🏛️ STEP 4cb — DIFFERENCE IN CORPORATIONS

Choosing the Right Entity for Protection, Taxes, and Long-Term Wealth

🌟 INTRODUCTION — Picking the Right “Shell” for Your Wealth

In Step 4ca, you learned why you need a corporation or entity:

Protection
Tax advantages
Clean separation
Professionalism
Business credit
Long-term wealth structure

Now we answer the next question:

“Okay, but which one do I pick?”

There’s a reason people get overwhelmed here:

Too many terms: LLC, S-Corp, C-Corp, PLLC, Series LLC, partnerships…
Random advice: “Just get an LLC” or “All the rich people use Delaware C-Corps!”
Fear of picking the “wrong” thing

Step 4cb will clear the fog and give you:

A clean map of entity types
The real differences between them
How they are taxed
How they protect (or don’t protect) you
When each one makes sense
How they connect to real estate and tax strategies we already built

By the end of this, you’ll be able to say:

“I know which type of entity fits my situation.”

Let’s go.

🧭 SECTION 1 — THE BIG MAP OF ENTITY TYPES

We’ll focus on the main ones you actually need to understand:

🟥 1️⃣ Sole Proprietorship (default, not really an entity)

🟧 2️⃣ General Partnership

🟩 3️⃣ LLC (Single-Member or Multi-Member)

🟦 4️⃣ S-Corporation (tax election)

🟨 5️⃣ C-Corporation

🟪 6️⃣ PLLC (Professional LLC)

🟫 7️⃣ Series LLC (especially for real estate)

We’ll explain:

What it is
How it’s taxed
How it protects you
When it’s smart
When it’s risky or overkill

🟥 SECTION 2 — SOLE PROPRIETORSHIP (DEFAULT MODE)

❓ What It Is

A sole proprietorship is what you are by default if:

You start selling something
Or doing freelance work
Or running a side hustle
Without forming any formal entity

There’s no paperwork (for the structure itself).
You are simply you doing business.

🧾 How It’s Taxed

All income and expenses are reported on Schedule C of your personal tax return.
Net profit is subject to:
- Income tax, and
- Self-employment tax (Social Security + Medicare)

Simple, but expensive as you grow.

🛡️ Protection Level

No liability protection.
YOU and the business are legally the same.
If the business is sued, you are sued.
Your home, car, bank account, wages, etc., are all on the line.

✅ When It Might Be Okay (Short-Term)

You’re just testing an idea.
You’ve made less than a few thousand dollars.
Your risk is genuinely very low.
You plan to incorporate as soon as it’s real.

❌ Why It’s Not a Long-Term Wealth Vehicle

No shield.
No entity identity.
Harder to be taken seriously.
Limited tax planning.
Full self-employment tax on all profit.

Takeaway: Sole prop is “training wheels,” not the final bike.

🟧 SECTION 3 — GENERAL PARTNERSHIP (DOUBLE RISKY MODE)

❓ What It Is

A general partnership exists when two or more people start doing business together without forming an entity.

This is like a multi-person sole proprietorship.

🧾 Tax

Files an information return (Form 1065).
Profits and losses pass through to partners via K-1 forms.
Each partner pays their own tax on their share.

Tax-wise, pass-through is fine.
Legally? Very dangerous.

🛡️ Protection Level

Almost no protection.
Partners have joint and several liability, which means:
- You can be personally liable for the actions and mistakes of your partner.

That’s as bad as it sounds.

❌ Why You Generally Want to Avoid It

You’re tied to your partner’s behavior.
No liability shield.
Messy if something goes wrong.

Takeaway: If you're going into business with someone, it is usually better to form an LLC with an operating agreement rather than an informal partnership.

🟩 SECTION 4 — LLC (LIMITED LIABILITY COMPANY)

Now we’re talking.

❓ What It Is

An LLC is:

A flexible legal entity that provides limited liability protection and can be taxed in different ways.

Key features:

Owned by members (not shareholders).
Flexible structure.
Works great for:
- Small businesses
- Online businesses
- Contractors/freelancers
- Real estate investors
- Holding companies

You can have:

Single-member LLC (one owner)
Multi-member LLC (more than one owner)

🧾 How It’s Taxed (by default)

Single-member LLC → taxed like a sole proprietorship (disregarded entity).
Multi-member LLC → taxed like a partnership (pass-through via K-1).

