Setting up your entity: Why this is important?

- To start a company, you need to create a business entity in order for you to protect yourself legally from liability, get tax advantages, and have access to business lines of credit, and investments from banks and investors, who would rather invest in a legal business structure, rather than just a sole proprietorship or general partnership. There are different types of entities, such as partnerships, limited liability companies or LLCs, corporations like S-Corps, C-Corps and B-Corps. The two that I believe most creatives will require are LLCs and S-Corps. To figure out which entity works right for you, please consult an attorney because I am not a licensed business law professional. So with an LLC and corporation, having limited liability protection means that your personal assets are protected from business creditors because your financial investment in the business is the limit of your liability. Having an entity will protect the owners from personal liability for any wrongdoing committed by the co-owners or employees, but it will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business. So just because you have an LLC or S-corp, doesn't mean you can do criminal acts and be protected. Now if you're just a sole proprietor or general partner without a legal entity, and your business is sued or has unpaid creditors, you personally face liability. But as an LLC or corporation owner, you might lose everything you have invested in the business, but your personal home, bank account, and other assets are protected. Having an entity also makes you subject to pass through taxation. So no income taxes are paid at the business level. Business profit or losses are passed through to owners personal tax returns. You can deduct expenses before taxes, including those for meals, travel, advertising costs, and more so it lowers your tax burden. In other words, you can write off business related expenses to offset your revenue, so you pay taxes for your profits after your expenses, which in turn can lower your taxes. And remember, I'm not a tax professional. So please consult an accountant to get more information on the tax benefits for having an LLC or corporation. Other advantages are having an operating agreement that lays out the structure of the company, which can minimize expensive conflicts later with partners. Also, two business entities can't have the same name in the same state. So forming an entity helps ensure that you keep your unique business name. You can also set up a bank account and apply for business credit, in which some cases do not report on your personal credit file. So you can leverage other people's money to boost your company without affecting your FICO score. But again, please consult a tax and legal professional to get all the details. I know that was a lot to take in, so hopefully that was helpful. I'll see you in the next video where I discuss the process of setting up an entity.