Types of Firms:Sole Proprietorships, Partnerships,Corporations
Summary
TLDRThis video script delves into the three main business structures: sole proprietorship, partnerships, and corporations. It explains the ease of setting up a sole proprietorship but highlights the risk of personal liability. Partnerships, including general, limited, and limited liability partnerships, are discussed with their respective pros and cons. Corporations are presented as the most protective entity for personal assets, despite higher costs and paperwork. The script also touches on dividends, double taxation, and flow-through entities like REITs, advocating for corporations as the safest business choice.
Takeaways
- 😀 Sole proprietorship is the simplest form of business with one owner who is also the employee, enjoying all profits and losses.
- 📚 Setting up a sole proprietorship is easy with minimal paperwork and low costs.
- 🚨 The major downside of a sole proprietorship is the personal liability for business debts, which can affect personal assets.
- 🤝 Partnerships involve multiple people sharing profits, with three main types: general, limited, and limited liability partnerships.
- 🔍 General partnerships carry the risk of personal liability for all partners, which can be a significant drawback.
- 💼 Limited partnerships offer a balance where general partners manage the business and limited partners invest with limited liability.
- 🛡️ Limited liability partnerships (LLPs) provide protection for partners from personal liability in case of business lawsuits, making them a safer option.
- 🏢 Corporations are legal entities that can enter contracts, own assets, and get loans, offering a higher level of protection for owners' personal assets.
- 💰 Corporations can declare bankruptcy without affecting the personal finances of the shareholders, which is a significant advantage.
- 🌐 Shareholders in a corporation elect a board of directors who make decisions aimed at maximizing the corporation's wealth.
- 💡 Dividends are a way for corporations to pay back investors from their net income after taxes, but this can lead to double taxation issues.
Q & A
What is a sole proprietorship?
-A sole proprietorship is a type of business where there is usually only one employee, who is also the owner. The owner works by themselves, takes all the profits, and bears all the losses.
What are the advantages of setting up a sole proprietorship?
-The advantages of a sole proprietorship include ease of setup, minimal paperwork, and lower costs compared to other types of firms.
What is the main disadvantage of a sole proprietorship in terms of liability?
-The main disadvantage is that the owner's personal assets are at risk if the business is sued and cannot cover the costs of the lawsuit.
What are the three main types of partnerships mentioned in the script?
-The three main types of partnerships are general partnerships, limited partnerships, and limited liability partnerships.
In a general partnership, what is the liability of the partners?
-In a general partnership, all partners are equally liable for the business's debts and obligations, which means they can be held personally responsible.
What is the difference between general partners and limited partners in a limited partnership?
-General partners in a limited partnership have the same level of liability as in a general partnership, while limited partners have limited liability and are not personally liable for the business's debts beyond their investment.
What is the advantage of a limited liability partnership over a general partnership?
-In a limited liability partnership, partners are protected from personal liability for the actions of other partners, unless they were involved in the wrongful act that led to the lawsuit.
What is a corporation and what are its main features?
-A corporation is a legal entity that can enter contracts, own assets, and be sued. It offers limited liability to its owners, known as shareholders, protecting their personal assets from the corporation's debts.
What is a dividend and how does it relate to a corporation's net income?
-A dividend is a payment made to shareholders from a corporation's net income after taxes. It is a way to distribute a portion of the company's earnings back to the investors.
What is double taxation and how can it be avoided in a corporation?
-Double taxation refers to the taxation of both the corporation's income and the dividends paid to shareholders. It can be avoided by structuring the business as a flow-through entity, such as a Real Estate Investment Trust (REIT), which allows income to be taxed only at the shareholder level.
Why are corporations considered the least risky business structure for the owners?
-Corporations are considered the least risky because they offer limited liability protection to the owners, shielding their personal assets from the corporation's debts and legal issues.
Outlines
😀 Sole Proprietorship Basics
This paragraph introduces the concept of a sole proprietorship, which is a type of business where the owner is the only employee and has full control over the business's profits and losses. The ease of setup and minimal paperwork are highlighted as pros, while the potential for personal liability in the event of legal issues is noted as a significant con. The summary emphasizes the simplicity of starting a sole proprietorship and the risks associated with personal asset exposure in lawsuits.
