Choosing the Right Entity Structure for Your Business

Episode Summary:
In this episode of The Mark You Leave, Alex Mejias of James River Law, along with co-hosts Tariq and Bri, breaks down the big decision every business owner must make -- how to choose the right legal entity structure.

From the simplicity (and risk!) of sole proprietorships to the flexibility of LLCs, the team uses real-life examples (yes, Beyoncé and Destiny’s Child included) to walk through partnerships, C corps, S corps, and PLLCs. Plus, they discuss how to actually protect yourself from liability — because filing the paperwork is just the beginning.

Whether you’re launching your side hustle or scaling your startup, this episode is a must-listen.

What You’ll Learn in This Episode:

• The real risks of sole proprietorships and partnerships
• Why LLCs are a flexible, popular choice for entrepreneurs
• How corporations are structured and taxed (C Corps vs. S Corps)
• When and why a PLLC is required
• The truth about “piercing the corporate veil” — and how to avoid it
• How creatives and public figures can protect their identity using an EIN
• Why business formation is more than just paperwork

Connect with Us:

• Website: jamesriverlaw.com
• Instagram: @jamesriverlaw
• LinkedIn: JamesRiverLaw
• Contact: hello@jamesriverlaw.com
• Book a Call: jamesriverlaw.com/book-a-call

👉 Like, subscribe, and share to stay tuned as we explore the full journey of entrepreneurship — from start to legacy.

Transcript

Alex: 

Hi, and welcome to the Mark you Leave where we explore the entrepreneur's journey.

My name is Alex Mejias with James River Law.

I'm joined, as always, by Tariq and Bri. 

Thank you all for being here.

On today's podcast, we're talking about choosing the right entity structure for your business.

This is a topic that a lot of people have questions about, a lot of people on the internet and they come to us with their internet answers and we spend a lot of time helping them understand what is actually going on and helping them make the best decision that is possible.

So I'm actually just going to kind of give an overview.

If you all have questions along the way, please ask.

And we'll kind of just go really through pretty much every single type of different business structure you have, starting from sort of the most basic business structures and then we'll kind of go from there.

So whenever you start doing any type of business activity, if you had a lemonade stand, you are what's called a sole proprietor.

You have a sole proprietorship.

That is basically any individual person doing business.

And it's the simplest form of a business.

It doesn't require any type of filing.

It doesn't require really anything.

If you just start doing business, you have a sole proprietorship.

Most banks will give you a bank account in your name that is a business bank account and you can do that.

Now, I do not recommend doing a sole proprietorship.

The point of having a business entity is really to limit your own liability, your exposure. if you do something, you hurt someone, if you break a contract and you have liability in the form of money that you owe to someone else. When you are a sole proprietorship, your personal assets can be at risk.

Tariq: 

And so, if I'm Beyonce and I's stick with you stick with me.

Alex: 

Okay.

Bri: 

I love this example already. 

Tariq: 

Stick with me, okay. 

Alex: 

Okay, humble.

Tariq:

So I could be or form a sole proprietorship, or I guess I just naturally would be, but I would not want to do that because I would not want people to come after me personally.

Alex: 

Yeah. So that's a good example.

So let's say you're Beyonce and you're just starting out, right? And so you want to enter into a contract with people.

Should you form a sole proprietorship, or should you have a sole proprietorship, or should you do something more?

So maybe what we'll use, let's use Beyonce as like our example, as we talk about all these things.

Tariq: 

I love that.

Alex: 

So Beyonce goes out and she starts entering into contracts.

Well, what happens when Beyonce doesn't show up to a gig and she gets sued?

What happens if Beyonce is putting on a show and someone is injured at the show?

Well, her personal assets in Houston, Texas, are not to like, but are at risk and she could lose, you know, her own personal money.

You know, there are some protections for your house up to a certain point, but her personal assets are a risk.

So it wouldn't be the best form of a way to conduct business because her personal assets are risk.

So sticking with that, let's say Beyonce forms a band called Destiny's Child.

A group.

Let's just say, I just came up with that.

Bri: 

That was very creative. Very impressed.

Alex: 

So, and they start essentially performing and offering their performance services.

What they have is actually called a partnership, which is sort of like the multi-member version of a sole proprietorship.

It's just two or more people entering into a business endeavor together.

So if you and I, if Beyonce and her friends start a group, that is a partnership by default.

If you and I start a lemonade stand, that's a partnership by default.

In a partnership, again, there is no liability protection.

And not only that, but we are all what are called jointly and severally liable for the acts and the liabilities of our partnership.

So Destiny’s Child is out touring and Beyonce just hits a fan.

I don't know why she does.

She gets sued.

Well, as if it's part of a Destiny's Child show, each of the partners could also potentially be liable, fully for the entire amount of that liability because this is it's a partnership and they're each jointly and severally liable for the acts of each other, essentially, in the course of business.

So, it's not an ideal way of doing things.

Bri: 

Now, how are you able to protect in that situation?

What should Destiny's child do?

Alex: 

So, both Beyonce and Destiny's Child should use some type of a corporate entity structure.

