Cash Course: Becoming a Business

wow looks like you've had some real success with selling lemonade congrats thank you so have you formally created a company for your business what you know like a sole proprietorship an LLC or maybe even a corporation huh you do know there are advantages to formally creating a company to run your business right totally I definitely know that no actually I don't well it's great that you found success in your business let's talk about how to protect all that hard work and continue to grow it on this episode of why can't I just run the business as myself well technically you're not a business to be a business you'll need to form a business entity an entity is anything that has a clear and separate existence in the business world it's an organization that's formed to engage in activities to make money being a business entity provides many benefits such as possible tax advantages you are paying taxes right of course good now let's take a look at some of the most common business entities starting with the simplest one sole proprietorships this is a business structure that's owned by a single individual who is liable for the business's debts and pays personal income tax on the money made by the business a sole proprietorships advantages include being simple to set up Easy Tax reporting and lower operational costs great sign me up however it comes with the disadvantage of unlimited personal liability which means meaning if your lemonade operation runs into Financial or legal trouble you'll be personally responsible say your lemonade makes someone sick and you get sued you could lose your house my house yes but thankfully there's another type of business that can give you some liability protection a limited liability company also known as an LLC this business bus structure protects owners from being personally held responsible for any debts accured by the business and allows for more than one owner nice similar to a sole proprietorship profits earned in an LLC can be taxed as personal income and the company isn't completely separated from its owners forming in LLC is generally more costly and more difficult than a so proprietorship but it offers the protection that a sole proprietorship does not and since it's not always legally separate from the owner the LLC may need to dissolve if an owner goes bankrupt or passes away so once it's set up it'll be the ultimate lemonade Corporation actually incorporation is a separate kind of business entity this is the legal process of forming a company as its own entity rather than being attached to its owners once incorporation is completed a corporation is formed and the business assets and income are now considered separate from all owners and investors it's often designated by the abbreviations for incorporated or limited after its name this process tends to be the most difficult and costly to set up incorporations could be subject to being double taxed once at the business level and once at the personal level so it Separates Me from my business it's expensive and it's difficult why would anyone want to incorporate well say you wanted to raise money from people outside your immediate family and friends to grow your operations incorporating makes that easier because investors and financial institutions generally have more confidence in a corporation's ability to pay back debts sweet being a corporation also gives the ability to issue shares of stock in order to raise money most major stocks such as Google Apple and Amazon which trade on public stock exchanges are corporations both incorporation and llc's provide a corporate veil that covers or protects a business when it's unable to pay back debts this Veil means creditors cannot recover their losses by going after the owners person so if I have a corporate veil and I'm accused of breaking the law I'll be fine right well not quite if the business is involved in illegal activity the law can pierce the corporate veil and hold the owners personally responsible wow now that you know something about forming a business let's pretend you're looking to start your own all right first talk to someone who's formed a business ask them what type of business they own and why they chose the business entity they did second do some research look up and explore the details of sole proprietorships llc's and corporations there are lots of unique vocabulary and processes when it comes to forming a business third write out which business entity you would choose and why show it to someone with business experience and get some feedback finding success is a great feeling but it's important to protect your hard work and to find potentially even more success establishing a formal business entity could be the first step to doing just that giving you benefits and protections through the highs and lows of being an entrepreneur wait do I put salt or sugar in this what is this [Music] taste watch more at pruk kids.com and parents don't forget to subscribe