[MUSIC] Welcome back to our discussion about incorporation. We're going to spend this lesson going over the comparisons between the two most common forms of incorporation in the United States, the C-corporation and the limited liability corporation. Let's get started. And to get things started, we need to go over a couple of subtleties between the terminology behind LLCs and C-Corps. First, there's a subtle difference in what equity owners and these two types of entities are called. Equity owners in a limited liability corporation are called members. While equity owners in a C Corporation are known as shareholders. Secondly, in an LLC there are no shares of stock that are issued, there's no equity ownership, instead owners of an LLC are described by percentage ownership. In contrast, equity owners of a C Corp are referred to as share holders, as they have been issued shares of stock to denote their ownership interest. Of course a simple math equation divided a number of shares, owned by the number of shares issued can also create a percentage ownership calculation for a C-Corp as well. So you might be asking, what's the difference? To be honest, not much, but it's important to know the correct terminology as unique to each entity. And it's important as a business owner to understand these keywords. Although there is not much difference between ownership terminology, there's certainly other differences and similarities worth covering between these two entities. The following slides will each cover a particular subject related to these corporations. Let's get started. And C-Corporations control the company lies with its shareholders. These shareholders elect other shareholders to serve as directors who in turn higher officers, which also often times are shareholders as well. Officers are charged with handling the day to day operation of the company. The director oversee the overall performance of the company, and have more of a big picture responsibility to shareholders. And regular shareholders provide directions through voting rights and who serves as the director. Although the change of ownership describe above might see more fit for a publicly listed fortune 500 company. The structure is actually true for all C-Corps regardless the size. The difference being that there are much fewer shareholders. As for LLC's, the company is of course controlled by members. But similar to C-Corps, the control the company can also be shared with highered managers who might also be equity holders as well. Next, lets talk about one of the more important differences between these entities, which is how they are taxed. C-Corporations, by law, are considered to be a separate taxable entity. And subject to the payment of federal corporate income tax, and in some cases, even state income tax. This fact is what creates a situation of dual taxation, meaning that not only is the income of the corporation taxe. But also, each individual shareholder must pay income tax on any dividends paid to them. LLCs are different in this respect. By default LLCs service a pass-through or profits to the members, so the entity itself is not considered a taxable entity. Therefore each member is responsible for his or her proportional share of taxable income and their personal tax insurance. However it's important to note that an LLCs may choose to be a taxable entity, if a member decides. Not to sound like a broken record, but it's these types of subtleties that make it important to consult with an attorney, and CPA to ensure you create a business that is best suited for your particular life situation and those of your investors, if you have them. Next, let's look at ownership limitations. Let's start with c-corporations. One of the reasons why C-Cops operations have popularity is that it's quite easy to bring a new equity owners, as there is not limit to the number of shares or stocks that are permitted to be issued. This feature makes C-Cops very friendly to the types of companies that may need to raise multiple rounds of equity funding, as it can certainly speed up the process and allows the company to operate smoothly as a board of directors and officers can still provide companies' oversight. LLCs on the other hand are allowed to also bring an unlimited number of members. And therefore, also an unlimited division of ownership. But issuing percentages of ownership requires a refiled of the articles of organization. And can become burdens on the ownership positions are being awarded on a frequent basis. Therefore, I always recommend that you think about what type of financing and ownership distribution will be needed as your company grows. If you think that you might require a multiple round of financing with new equity investors. It might benefit you to consider a C corporation structure to provide ease of ownership expansion. If, on the other hand, you expect infrequent ownership changes, an LLC provides an easy distribution of ownership rights. Lastly, both forms of ownership allow for any type of owner to take equity position. Meaning that owners in these entities can individuals as well as other types of corporations, including more C-Corps or LLCs. At this point your head might be swimming in all these details, don't worry. Just remember that most companies are generally very simply structured C-Corps or LLCs. But it is important to know that these particular details that make each one unique. Lastly, I want to talk to you about the two documents that are necessary and important to the formation of your company. Not surprising there is yet more similar yet differently named documents for your C Corps and LLC's. When forming an LLC you must file what's known as articles of organization, state you live in. And when forming a state corp you must file articles of incorporation. The rule on both of these documents is to set up the basics for the corporation, such as contact information, mailing address, and ownership rights. These documents are both filed at the state, in which the company is registered, and are part of the public record. Also, I'd like to note that in the United States, operating a business in multiple states is permitted, and does not require you to form a new corporation in each state. Rather, you must register your company with the state you plan to do business as an out of state entity. The last two documents we'll cover are considered to be the blueprints for each type of entity. These are the corporate bylaws in the case of c-corps and the operating agreement in the case of LLCs. What do they do? Well, they define how the company runs and operates. They formalize the structure of the company. They determine roles and responsibilities. Often times they describe the powers, rates and capitalization distribution of stakeholders, including shareholders, members, directors and officers. And they help settle disputes that may arise among shareholders. Lastly these documents are not publicly filed but rather internal legal documents signed by the owners. This of course changes if the company becomes listed on a public stock exchange. So what does all this discussion add up to? Once again the goal is to get you familiar with these types of entities. Ultimately we highly recommend that you work with an experienced, and trusted attorney to choose the correct business entity that will work best for your future growth needs as well as your tax situation. Also don't be afraid. The reality is most people make mistakes along the way when it comes to incorporation. Remember that mistakes can be corrected albeit often at expense, but don't let perfection get in the way of progress or getting your business off the ground. You'll learn a lot more setting up your entity then you ever will listening to me or anyone else talking about this subject. So let's get to work. [MUSIC] [MUSIC]