So a corporate entity is essentially a legal person that is created by statute or the law, that can basically transact business and can be sued, can enter into contracts, can do all of the things that you can do as an individual, human person, they would be a corporate person doing all of those things in the world.

And now they are the party that is actually doing the bad act, breaking the contract, doing whatever.

And so, whatever they own is at risk and not the assets of these owners of that entity.

So, whether you're a single member person or a single member business entity or a multi-member, you can do any of the following structures that we'll talk about.

So, the first that you've everybody, I'm sure has heard of, is a limited liability company.

So, a limited liability company is a very flexible entity form that is basically a blank slate.

It's a kind of a choose-your-own adventure type of company.

There are default rules that are in the code of Virginia for how a limited liability company operates, but you can kind of change and make the rules however you want them to be in terms of how, um, you operate within, you know, how you relate to the control of the entity. Um, the splitting of like profits and really everything within the entity, you can make it, you can structure everyone.

So, they're really flexible.

But essentially, if you form a limited liability company and you take proper steps, so it's very important, it's not just a piece of paper, you have to actually do things, you would be shielded from any liability that kind of comes your way.

So, in our example, let's say they for Destiny's Child LLC, and that same issue happens.

Well, now the LLC would be sued and only the assets of the LLC would be at risk and not each of their personal assets.

So, obviously, it's a very powerful thing to have a business entity versus not having any type of a business entity.

So, we always recommend at a very minimum, having an LLC.

So, from a liability standpoint, an LLC provides the same level of liability protection as a corporation.

However, an LLC is taxed differently than a corporation.

And so just to briefly introduce a corporation, a corporation is an older form of an entity than the LLC LLCs are relatively new, they've been around for, you know, 40 or 50 years.

But a corporation obviously has been around much longer.

And a corporation, you can have, again, a corporate person.

But a corporation is also governed by statute.

So, like there are rules about how corporations work.

And they are a little bit less cookie cutter.

Although there are things that you can do to kind of have like bring some creativity into a corporation.

But typically, a corporation has shareholders or stockholders who are the owners of the corporation and a board of directors who control and who are responsible for the company, and then officers who kind of like execute the day-to-day operation of a company.

And within that, you can have lots of different permutations of classes of shares and all kinds of interesting stuff.

But the biggest difference between a C corporation and an LLC is how they are taxed.

So, from a tax perspective, a limited liability company is disregarded for tax purposes by default.

So, if I'm a single member LLC, I'm basically taxed like a sole proprietor.

So, the government basically doesn't look at the LLC, whatever profits and losses I have, I put that on the schedule C, as if I was an independent contractor.

And then that's how, and then I pay self-employment tax on those on those profits.

And then I add it to my 1040 and move on with my day.

If you're a multimember LLC, you're taxed like a partnership because again, you're disregarded for tax purposes.

A C corporation is different. The IRS sees a C corporation.

That is a terrible, not unintentional.

Not really a pun.

So that corporation actually pays its own taxes.

So, a C corporation pays taxes, and then it's owners also pay taxes on the dividends or the money that they receive from the profits.

Okay, so corporation pays out its profits to its owners in what that's called a dividend, essentially.

So, when you hear this idea of like double taxation, that's what that means, is that the corporation is taxed, and then the owners are also taxed on top of that, whereas with an LLC, the entity is not itself taxed.

Tariq:

Right.

Alex: 

Okay.

So, the advantage of an LLC from a tax perspective is huge because you're not paying an extra level of taxes.

Well, then why does anybody do a corporation?

Well, there are rules about what you can and can't do with an LLC, typically corporations are really good for raising funds, if you want to bring on investors.

Obviously, every publicly traded company is a corporation.

If you want to offer your stock and make your stock available publicly, it's also a very it’s ideal for folks who have foreign owners who are involved.

Tariq: 

Like in Succession, that sort of world.

Alex:

Exactly.

Yes, yes, yes.

So, there are a lot of reasons, but typically there are reasons why we see people form C corporations is to raise money.

They want to raise like venture capital money.

Now, the other, the last sort of entity that we'll talk about today is a hybrid between a C corporation and an LLC, and that's called an S corporation, which is actually not its own type of entity.

It's really more of a tax election.

So, you can form a C corporation or an LLC, and then you can elect to be taxed as an S corporation.

And that gives you the benefit of avoiding self-employment tax.

You don't have to pay self-employment tax, but the corporation itself is not taxed either.

So, but what you, the way that it works, and there are some special rules about who can qualify for an S corporation, but you would pay the owners a salary so they have to make a reasonable wage, and you pay employer taxes on that.

But then that allows you to get out of the regime of paying self-employment tax.

So, it's a little bit of a hybrid entity, but there are, again, rules you can only have hundred owners.

There can only be one class of shares.

So, everybody has to be sort of on equal footing.

So, it's a very specialized form of corporations that's really designed for small businesses.

So, it's not something if you're like raising venture capital money, you're going to have investors who want to have preferred shares.

You can't do that.

And if you are very small, you probably don't really need to do that because for a like a tax perspective, self-employment tax is not going to be all that much.