But the magic is:

An LLC can elect to be taxed as an S-Corp or even a C-Corp later.

So:
Legal form = LLC
Tax form = your choice (within IRS rules)

This flexibility is gold.

🛡️ Protection Level

Limited liability for members (owners), meaning:
- Personal assets are generally protected from business lawsuits & debts
- As long as you:
  - Keep business & personal finances separate
  - Don’t commit fraud
  - Follow basic entity formalities

✅ Why LLCs Are So Popular

Simple to form
Simple to maintain
Flexible ownership
Flexible taxation
Widely recognized
Ideal for:
- Side hustles
- Service businesses
- Real estate holdings
- Online brands
- Coaches, creators, consultants

⚠️ Limitations

By default, you still pay self-employment tax on all profit (unless you elect S-Corp).
Still need to do proper bookkeeping and treat it like a real business.

Takeaway:
LLC is the go-to starting point entity for most small businesses and investors.
Later, you decide how you want it taxed.

🟦 SECTION 5 — S-CORPORATION (NOT A THING, A TAX ELECTION)

This one confuses people the most, so let’s make it VERY clear:

An S-Corp is not a type of company you form.
It is a tax status you elect with the IRS.

You can have:

An LLC taxed as an S-Corp
A corporation taxed as an S-Corp

Most small businesses:

👉 Form an LLC with their state,
👉 Then file with the IRS to be taxed as an S-Corp.

❓ What S-Corp Status Does

It changes how your business income is taxed, not how your legal entity is formed.

Key features:

Profits pass through to you (no corporate-level income tax).
But you can split income into two categories:
1. Salary (subject to payroll taxes)
2. Distributions (NOT subject to self-employment tax)

That’s the big benefit.

🧾 Tax Treatment

The business files Form 1120-S (S-Corp tax return).
You receive a K-1 for your share of profits.
You must pay yourself a “reasonable salary” for the role you perform.
Additional profit can be taken as distributions.

Salary = payroll taxes (Social Security + Medicare)
Distributions = no payroll/self-employment tax (but still subject to income tax)

💰 Why This Can Save You Thousands

Example (super simplified):

$120,000 net profit from business
As sole prop/LLC default → all $120k hit with self-employment tax (~15.3%) + income tax
As S-Corp:
- You pay yourself reasonable salary = $60k (payroll taxes on that only)
- Remaining profit = $60k distribution (no payroll tax)

That can easily save $6,000–$10,000+ per year in taxes, depending on your numbers.

✅ When S-Corp Status Makes Sense

Your business has consistent profit
Profit (NOT revenue) is usually at least $40k–$60k+/year
You’re okay with more complexity:
- Payroll
- More forms
- Possibly a CPA

⚠️ When It May Be Overkill

You’re just starting
You’re only making a few thousand in profit
You hate paperwork and complexity
You don’t have steady income yet

Takeaway:
S-Corp status is a power tax tool, especially for service businesses and solo entrepreneurs with solid profit.

🟨 SECTION 6 — C-CORPORATION (THE “BIG COMPANY” STRUCTURE)

❓ What It Is

A C-Corporation (“C-Corp”) is the classic corporate structure:

Owned by shareholders
Managed by a board of directors
Officer roles (CEO, CFO, etc.)
Common for:
- Startups seeking investors
- Public companies
- Some very high-level tax strategies

🧾 Tax Treatment

The corporation is its own taxpayer.
Pays tax on profits at corporate tax rate.
If it pays dividends to shareholders, those dividends are taxed again at the individual level.

That’s called double taxation.

BUT:

There are also advanced C-Corp benefits for:

Health insurance
Fringe benefits
Retained earnings
Some types of income

We’re keeping it high level here.

🛡️ Protection Level

Strong liability protection (like LLCs).

✅ When a C-Corp May Make Sense

You’re building a high-growth startup with outside investors.
You plan to issue different classes of stock.
You plan to go public someday.
You are using specific advanced strategies with professional guidance.