🤝 Partnerships and Their Types
The second paragraph delves into partnerships, explaining the three main types: general partnerships, limited partnerships, and limited liability partnerships. It discusses the pros and cons of each, with a focus on the varying degrees of personal liability and the ability to raise capital. The paragraph suggests that limited liability partnerships offer the least risk due to their structure, which protects partners from personal liability unless they are directly involved in wrongdoing.
🏢 Corporations: Benefits and Structure
This paragraph outlines the features of corporations as legal entities with the ability to enter contracts, own assets, and obtain loans. It discusses the concept of limited liability, which protects the personal assets of shareholders, and the process of electing a board of directors and a CEO. The paragraph also introduces dividends as a method of paying back investors and touches on the issue of double taxation, offering flow-through entities like REITs as a solution. The summary concludes by emphasizing the reduced risk for personal assets in corporations, despite the higher cost and paperwork involved.
Mindmap
Keywords
💡Sole Proprietorship
💡Partnership
💡General Partnership
💡Limited Partnership
💡Limited Liability Partnership (LLP)
💡Corporation
💡Shareholders
💡Board of Directors
💡Dividend
💡Double Taxation
💡Flow-Through Entities
Highlights
Introduction to the three types of firms: sole proprietorship, partnerships, and corporations.
Sole proprietorship is easy to set up with minimal paperwork and costs.
Risk of personal liability in a sole proprietorship if the business cannot cover a lawsuit.
Explanation of the three main types of partnerships: general, limited, and limited liability partnerships.
General partnerships involve shared profits and personal liability for all partners.
Limited partnerships differentiate between general and limited partners in terms of risk and liability.
Limited liability partnerships protect partners from personal liability except in cases of their own wrongdoing.
Corporations are separate legal entities that can enter contracts, own assets, and face lawsuits.
Corporations offer protection of personal assets from business liabilities.
Bankruptcy in corporations does not require personal financial responsibility from the owners.
Shareholders, the board of directors, and the CEO structure in corporations for decision-making.
Dividends as a method to pay back investors from a corporation's net income after taxes.
Double taxation issue in corporations and the concept of flow-through entities to avoid it.
Real Estate Investment Trusts (REITs) as an example of flow-through entities to prevent double taxation.
Corporations being the least risky business structure due to personal asset protection.
Higher costs and paperwork associated with corporations compared to sole proprietorships and partnerships.
Recommendation to choose a corporation for business due to its protective nature for personal assets.
Transcripts
hello thank you for tuning in in this
video we'll be talking about the three
different types of firms starting out
with sole proprietorship then going
through partnerships and finally
corporations so let us start off with
sole proprietorship this is where there
is usually only one employee and that
employee is usually the owner he works
by himself and he gets all the profits
and losses so let's talk about the pros
and cons of a sole proprietorship if you
wish to start any so the first Pro is
that it is very easy to set up when you
compare it with other types of firms and
also it has very less paperwork when
you're trying to file the papers under
your name let's say you want to start a
company it's under your name the
paperwork or very less and since it is
very easy to set up in a very less
paperwork it costs you very less okay
now let's talk about the cons of a sole
proprietorship the main biggest con of
the sole proprietorship is that imagine
if someone Sue's your company for some
reason it could be any reason to pending
upon what company's startup and if your
company does not have any money left to
pay they sue you they can take hold of
your personal assets so let's say you're
the person on the left and the person on
the right is trying to sue you they can
reach out the money in your pocket and
they can take it that doesn't physically
happen but they go to a court and the
court does all of this so that is the
biggest risk that you want to understand
acknowledge before you have to start a
sole proprietorship okay secondly we're
going to talk about the partnerships and
the partnership there are three
different types that you need to know in
partnerships okay so the three different
types are the main types that you might
want to set up and each one of them has
their pros and cons and I'll recommend
one which is with the least risk so the
first one we talked about general
partnerships okay general partnerships
we have a few people all of the
more general partners deep let's say
three people okay they all put the money
together and they raise that money and
they manage that money in whatever firm
they're making had a very good example
is in accounting and law firms right so
people put their money together and that
money is used to put advertisements any
rental cost and anything else so they
share let's say three people they three
people share all of the profits okay now
a main problem it's such a kind of firm
is that if any one of them gets into a
problem or causes a problem and they
leave the country okay and someone else
sues the company the person who leaves
the company is safe they leave the
country and or the rest of the two
person who is in the country what
happens is that they have to pay if they
don't have any asset the company doesn't
