Types of Firms:Sole Proprietorships, Partnerships,Corporations

Summary

This 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

00:00

😀 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.

05:03

🤝 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.

Keywords

💡Sole Proprietorship

Sole proprietorship is a type of business entity where one person owns and operates the business. It is characterized by simplicity in setup and minimal paperwork. In the video, it is described as easy to set up with the owner being the only employee and having full control over profits and losses. However, it also carries the risk of personal liability, where the owner's personal assets can be at risk if the business faces legal issues.

💡Partnership

A partnership is a business structure where two or more individuals share the management and profits of a business. The video outlines three types of partnerships: general, limited, and limited liability partnerships. Each type has distinct characteristics regarding the sharing of profits and the extent of personal liability the partners may face. For example, in a general partnership, all partners are equally liable for the business's debts.

💡General Partnership

A general partnership involves multiple partners who contribute equally to the business and share in its management and profits. The video mentions that all partners in a general partnership have unlimited liability, meaning they are personally responsible for the business's debts, which can include their personal assets if the business cannot cover its liabilities.

💡Limited Partnership

A limited partnership consists of both general and limited partners. The general partners have the same unlimited liability as in a general partnership, while the limited partners have limited liability, meaning their personal liability is restricted to the amount of their investment in the partnership. The video uses this term to illustrate a partnership structure that allows for raising capital while limiting the risk for some investors.

💡Limited Liability Partnership (LLP)

An LLP is a type of partnership where the partners have limited personal liability for the business's debts and actions. The video explains that in an LLP, if one partner engages in misconduct that leads to a lawsuit, the other partners are not held personally liable, thus providing protection for the personal assets of the non-culpable partners.

💡Corporation

A corporation is a legal entity that is separate from its owners, known as shareholders. The video describes corporations as having the ability to enter contracts, own assets, and obtain loans in their own name. Shareholders' liability is limited to the amount they have invested, which is a significant advantage over other business structures in terms of personal asset protection.

💡Shareholders

Shareholders are the owners of a corporation who hold shares or stocks in the company. They elect a board of directors to make decisions on their behalf. The video mentions that shareholders share in the corporation's assets and liabilities but have limited personal liability, which means their personal assets are protected from the corporation's debts.

💡Board of Directors

The board of directors is a group of individuals elected by the shareholders to oversee the management of a corporation. They are responsible for making strategic decisions to maximize the corporation's wealth. The video explains that the board is chosen by the shareholders and includes the selection of the CEO.

💡Dividend

A dividend is a payment made by a corporation to its shareholders, typically as a distribution of profits. The video describes dividends as a portion of the corporation's net income after taxes, which is returned to the shareholders. It is an example of how corporations can provide returns to their investors.

💡Double Taxation

Double taxation refers to the situation where both the corporation and its shareholders are taxed on the same income. The video explains that corporations pay taxes on their profits, and then when dividends are paid to shareholders, the shareholders may also be taxed on these dividends, leading to the same income being taxed twice.

💡Flow-Through Entities

Flow-through entities are business structures where the income is taxed only at the owner's level and not at the entity level. The video uses Real Estate Investment Trusts (REITs) as an example, explaining that they avoid double taxation by passing income directly to shareholders, who then pay tax on their personal level, thus eliminating corporate-level taxation.

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