Sole Proprietorship, Partnership, LLC, and Corporation... Oh my!
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Alright, so now let's discuss some of the most common ways you can form a business. So we're going to discuss these four in in the chart at the top, we've got a sole proprietorship partnership, an LLC and a corporation. Two things I want to focus on here is the ownership. How are how's the ownership of this business split up? And the second is personal liability. Okay? So when I talk about personal liability, this means if the company loses so much money, can the debtors, can the bank come after you personally being an owner, can the bank come after you and your assets? Can they come take your house? Can they come take your car? This is possible in some business models. So let's check it out. The first one is the sole proprietorship. This is a very easy formation. If you wanted to start a business, you just go ahead and start it. There's not much paperwork to fill out. And the key word here is soul. Soul meaning there's only one. This is when you just want to start a business. Well, it's very simple to do. You're just the sole proprietor, you're the one owner and we call that owner the proprietor. Okay? But the downside of this business type is the personal liability that I just mentioned that proprietor. If the business debts gets so big or if he gets sued for something crazy, he could lose all his personal assets as well. There's no separation between the owner of the business and the business itself. So there's that risk of personal liability there. Alright, so next let's move on to the partnership. A partnership is very similar to a sole proprietorship except there's more than one owner, right? There's gonna be two or more proprietors were gonna say right, these partners, they're gonna be each proprietor of the business. All right, so we're gonna have more multiple proprietors here. Now in this case it's the partners, they can still be held liable. There's different types of partnerships, but we don't have to get into it in this course. But in general the partners of a business can be held liable in the same way that a proprietor can if the business goes under water, the next one is an L. L. C. An LLC is kind of a hybrid business organization. We don't go into too much detail in this class about that either, but it's nice to mention it because it's very common. The owners of an LLC are called members. Okay? So we have members in an LLC. But now with the personal liability it's actually only the business that can lose money. So you can only lose up to what you've put into the business. They can't come after your personal house, they can't come after your personal car, nothing like that. You can only lose up to what's in the business itself. So now you have some separation of the business from you personally. Right. Same. What we're going to see here with the corporation, the corporation is gonna have what we're gonna call. Oh sorry and with the L. L. C. We're gonna have two or more there as well. It's not just gonna be one member LLC that's not really a thing. Okay. And last year we're gonna have two or more for the corporation. So this is a very common business example right I'm sure you've heard of corporation before there's gonna be two or more and we're gonna have stockholders in the corporation. Okay So we have stockholders and they hold stock in the company so there's so many shares of stock in the company and the owners hold shares of stock. Okay. Now what about personal liability? Think about it if you own a share of say Apple Stock and Apple all of a sudden got into a huge lawsuit. Do you think that people are gonna you know the people suing are gonna come after, you personally know they're gonna sue the business, right? You being an owner of a share of stock, they can't come after your house or your car or anything like that. So the corporation itself is liable, there's no liability to the personal personally to the owners of the business. Okay. There's a separation there as well. So let's go through a little bit more detail here on each of these and nothing too crazy here. So let's just talk about it. So the income of a sole proprietorship when there's only one owner well it completely passes through to the owner. Okay, So there's no taxation for the business the business, whatever money it makes, it just gets put on the owner's tax return. Right? So there's that's why there's no separation there, right? And like we said, the owner of this business, we're gonna say has unlimited liability. Okay, So there's no limit to what liability, If there's a huge lawsuit against him, they can come after all his stuff. Right? And like we said, a partnership is generally the same as a sole proprietorship, Right? Uh tough word to spell here, proprietor ship. Okay, I think I got it there. Except now we have multiple owners. Right? So it's gonna be similar to the sole proprietorship, but there's multiple owners. Okay, So and and just like we said, the owners of this business are generally gonna have unlimited liability as well. Okay, next let's talk about the corporation. So the corporation is a separate entity, so it's its own entity that's separate from the owners of its business. In the US we go so far as to say that the corporation has its own life, its its own artificial person, it has a person's status, right? It's kind of crazy. So characteristics of a corporation. First, they have unlimited life, right? They go on longer. If you have a share of stock, you can give it to your to your grandson, right? Any any stock it can be handed down and the corporation lives on and on, right, You can easily transfer ownership if you don't want to own the stock anymore. Well you can sell it to someone else. Right? So the ownership of the corporation doesn't really affect think about a sole proprietorship if I had my huge private tutoring business going and then all of a sudden I'm not gonna private tutor anymore. Well, I can't really just pass on the ownership of that business to someone else. Right? Because I'm a huge part of the business when I'm private tutoring so it doesn't really have that transfer ability there. Okay. And last, well the owners have limited liability. This is one of the big advantages of of making a corporation, is the separation that the owners have from the corporation. Okay. And last year is the hybrid business organizations. This is like the L. L. C. That we talked about above. Right? So such as an LLC. Well, they're gonna have special rules about liability that we're not really going to get into. But it almost fits with the corporation. Where there is a separation, here's an example where where there's a limited LLC by the way means limited liability company. An LLP in my example is a limited liability partnership. Okay? So the idea here is that there's special rules. So in this LLP, in my example, a doctor can't be sued when there's another doctor in the LLP. So their partners, These two doctors are partners. One of them does malpractice. Well they can't come after the other doctor. Okay. So they have this limited liability from each other's malpractice. Okay. So nothing too crazy there. Don't get too caught up in the hybrid business organization. You just want to be aware of these things. All right. So that being said, let's go ahead and move on to the next video.