Legal Basics and Business Entity Formation: Crash Cours… — Transcript

Learn the legal basics of business entity formation, including sole proprietorships, partnerships, LLCs, and corporations in this CrashCourse video.

Key Takeaways

Registering a business legally marks the transition from a side hustle to a recognized business entity.
Business structures differ in liability, taxation, and complexity, affecting owner protection and financial management.
Sole proprietorships are easy to set up but expose owners to personal liability.
Corporations and LLCs provide limited liability but come with more regulatory requirements.
Choosing the right business entity is crucial for legal protection, tax benefits, and investment opportunities.

Summary

The video explains when a casual side hustle becomes a formal business through legal registration.
It covers different U.S. business structures such as sole proprietorships, partnerships, LLCs, C-Corps, and B-Corps.
Sole proprietorships are simple to form but offer no personal liability protection.
Partnerships involve shared ownership and liability, with variations like General, Limited, and Limited Liability Partnerships.
LLCs provide limited liability protection and can have one or more owners.
C-Corps offer limited liability and the ability to sell stock but require extensive record-keeping and are taxed separately.
B-Corps combine profit-making with social good and require additional transparency reports.
The video emphasizes the importance of choosing the right business structure for legal and financial protection.
Tax implications such as pass-through taxation and self-employment taxes are discussed.
Viewers are encouraged to consult government resources and accountants for detailed legal and tax advice.

Full Transcript — Download SRT & Markdown

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When will your idea transform from a casual side hustle into a full-blown business? Is it when your podcast gets sponsorships, when your catering company is booked for five weekends straight, or when you’ve sold your 100th bottle of Slug-be-Gone?

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Basically, when do things get REAL? I can’t tell you when you’ll start to feel like a businessperson, but the world recognizes it when you legally register your formal business structure.

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Basically, when do things get real? I can’t tell you when you’ll start to feel like a businessperson, but the world recognizes it when you legally register your formal business structure.

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It can be daunting to move from the abstract idea stage to the realm of bank accounts, taxes, and liability.

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You could be an LLC, or a C-Corp, or a B-Corp, or a Co-op. So many different letters!

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Things are about to get legit. I’m Anna Akana and this is Crash Course Business: Entrepreneurship.

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It can be daunting to move from the abstract idea stage to the realm of bank accounts, taxes, and liability.

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But think about them like a Choose Your Own Adventure novel. Choosing a business structure opens up a different future with unique twists and turns.

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Sometimes, it can feel like you’re making arbitrary decisions, but we’re going to wade through the legalese together.

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In the U.S., you register to say a cordial “what’s up?” to the state and federal government.

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Things are about to get legit. I’m Anna Akana, and this is Crash Course Business: Entrepreneurship.

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For you as the owner, and anyone you’re doing business with, registering can create some legal and financial protection.

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[Theme Music Plays] The legal basics of entrepreneurship aren’t as flashy as generating ideas or staking out the competition.

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We’ll talk about a bit of money stuff here, but check with your government’s commerce, tax, or treasury departments for more details.

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But think about them like a Choose Your Own Adventure novel. Choosing a business structure opens up a different future with unique twists and turns.

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These are most of the U.S. options, but a lot of countries have similar structures.

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

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Think freelance writers, independent landscapers, or even YouTubers. This is the easiest Choose Your Own Adventure decision: choosing nothing.

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In the U.S., you register to say a cordial “what’s up?” to the state and federal government.

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But it has some drawbacks. You aren’t considered separate from your business -- you’re personally liable.

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They need to know you exist so you can get the licenses and permits you need to do business and—everyone’s favorite topic—pay your taxes.

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Yikes. Raising investment money can be tough because you can’t sell stock -- or shares of ownership in the company.

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For you as the owner, and anyone you’re doing business with, registering can create some legal and financial protection.

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Filing taxes as a sole proprietor is pretty easy. You have what’s called pass-through status, where profits are passed straight to business owners and are just part of personal taxes, instead of also being included in the business taxes.

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Specifically, we’re talking about liability—or the state of being legally responsible for something—and potentially using helpful tax structures.

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Also, you have to factor in self-employment taxes, which are explained on IRS.gov. The cool thing about a sole-proprietorship is that your business expenses can be tax write-offs!

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We’ll talk about a bit of money stuff here, but check with your government’s commerce, tax, or treasury departments for more details.

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A partnership is a way for two or more people to share ownership of a business, which is great if you don’t want to go it alone, or for professional groups like attorneys or dentists.

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

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In a General Partnership, you and one or more partners share personal liability and all have an equal say when making decisions.

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These are most of the U.S. options, but a lot of countries have similar structures.

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In a Limited Partnership, someone takes on unlimited liability, so their personal assets can be seized in a legal battle, and they have to pay self-employment taxes.

