March 18, 2021

LLC’s vs. Corporations

Transcription by Cera Keeler, CK Transcriptions

Narrator: It’s another sidebar: LLCs vs. Corporations. This is Episode 84 on Kelly Bagla’s Go Legal Yourself Podcast.

Kelly Bagla: Welcome to the Go Legal Yourself Podcast. This show is about knowing the legal life cycle of your business. 

Hello, my fantastic friends. It’s Kelly Bagla, the Queen of Business Law, and I’m here to bring you another sidebar. The title of this sidebar is, “LLC’s vs. Corporations”. You might have heard that there’s so much confusion out there, or you might have even experienced it yourself. You’re starting a business and you don’t know which entity to incorporate. You’ve obviously heard, oh, LLCs are great because your friend’s mother’s neighbor’s daughter-in-law’s son’s cousin has an LLC, right? And so, therefore, you should also have an LLC. This sidebar is really really important for you to understand the distinctions between the two entities. We have an LLC, which is a Limited Liability Company, and then we have a Corporation. 

So, an LLC -- it was established in the ‘70s, so, it’s really not that old of an entity, and the law for it, too, is from the ‘70s. Again, when it comes to laws, it’s a fairly brand new type of entity that one can incorporate. Now, LLCs -- their original use was only to hold real property. They were not built to, or created to actually run a business through. They were used to hold real property and act as a vehicle to receive passive income. Passive income meaning royalties from book deals, right, or rent, rent from real property. That’s passive income. And that’s why they were created, but over time, they’ve become a hybrid of the two. So you have the flexibility, if you will, of an LLC, because you can craft any terms that obviously are not contradictory to the LLC Act. You can craft those terms in an operating agreement. So that’s where the flexibility comes from.

Now, corporations are as old as time, right? And they have a set law. And corporations were created so you can do business through a corporation and it would -- you know, actual moving business. You know, you could be in any type of business. You could be a manufacturer, you can be a law firm, a professional law firm, or a doctor’s office. You can be someone that sells incredible products. That -- a corporation is the ideal entity for you. 

Going back to LLCs. An LLC is taxed differently, too, than a corporation, and you really have to understand -- how is the tax aspect going to affect your income? So, being a sole-proprietor, you are responsible for at least 16% of your entire income coming in and you give that away in self-employment tax. 16%, think about that. That’s a lot of money. And you’re just giving it away. You’re not getting any expenses -- you can’t expense that. You’re not putting into the system, such as, you’re not saving, and it doesn’t go into your Medicare, [indiscernible], your social security. What about disability? What about if you have to have some sort of knee surgery, and you’re out for a week. Who’s going to pay for that? And you are self-employed. Who’s going to pay for that? No one. You have to, right? So, now you’ve suffered the loss of income, plus you have to pay out of your pocket for your disability. So those are some of the disadvantages that come along with an LLC, because an LLC also pays 16% in self-employment tax. Again folks, that’s a lot of money. Just imagine what you could do with 16% of your income. You could use that for marketing. Remember that little thing, marketing? How are people going to find you without marketing? So, that’s the huge difference.

If you have a passive business, such as rental property, or if you have products that you sell such as royalties from books, an LLC is a fantastic way to receive passive income. Anything else that’s active income, it should always flow through a corporation. And obviously, I’m here to help you. You can always email me, contact me, and don’t forget I do have an app. Just download the app. Go to your app stores right now, right now, while you’re listening to -- go ahead, go to your app stores, download Go Legal Yourself, and contact me directly from there. And plus, this is the benefit of having an app, too. You can contact any of my guests directly from the app. 

Until next time, guys, this is attorney Kelly Bagla, the Queen of Business Law. I hope you have a fantastic week. 

Transcription by Cera Keeler, CK Transcriptions