❌ When It’s Overkill

Most small local businesses
Most solopreneurs
Most online brands
Most real estate investors

Takeaway:
Most Life’s Wealth Quest students will NOT need a C-Corp as their first entity.
An LLC (possibly taxed as S-Corp later) is usually better.

🟪 SECTION 7 — PLLC (PROFESSIONAL LLC)

❓ What It Is

A PLLC is a Professional Limited Liability Company.

Certain professions are regulated by states and must use special entity types, for example:

Doctors
Lawyers
Accountants
Engineers
Some licensed therapists

Some states require PLLCs instead of regular LLCs for these professions.

✅ Key Points

Same basic benefits as an LLC (limited liability, flexibility).
Specifically designed to meet licensing board and state law requirements.
You still might layer tax elections (like S-Corp status).

If you’re in a regulated profession, you’ll likely hear PLLC from your state or licensing board.

🟫 SECTION 8 — SERIES LLC (ESPECIALLY FOR REAL ESTATE)

This will show up again in your real estate section, but here’s the introduction.

❓ What It Is

A Series LLC is:

One “master LLC” that contains multiple “series” or “cells” inside it, each treated like a separate entity for liability.

Think of it like:

A parent folder
With multiple sub-folders
Each sub-folder holds a different property or business asset

Popular with:

Real estate investors
People who own multiple properties
Asset protection-focused investors

🧾 Tax Treatment

Depends on the state and setup:

Each series might be treated like its own LLC for tax purposes.
Or everything flows through the master.
You must follow state-specific rules carefully.

🛡️ Liability

The idea is:

If something goes wrong with Property A (Series A),
It doesn’t affect Property B (Series B),
Even though both are under the same “Master LLC.”

⚠️ Important

Not available in every state.
Rules are evolving.
Must be done carefully, often with professional guidance.

Takeaway:
Series LLCs can be VERY powerful for a real estate-heavy strategy, but they’re not always necessary as a first step.

🧾 SECTION 9 — SIDE-BY-SIDE COMPARISON (PLAIN ENGLISH)

🔍 Liability Protection:

❌ Sole Proprietor → None
❌ General Partnership → None, and you’re exposed to partners’ actions
✅ LLC → Yes
✅ S-Corp (via LLC or corp) → Yes
✅ C-Corp → Yes
✅ PLLC → Yes (with professional rules)
✅ Series LLC → Yes (potentially stronger compartmentalization, when done correctly)

💰 Tax Complexity (from lowest to highest):

Sole Proprietor
Single-Member LLC (default tax)
Multi-Member LLC / Partnership
LLC taxed as S-Corp
Corporation taxed as S-Corp
C-Corp
Series LLC structures

🧮 Tax Power (from basic to most powerful):

Sole Proprietor
General Partnership
LLC (default)
PLLC
LLC taxed as S-Corp
Series LLC with S-Corp and real estate
C-Corp in advanced strategies

For MOST people following Life’s Wealth Quest:

Start: LLC
Grow: LLC taxed as S-Corp
Expand (Real Estate): add LLCs or Series LLC, connected to your plan.

💡 SECTION 10 — HOW TO CHOOSE BASED ON YOUR SITUATION

💻 Scenario 1 — Online Service Business (Coaching, Consulting, Design, Freelance, etc.)

Most likely path:

Start as a Single-Member LLC in your home state.
Once profit is consistently >$40k–$60k/year → consider S-Corp election.
Add:
- Business bank account
- Solo 401(k)
- Possibly add a holding LLC later when you buy real estate.

🛒 Scenario 2 — E-Commerce Brand or Digital Products

Most likely path:

LLC in your home state (or a favorable state if you’re fully online and have guidance).
S-Corp election when profitable enough.
Holding company & sub-LLCs if you build multiple brands later.

🧰 Scenario 3 — Contractor/Trades (Construction, Landscaping, etc.)

Most likely path:

LLC (for protection + simplicity).
Insurances (general liability, etc.).
S-Corp election once profit is high and steady.