So those are the main types of business structures.

Again, we typically are doing LLCs, S corporations, or C corporations.

We strongly recommend people not to do a sole proprietorship or a partnership that just leads to a lot of terrible potential consequences.

One thing that I will say is that forming these types of entities, just alone, just getting the piece of paper is not enough, courts have a concept.

There's a common law concept called piercing the corporate veil where a court can like look past the corporate entity to its owners and essentially say, well, this entity is not really a real thing.

It's just a piece of paper.

You're just trying to get out of liability.

So, when you are forming one of these entities, you want to make sure that you are doing it correctly.

So, you want to observe basic corporate formalities, have resolutions, have an operating agreement, if you're an LLC. 

Have bylaws, if you're a corporation, you want to have, um, money in a bank account.

Capitalization is something that a bank looks at.

Are you, can you pay the debts of this business?

Um And then things like insurance are a really good idea to have.

And even, um, if you are a sole proprietor, you can also still have insurance, which we'd highly recommend.

If you are a sole proprietor, you want to make sure that you have insurance no matter what.

So those are ways that you can make sure that the that it's not just a piece of paper, that it actually really does provide the maximum amount of protection.

One thing that I will say for athletes, for folks that are like famous, having an LLC is a really important thing for a number of reasons.

One is that you don't want to be giving your Social Security number out to people all the time, you know, typically, when you're paid as a contractor, um, on a marketing deal or anything like that, they're going to ask you for a W9, which is a tax form where you basically give them your tax ID number, which by default is your, your SSN.

Well, you're going to enter into a lot of contracts over time.

So, Beyonce is going to be entering into a ton of contracts, so she doesn't want to be , um, giving out her personal information.

She should be, you know, using a furnishing company or an LLC or some type of corporate structure to then, you know, furnish her services so that she can give an EIN, an employer identification number instead of your personal information.

So definitely an essential thing.

If you are a creative, if you're an athlete, if you're a performer of any kind and you're going to be entering into marketing agreements, make sure you have some type of a corporate entity that you can use to kind of receive those funds and to enter into contracts on your behalf because you're going to want to have that level of protection for your own identity .

And also, there are lots of reasons, other reasons why it can be beneficial to form that company in the form of, you know, tax write-offs and being able to kind of contain all of your business activity within an entity structure.

Are there any other questions that you all have as I've been talking about all this?

I know it's kind of a lot of information.

Tariq:

I don' think. Think I'm set.

Bri: 

No, I'm still loving the choose Your Own Adventure tagline from your LLC.

Alex: 

Yeah, LLCs are crazy because like you can actually set them up to operate just like a corporation.

You can have classes of shares.

You can have a board, um, you can, you know, typically, by default, um, ownership in LLC is designated by membership interest or like percentage interest, but you can also change that, to have it be represented by what are called units, which operate essentially like shares.

And so, you can have shares and do creative things with different types of units.

There' There's lots of interesting things that you can do with an LLC.

So, it's a super flexible structure.

And so, a lot of times we do recommend an LLC and, you know, make an S Corp election.

You can even actually elect to be taxed as a C Corp, as an LLC.

I don't know why you would, but you can.

Bri:

But the options there.

Alex:

It's there.

Yeah, it's there There's a little more question.

Yeah.

Tariq:

Can you talk about a PLLC a little bit?

Alex:”

Yeah, so a PLLC, we are a PLLC, which is a professional limited liability.

That's typically for lawyers, doctors, I think architects. Honestly, for real.

Tariq:

Yeah.

Alex:

It feels a little bit like a money grab.

I don't really know.

It's basically, I guess it's a way to designate that you are some type of a licensed professional.

You do have to pay an extra fee every year for it.

But all I know is that you have to do it if you are certain types of business.

So if you're a medical practice, if you're a legal practice , and you have to, and it's a state-by-state thing of like who, you know, um, who has to be a PLC or a PLLC, but it's basically just a professional, limited liability company, and it just designates it you're some type of quote unquote professional.

So, yeah, and PLCs are a little bit different because they can typically only be owned by professionals.

So, a law firm here in Virginia can only be owned by lawyers.

So, there's no equity coming in either of yall's way.

Tariq: 

Man.

Alex:

Sorry .

So just, you know, set expectations here.

So, yeah.

And honestly, like, I don't love that rule because I do think that lawyers are not great businesspeople a lot of times.

They don't really know how to do it.

So to be able to bring on a partner who could like run the business and have skin in the game, would make a lot of sense, but, yeah, but it's not allowed. .

Bri:

Maybe one day.

Alex: 

Maybe one day.

And there be, there may be states that are moving in that direction.

I think.

Arizona's got some interesting things going on around legal ethics, but for now.

Yeah, it's not, it's not possible.

Tariq:

Gotcha.

Alex:

Cool.

Yeah.

So, I think that's about it for this one.

So, thank you so much again for tuning in.

Hope that this was informative.

If you have any questions for us about today's topic, please feel free to write us at podcast@jamesriverlaw.com and we will answer your questions on a future podcast.

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See ya.