All right, I wanna talk real quickly about business entity forms, OK?
Let's talk real quickly about business entity forms.
Now this is not a law class so I'm not gonna go as in depth as a law class would, but I
think it's helpful that we need to at least approach the subject from an accounting viewpoint,
OK?
Now, this slide says that there are three main business entity forms: A sole proprietorship,
a partnership and a corporation, OK?
Now this slide is a little misleading because what it seems to indicate is, if there's just
one person, you're a sole proprietorship.
If there's just two or three of you, you're a partnership and if there's a whole bunch
of you, you are a corporation.
That's not exactly true, OK?
There are many, many, many corporations that have just one owner, OK?
A corporation is what you do, if you go through the, the paperwork, the legal ramifications,
all the sort of government rules to set your company as its own separate entity, you are
a corporation and if you two had your own business, you could be a corporation.
Matthew, if you had your own business, you could be a corporation.
You with me?
OK?
It's if you have gone through all that legal stuff that's required by the government to
set your company up as a separate entity, OK?
Now, let's talk real quickly and again, just from an accounting viewpoint about these three
different types of entity forms.
OK.
Regardless of how you set up your company, regardless of how you set up your company,
it is its own separate business entity.
It's its own separate business entity and what do we mean by that?
What we mean is that that business will be set up and, and kept track of separately from
your personal life.
OK?
Jacob, let's say that you were a sole proprietorship and you were a landscaper, OK?
Well, you would want to keep track of your landscaping business separately from your
personal life.
You would wanna have the landscaping business have its own checking account, its own checkbook,
all of, you don't want to co-mingle all that stuff, right?
'Cause that would be a mess.
No.
Keep track of your business over here, keep track of your personal life here.
And if you had more than one business, you would want to keep those separately as well,
right?
Think of it this way, you guys are taking a number of classes, right?
Do you have like, separate notebooks for each class notes or at least maybe a divider?
Could you imagine what a mess it would be if you left accounting class and halfway through
the page then you went to biology and just started taking biology notes, then turn the
page, went to history and started taking, I mean, what a mess, right?
No.
Keep your classes separate.
Keep your businesses separate.
No matter how you organize your company, you will be a separate business entity.
Now only a corporation is a separate legal entity.
Only a corporation is a separate legal entity.
So what do we mean by that?
Proprietorship?
Not.
Partnership?
Not a separate legal entity.
Corporation, yes.
And this is really what we call a C-Corporation, OK? C-Corp.
Like Sprint or Gorman.
A corporation is its own separate legal entity.
In a way, it is an artificial person that we establish through the process legally and
through the government.
It has, it's its own legal entity, it's like an artificial person in that it has rights
and responsibilities, it could enter into contracts, it can sue, it can be sued.
All those different things.
It's like an artificial entity legally.
OK?
Only a C-Corp is.
Or a corporation is.
Limited liability, what does that mean?
Well, proprietorships do not have limited liability.
Partnerships do not have limited liability.
Proprietorships and partnerships have what we call unlimited liability and that stinks.
OK?
Jacob, let's say you're sole proprietor with your landscaping business.
What that means is this: Let's say you had an accident on your way to a new lawn, OK?
Let's say a mower fell out, somebody had a wreck.
Well, they could sue you and not only come after your company assets but they could come
after your personal assets.
So they could come after your home, they could try to get your automobile if you have a,
if you have a retirement account.
They could do all of that.
That stinks, doesn't it?
OK?
Same way with a partnership.
Let's say you two guys were partners in a business, OK, and Matthew, let's say Tanner
did something stupid on the job and you are getting sued by a customer.
What really stinks is let's say he didn't have any personal assets.
They could come after you.
So do you see how unlimited liability stinks?
Stinks.
Corporations, do they have limited liability?
Yes.
And that's good.
What does that mean?
Well, does anybody here own stock in a company, not a mutual fund, but a company itself?
Nobody?
I used to own some PepsiCo stock.
I was an owner of PepsiCo.
