt status, you don’t have to pay federal corporate income tax. You might also be exempt from state and local taxes, but that is something that each state decides on its own, and you might benefit from lower postal rates. And you can do good in the community and good for the people who you want to support through your nonprofit.

Some of the cons are that they do require time, money, and energy. There is a ton of paperwork and very, very nuanced rules. So you need to work really closely with your lawyer and your tax professionals to make sure you’re not running a foul of any rules.

And then the third thing, I don’t know if it’s really a con or something that you just need to think about when, if you’re going to incorporate a nonprofit in most States, one person doesn’t own a nonprofit the same way you can own an LLC or corporation.

Nonprofits usually have to select directors. And those directors are the only people who can elect or appoint officers. Then the officers are the ones who determine the direction and the policies of the nonprofit, not necessarily the founder.

So there you have it! A Rundown of the four most popular types of business entities: sole proprietors, limited liability companies or LLCs, corporations, and nonprofits. I’ve talked a lot about secretary of state’s offices and that kind of thing in this episode.

If you’d like to learn more about secretary of state offices or whatever they’re called in your specific state and where you should walk down this path of creating a business entity, you can find more about that on my website shontavia.com I’ll also include some things in the show notes that lead you in the right direction, if you’re going down one of these paths.

Thank you so much for listening to this episode of The Shontavia Show. If you enjoyed this episode, please be sure to like, subscribe and leave a comment wherever you’re listening. You can find me on social media everywhere, Facebook, Instagram, Twitter, LinkedIn, and wherever else @ShontaviaJEsq. You can also visit me at shontavia.com to find a transcript of this episode along with other show notes.

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The information shared in this podcast and through my other platforms is designed to educate you about business and entrepreneurship and I love to do this work. While I am a lawyer, though, the information I provide is not legal advice and does not create or constitute an attorney client relationship.

The Shontavia Show is a LVRG Incorporated original. The show is recorded on site in South Carolina and produced at Sit N Spin Studio in Greenville, South Carolina. Original music and sound design is by Matt Morgan and Daniel Gregory. Mixing and mastering is by Daniel Gregory and the video is by GVL Media.