All right. So let's go over the types of business entities

available to you for the formation of your company in the United States.

Now, for those of you who are watching but aren't in the United States,

the business entities in your country aren't in my area of expertise,

so I won't be covering them in this video.

However, I've provided some resources in the notes below

that should enable you to come to an educated decision on your own.

For the different kinds of entities in the U.S.,

we won't go into detail on all the types

because some aren't so relevant to running a freelance business,

but we'll cover them, nonetheless.

Now, the most basic business entity is a sole proprietorship.

There is next to no paperwork to fill out,

and most states recognize you as a sole proprietorship

if you're conducting business, even if you don't think of yourself as one.

In a sole proprietorship you, the owner,

are responsible for all business transactions

including any debts and liabilities owned by the business.

Sole proprietorships exist as long as

the owners are engaged in the business

and can even pass on this business to their heirs.

They also don't have to file any separate business taxes.

All taxes on income earned by the business

are filed along with the owner's personal tax returns.

Sole proprietorships are quite simple,

but they do offer a few advantages.

You retain complete control of the business, of course,

which is one of the reasons you got into freelancing.

But as long as the company consists of only you,

you'll have that advantage regardless of the company's structure.

There are also very minimal costs associated with

having a sole proprietorship and no corporate tax payments or fees involved.

There are certainly downsides as well, though.

Because all the money earned in the course of your business

is filed with your personal tax returns,

you will be paying self-employment taxes on that entire sum.

On top of that, sole proprietorships don't offer any liability protection.

If you run a freelance business, chances are you already are a sole proprietorship,

but since it doesn't really offer much in the way of protection,

and tax savings, we're going to look at some of the other entities.

A partnership is another popular structure for small businesses,

but it is one that's ideal for when two or more people

go into business together.

In our scenario, we're still solo freelancers,

so partnerships don't fit in well with our model either.

Then we have corporations.

A corporation, in contrast to a sole proprietorship,

is a business entity that is a completely separate entity

from the owners of the company.

It can have from one owner to an unlimited number of owners,

who don't have to be involved with the running of the company.

Corporations are separate taxable entities,

which means that you as an owner or stockholder

are entirely independent from the company.

Corporations provide all the flexibility that you would need

as a freelancer, but there is a downside.

Corporations are the most expensive to set up,

and the costliest to maintain.

You also have all this unnecessary paperwork burden

that you have to submit to the relevant authorities every year.

That is unnecessary overhead for more flexibility than we would need.

Remember, part of running your business

is keeping those costs low whenever possible.

Then we have LLCs.

LLCs are a very popular choice of business entity for freelancers.

LLCs are far simpler than corporations

and are great for people looking to start a business

with minimal hassle and fewer formalities.

Similar to corporations, LLCs may have

an unlimited number of owners, called members.

LLC stands for limited liability corporation and,

as you probably guessed, this means it offers

the limited liability protection that corporations enjoy.

In terms of taxes, LLCs are flow-through entities for tax purposes.

This means that any taxable income earned by the company

is passed on through to the individual members

and is taxed only once.

These taxes aren't distributed as wages but as a profit distribution.

Unfortunately, in an LLC taxes are paid on any profit earned by the company.

So, regardless of how much you take out

as a profit distribution,

you'll be paying taxes on the whole amount rather than just your share.

The last structure we're going to look at is an S corporation.

S corps, as they are commonly known, are corporations

that elect to be taxed under the subchapter S specifications

of the Internal Revenue Code of the IRS.

This gives the corporation certain additional characteristics.

Shareholders of an S corporation

report the flow-through of income and losses

on their personal tax returns

and are assessed tax at their individual income tax rates

instead of being taxed like a corporation.

This allows S corps to avoid double taxation on their corporate income.

In simple terms, the owners pay the taxes

on the profits of an S corp.

Unlike LLCs, however, the owners are only paying taxes

on their share of the profits.

An S corp is a subset of a regular corporation,

and as a result offers the same limited liability protection

that regular corporations do, thereby reducing the risk

that the owners bear.

In addition, S corps can lower what the company pays in taxes

since you can pass the income through to the shareholders.

S corps still have the paperwork burden,

higher cost, and complexity of running a corporation,

but they provide for a compelling business entity

because of their tax advantages and liability protection.

So, to summarize, we're going to go with either

an LLC or an S corp for our freelance business.

For you to make a decision regarding

what structure you should pick between the two,

you need to evaluate which one provides the best

tax advantages for you in comparison to the cost of running it.

This is where you talk to tax professional or an accountant.

The laws vary from state to state, and it's probably best

to let an expert advise you on this.

Regardless of the choice, here's how you go about doing it.

First you research the entity within your state or locale.

The advantages and disadvantages I provided

apply to the generic structures.

Your state could have certain restrictions on some of these

or have more benefits piled on.

Make sure you understand what the entity means in your state.

Talk to a tax professional about the tax benefits you get

from creating that specific business entity

versus any of the others.

Fill out the paperwork.

The traditional way to go about this is to go the state office

and fill out any forms.

There are plenty of solutions on the web, of course.

Check out LegalZoom or BizFilings.

It's relatively cheap and gets the job done with fewer hassles.

Gather all the documents you need to apply for a business bank account.

Remember, one of the reasons you created a company

is to keep your personal and business finances separate.

If you filed for an LLC, for example, the bank will ask you

for your articles of organization and the operating agreement, at minimum.

Once you have your company's structure and business bank accounts,

you can go about doing everything as a company.

You can issue and sign your contracts, invoice clients,

and collect payments rather than as an individual.

This provides a nice barrier of safety, allowing you to go about your business

without worrying that you might lose your home.