🏡 Scenario 4 — Real Estate Investor (Present or Future)

Most likely path:

Your first property: either under your personal name (short-term) or directly in an LLC.
As you scale:
- Each property gets its own LLC or
- You set up a Series LLC if your state allows it.
Potential holding company at the top in the future.
Possibly a separate LLC/S-Corp for your active real estate business (flips, wholesaling, management fees, etc.).

⚖️ Scenario 5 — Licensed Professional (Doctor, Lawyer, Accountant, etc.)

Most likely path:

PLLC or PA (Professional Association), depending on state.
Discuss S-Corp election with a CPA.
Possibly separate entities for practice vs. real estate.

📚 SECTION 11 — CASE STUDIES: PICKING THE RIGHT ENTITY

🧑‍💻 Case Study 1 — Sarah the Online Coach

Sarah:

Does 1:1 coaching + group programs
Makes $25k the first year

Year 1:

Forms LLC in home state
Uses default tax status (disregarded entity)
Opens business checking & credit card

Year 3:

Business profit = $80k
Elects S-Corp status for LLC
Pays herself $45k salary, $35k distributions
Saves thousands in self-employment tax
Opens Solo 401(k) and shelters even more income

🛠️ Case Study 2 — John the Handyman/Contractor

John:

Starts doing side jobs → sole proprietor
Realizes risk (working in homes, ladders, tools)

Year 2:

Forms LLC
Gets business insurance
Now clients can write checks to “John’s Home Services LLC”

Year 4:

Profits exceed $100k
Elects S-Corp status
Starts paying himself salary + distributions
Sets up a retirement plan
Uses the business to eventually buy a small warehouse owned in a separate LLC

🏘️ Case Study 3 — Maria the Real Estate Investor

Maria:

Buys a duplex, lives in one unit, rents out the other.
First property in her personal name.

Year 2:

Adds a second rental property.
Forms an LLC for property #2.

Year 4:

Owns 4 rentals.
Restructures:
- Sets up a Series LLC in her state.
- Moves properties into separate series.
Starts a property management LLC for her active work in the portfolio.

Later:

Uses cost segregation and accelerated depreciation out of these entities
Uses tax strategies from 4bf to minimize or eliminate tax on rental income
Eventually borrows against equity instead of selling properties

Entities become her wealth framework.

🎯 SECTION 12 — HOW THIS TIES BACK TO YOUR TAX & REAL ESTATE STRATEGIES

Everything you learned in:

4b (Taxes)
4bf (Tax Strategies)
4bg (Tax Implications)
4bh (How to Pay Zero Taxes)

…gets plugged into:

The entity structure you choose here in Step 4c.

Your entity choice affects:

Tax rates
Self-employment tax
Retirement plan options
Ability to hire family
How you hold real estate
How you access advanced strategies (cost seg, REP status, STR loophole, etc.)
Ability to borrow against assets in a structured way

Choosing the right entity = unlocking the full power of those earlier steps.

🧾 SECTION 13 — STEP 4cb CHECKLIST

By the end of this lesson, you should:

✅ Understand the difference between:
- Sole Proprietor
- General Partnership
- LLC
- S-Corp (as a tax election)
- C-Corp
- PLLC
- Series LLC
✅ Know which structures have liability protection
✅ Understand why LLC is usually the starting point
✅ Understand when S-Corp makes sense
✅ Understand that C-Corp is usually for startups or advanced setups
✅ Know that PLLC is a special case for professionals
✅ Know that Series LLC is an advanced tool, especially for real estate
✅ Have a probable “best-fit” structure in mind for YOUR situation

🚀 WHAT’S NEXT — STEP 4cc: WHICH STATE TO INCORPORATE IN

You now know:

WHY you need a corporation (4ca)
The DIFFERENCES between entities (4cb)

The next big question:

“In which state should I incorporate?”

There’s a ton of noise out there:

“Always use Delaware!”
“Nevada is the best!”
“Wyoming is the secret!”

In Step 4cc, we will cover:

When you should just use your home state
When Delaware, Wyoming, or Nevada actually make sense
Real estate vs online business considerations
State fees, franchise taxes, and annual reporting
Privacy and anonymity concerns
How your choice affects bank accounts, lawsuits, and taxes