Now if PepsiCo would've done something and been sued by another party, that party could
not come after my personal assets.
You with me?
Or if you two would've set up your business as a corporation and a customer was trying
to sue you, they could not come after your personal assets if you had incorporated.
You with me?
>> Mm-hmm.
>> So limited liability is something that we want.
Does it have an unlimited life?
Proprietorships and partnerships, no.
That means Jacob, you have a sole proprietorship and you pass away, that business is done.
If you two have a partnership and one of you passes away, that partnership is done.
Now, maybe you decide to form a new partnership with Martin, but that's, that's a new deal.
That partnership has a limited life.
A corporation has a unlimited life, OK?
When I was a shareholder of PepsiCo, what if I would've died?
Do you think the whole company would've stopped?
No.
It would've just kept on going.
They probably would not have even sent me flowers or sent my family flowers, right?
OK.
Corporation has an unlimited life.
Next slide, is the business taxed?
No.
Proprietorship, partnership.
No.
What does that mean?
Does that mean that Jacob gets to live a tax-free life?
No.
All it means is your landscaping business is in itself does not have to pay taxes.
You still have to pay taxes at the personal level and you'll have an informational return
that feeds into your individual personal return but you'd pay taxes only at the individual
level.
Same way with a partnership, guys.
The partnership itself does not pay taxes.
You pay them at the personal level, at the individual level, but the business itself
does not pay taxes.
What about a corporation?
Is the business taxed?
Yes.
And that stinks, K?
We will put a little, I'm gonna put some, this is a sad face, K?
Sad face, this is happy face, K?
This is happy face, K?
Sad face 'cause a corporation has to pay taxes.
So Sprint, Sprint itself pays taxes.
So they have this much money, they pay taxes to the government, now they have this much
money.
Now when they pay distributions to the owners, the shareholders through dividends, those
owners have to pay taxes on those dividends so that income was basically taxed twice.
It's called double taxation.
And that stinks if you're a corporation.
Are you with me?
And if you incorporated with a C-Corp, you would have to have double taxation as well.
Now, you might think oh, well business taxed, this is great, these don't have to pay taxes
twice, these do, so I don't wanna incorporate, I wanna be a proprietorship and a partnership.
But let's draw some more happy faces.
Who has the, who has the limited liability that we like?
The corporation.
And who had the unlimited liability?
>> Proprietorship, partnership.
>> OK.
Proprietorship and partnership.
So you see what you have?
OK?
We'll come back to that in a second.
Let's do our last line.
Is one owner allowed?
Yeah.
Any sort of business form can have just one owner except a partnership.
So again, there are many corporations that are just one owner or two owners or whatever.
OK?
Now, there is this thing called an LLC.
How many of you heard of an LLC?
OK.
And I'm gonna wager a guess that if, if you started a new business, I wouldn't be surprised
if you set it up as limited liability corporation, an LLC.
An LLC is the best really of both of these worlds because, let me just sneak in LLC right
here.
Is an LLC a separate business entity?
Yes.
Is it a separate legal entity?
Yes.
Does it have limited liability?
Yes.
Happy face.
Does it have an unlimited life?
Well, yes it does.
Is the business taxed?
No.
The business itself, if you are a limited liability corporation, it does not pay taxes.
So that's another happy face, right?
And is one owner allowed?
Yes.
But do you see how the limited liability corporation is the best of both worlds?
It has limited, it is a limited liability corporation so it has limited liability and
also the business itself is not taxed.
You see that?
Now you might say, well why doesn't everybody be an LLC?
Well, I don't, there is, LLCs were established to encourage people to start businesses and
I don't know all the legal rules, but once you grow to a certain size, you, you've grown
beyond, you can't be an LLC legally.
Are you with me?
Like Sprint.
Sprint who's double taxed, they would love to be an LLC.
They'd no longer have to pay taxes at the corporate level.
That's not an option for them, they're way too large.
Does this make sense?
And again, if you take a law class you'll go into this a lot more.
I think that's sufficient though for accounting because we do need to know what type of business
form it is as we account for it.