have any assets okay the so second of
all let's talk about limited
partnerships this is where there is
usually some general partners along with
some limited partners okay so general
partners let's say we have about two
general partners plus five limited
partners now let us put a circle around
them to note that there are two
different types of people with two
different kinds of benefits and risks
right the limited partner has very few
risks associated with them when the
company gets sued they do not get
personally sued but the general partners
have a liability in such an event so the
limited partners are much viewed much
safer few but what is the reason for
creating like this it's that you can
raise money from limited partners the
third partnership is the limited
liability partnerships now this is a
much more interesting one it is where it
usually consists of general partners
let's say three general partners in this
case and you know one of them screws up
and creates a problem on the company
gets sued right and all of that the
things that we said before right at the
company that's the enough money they sue
you
so what happens here is that the rest of
the two persons they are protected right
assuming that they have not involved in
that bad practice they're protected from
any problem the third person has cost so
if you're going to do a partnership it
is better to start a limited liability
partnership
some people like accounting and law
firms choose a general partnership to
show that they are trustworthy okay now
let's go on to corporations a
corporations are like a legal entity
okay corporations are a legal entity to
share benefits of person to be exact the
benefits that you get from your country
so let's say you can buy stuff a
corporation can buy stuff you can enter
into corn contracts and you can get
loans and you can get sued so can the
corporation let's say you declare
personal bankruptcy the corporation can
also declare personal bankruptcy so let
us write that down so first you can
enter contracts let's say a contract any
contract you can think off and secondly
you can get loans like that isn't itself
as a contract you could think off and
you can own assets okay
so that is what a corporation is a lot
of people do prefer owning a corporation
I'll tell you that why in a few seconds
okay
yes bankruptcy now this is one of the
main reasons that people choose
corporations because if the company
doesn't have enough money to pay off any
lawsuit it doesn't the people who are
owning the corporation doesn't have to
pay personally for the problem and so
let us talk about the people who own
this so there is no people that I'm
aware of who are general partners or
limited partners when it comes to a
corporation we have shareholders there
the person who owned a share in the
company or a stock they all share the
company right so they have to share all
the its assets and liabilities
and not there could be millions of
shareholders so they all come together
and they select a few people known as
the board of directors who are in charge
of taking all of the decisions that can
maximize the wealth of the corporation
so let's say a million shareholders puts
some kind of votes to choose you know
five ten directors who will then
hopefully elect the CEO and there's a
lot of stuff they do when speaking about
corporations I really want to introduce
to you some concepts like a dividend
right if you are aware of a dividend
that's great but just let's cover the
concept of a dividend what is a dividend
dividend is just a method to pay back
the investors of a company or
corporation right this money that comes
that makes up the dividend is the money
that the corporation has after paying
any taxes so this is part of a net
income so the part of a net income is
given back as dividend to the
shareholders that money goes to these
shareholders okay so what happens is the
corporation pays tax and after the rest
of the money that goes some of them goes
to the corporation saving account and
some of them goes back to the person
shareholders now this creates a huge
problem of double taxation and a lot of
people want to avoid that so here is a
very cool thing that can help you to get
away from that okay so that you don't
have to pay double tax you can only pay
one time so that awesome magical word is
called the flow-through entities an
example of that is the reads real estate
investment trusts what they do is that
they make sure that so what a real
estate investment trusts you might be
thinking so let's say you own a few you
know it's a company that owns a lot of
real estate properties that generate
rental income so the money from that
goes directly to the people owning that
corporation owning the REITs the
corporation itself doesn't have to pay
any corporate tax right
it all the money goes to the person's
owning the shareholders of the REIT and
the shareholders only pay the tax at a
personal level so there's a corporate
level and a personal level so it makes
sure that they pay the tax only at the
personal level and that solves the
double taxation problem okay so let us
go back to the corporation's right I
want to mention the corporations are the
least riskiest among all of the
businesses okay because it can save your
personal assets that's the main reason
so the corporation has more paperwork
than any other sole proprietorship or
partnership and because of more work it
is more costly and expensive okay but
the main thing about corporations is
that it protects your personal assets it
protects the owners personal assets in
any case of problem that may arise so
anyone if you're choosing firm please
choose corporation that is the best
thing you can do and thank you for
watching this video on types of firms
the end
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