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Let’s jump in. A sole proprietorship is a type of business that’s owned and run by one person.

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They’re only responsible for a slice of the business assets so they’re personally protected from lawsuits.

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Think freelance writers, independent landscapers, or even YouTubers. This is the easiest Choose Your Own Adventure decision: choosing nothing.

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It’s more work to form than a general partnership, and gives less protection than fancier business structures.

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If you provide a service or product to someone by yourself and get paid without registering for any kind of business, you’re considered a sole proprietorship.

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And you could get investments if you’re willing to take on silent partners. Partnerships are also helpful for tax reasons.

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But it has some drawbacks. You aren’t considered separate from your business—you’re personally liable.

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Overall, partnerships -- especially LPs and LLPs -- are more expensive than sole proprietorships because they need more legal and accounting help.

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That means your business money isn’t separate from your personal assets like your money, car, or house—and your personal assets could be taken in a lawsuit.

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Like a person, a corporation can have profits, taxes, and liability. The BBC, eBay, and AirBnB are all corporations.

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Yikes. Raising investment money can be tough because you can’t sell stock—or shares of ownership in the company.

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If you choose the C-corp path, you’re protected from lawsuits -- you aren’t personally liable and have limited liability.

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And banks might hesitate to lend money because they perceive a bigger risk in lending to just one person.

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Plus, if stockholders -- the people who own shares of your business -- leave or sell their stocks, you can keep chugging along instead of stopping to restructure.

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Filing taxes as a sole proprietor is pretty easy. You have what’s called pass-through status, where profits are passed straight to business owners and are just part of personal taxes, instead of also being included in the business taxes.

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They require extensive record-keeping, operational processes, and annual reports on their activities to the government.

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Basically, since the business money isn’t separate from your personal money, you just submit once with a few extra forms.

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C-corps are also beholden to profit. Their decisions have to be based on what makes the most profit for stockholders.

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Also, you have to factor in self-employment taxes, which are explained on IRS.gov. The cool thing about a sole proprietorship is that your business expenses can be tax write-offs!

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Like any corporation, B-corps give you lots of protection with limited liability. And maybe more importantly, this structure empowers and protects you to make a difference and a profit.

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New computer for work? Write it off! New desk? Write it off! You want to check with an accountant, of course, but that is a real advantage of owning your own business.

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Even if those decisions are a little less profitable, the CEO won’t get in trouble with stockholders.

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A partnership is a way for two or more people to share ownership of a business, which is great if you don’t want to go it alone, or for professional groups like attorneys or dentists.

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It’s still really expensive to incorporate, and B-corps are taxed the same as C-corps. Plus, to make sure you’re doing social good, you have to create even more reports for transparency.

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All the fun groups. If you choose a partnership, you have to pick one of three flavors that mostly affect power and liability: General, Limited, and Limited Liability.

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LLCs can have one or more owners. Complexly is an LLC! It’s literally in the name: you have limited liability.

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In a General Partnership, you and one or more partners share personal liability and all have an equal say when making decisions.

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Many startups begin with an LLC because of the protection and flexibility it has. In fact, this might help you attract investors.

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Just like a sole proprietorship, it’s the easiest choice for partners, but personal liability can be risky.

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And like a partnership, you have pass-through status for taxes, which can be nice, but you still pay self-employment taxes.

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In a Limited Partnership, someone takes on unlimited liability, so their personal assets can be seized in a legal battle, and they have to pay self-employment taxes.

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But you can also create a legal agreement within an LLC to cover ownership transfers.

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But they’re the head honcho and own and run most of the business. The other partners have limited input, but also limited liability.

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An elected board of directors runs the co-op, while every stockholder-slash-owner can vote on the overall direction.

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They’re only responsible for a slice of the business assets, so they’re personally protected from lawsuits.

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Stockholders vote on all decisions, which means that responses to market changes are slower. But in the spirit of equality, each owner gets precisely one vote and enjoys limited liability.

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These are often silent business partners... who are basically just the money. Shhh! In a Limited Liability Partnership, or LLP, everyone gets limited liability.

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But you might have a hard time getting outside investment. Traditional banks aren’t super excited about lending to businesses where their money won’t be guaranteed by one or a few specific owners.

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It’s more work to form than a general partnership, and gives less protection than fancier business structures.

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Nonprofits include Amnesty International, Better Business Bureau, or the Foundation to Decrease World Suck. If you choose this path, your work benefits the public.

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But it does give owners at least some liability protection. No matter the flavor, you’ll have an easier time raising money in a partnership than alone, since banks might be more willing to lend to multiple people.

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Also, owners are well-protected and have limited liability. After jumping through some hoops with the IRS, the government will grant you tax-exempt status, meaning you don’t pay state or federal taxes on any profits.

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And you could get investments if you’re willing to take on silent partners. Partnerships are also helpful for tax reasons.

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As for funding, nonprofits are often eligible for grants -- or money given by a government or organization for a specific project.

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General partners have pass-through status for taxes, like a sole proprietorship. Everyone splits the profits through the business, and deals with their own taxes, including self-employment taxes.

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And out of the goodness of their hearts, of course. Phew. Got all that? We made a handy chart for you too, just in case!

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Overall, partnerships—especially LPs and LLPs—are more expensive than sole proprietorships because they need more legal and accounting help.

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Let’s go to the Thought Bubble. You do a lot of tutoring online using free video chat software.

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Now a corporation, sometimes called a C-corp, is an entity that’s completely separate from its owners.

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You decide against a business partner, because you don’t want to share decision-making or profits with anyone, and you couldn’t find a co-founder with skills that complement yours.

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Like a person, a corporation can have profits, taxes, and liability. The BBC, eBay, and Airbnb are all corporations.

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It’s starting to look like a REAL business, so it’s time to choose your own adventure.

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Where you incorporate matters for many legal reasons. In the U.S., for example, lots of people form their legal entity in Delaware.

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After a couple years, though, you decide to become an LLC. You’re great at what you do, but some clients get mean when their grades don’t skyrocket -- so you need protection from personal liability.

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If you choose the C-corp path, you’re protected from lawsuits—you aren’t personally liable and have limited liability.

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So you can stick with an LLC or try to transform into a C-corp. Maybe you decide to stay an LLC, but you get an unlucky dice roll while generating your app.

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Funding is also easier, because corporations can sell stock to the public. While corporations can borrow from banks, they typically find it too restrictive and find money other ways.

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You eventually decide to cut your losses and call it quits. You had a good run!

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Plus, if stockholders—the people who own shares of your business—leave or sell their stocks, you can keep chugging along instead of stopping to restructure.

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You’re quickly becoming the premier tutoring organization in the U.S. and this business might outlive you.

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But for all these benefits, you have to be ready to hustle. Any type of corporation needs a giant pile of state and federal paperwork to form.

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We recommend talking to a trustworthy attorney or tax accountant for specific and nuanced advice, since they’ll know your business idea inside and out.

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They require extensive record-keeping, operational processes, and annual reports on their activities to the government.

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And this means… paperwork. Let’s start with the feds. In the U.S., you need an Employer Identification Number from the federal government, which will help you with taxes and getting a bank account.

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C-corps are also expensive to form. And unlike sole proprietors and partnerships, C-corps pay tax on profits before handing money out to stockholders, who also have to pay their own taxes, which means a little less profit for each owner.

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Next, register your business through your Secretary of State’s website. There are often small filing fees, and if that’s a barrier, try to find an advocate at a local Small Business Development Center, bank, or your state’s Department of Commerce.

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C-corps are also beholden to profit. Their decisions have to be based on what makes the most profit for stockholders.

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The worst they can say is no, go away! Then, check in with your local government.

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A benefit corporation, sometimes known as a B-corp, focuses on social good. Patagonia, Ben & Jerry’s, TOMS, and The Honest Company follow this path!

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And finally, it’s never too early to start thinking about taxes! Review the requirements for your state and federal tax reporting.

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Like any corporation, B-corps give you lots of protection with limited liability. And maybe more importantly, this structure empowers and protects you to make a difference and a profit.

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Make a plan. Stick to the plan. File your taxes. So the bottom line is: registering your business is a big decision, but an exciting one, because you get to define your own path.

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B-corps are designed to let the CEO—the person in charge of the business who may or may not be an owner—make decisions for social good.

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What infrastructure will you need? It’s up to you. Next time, we’ll talk about how to get feedback before launching our business, and what to do if our idea is falling flat.

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Even if those decisions are a little less profitable, the CEO won’t get in trouble with stockholders.

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If you want to help keep Crash Course free for everybody, forever, you can join our community on Patreon.

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The funding and structure is similar to a C-corp. But you can also look for impact investing—people investing money to create a specific social or environmental benefit.

Topics:business entitysole proprietorshippartnershipLLCC-CorpB-Corpbusiness registrationentrepreneurshiplegal basicstaxation

Frequently Asked Questions

When should I legally register my business?

You should register your business when you transition from a casual side hustle to a formal business recognized by the state and federal government, which provides legal and financial protections.

What is the difference between a sole proprietorship and an LLC?

A sole proprietorship is easy to form but does not separate personal and business liabilities, while an LLC offers limited liability protection and separates personal assets from business liabilities.

What are the tax benefits of a sole proprietorship?

Sole proprietorships have pass-through taxation where profits are reported on personal tax returns, and business expenses can be written off, simplifying tax filing.

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