let’s talk about the very interesting
issue of corporate taxation and to introduce this topic we need to talk
about in general there are three ways to
structure a business one is as a single person that’s called the sole
proprietorship that’s just a person doing business next a group of connected
people that’s called a partnership and finally a group of loosely connected
people that’s a corporation these three business structures let’s talk about
each one in turn first a proprietorship it’s easy to form you just start doing
business some of you probably are sole proprietors you just start doing
business maybe you need a business license but there’s no real process that
needs to be gone through you just form the business by starting to do business
it’s also easy to terminate a sole proprietorship just stop doing business
or sell the business to somebody else the downside of the sole proprietorships
structure is unlimited liability legally the acts of a person doing business and
the acts of a person in their individual life are not separated so business
obligations that are created in doing business can be satisfied or have to be
satisfied through payment from personal assets your personal bank account the
business and the personal life of the sole proprietor are not separated that’s
called unlimited liability a partnership is a little bit more difficult to form
the partners have to come together they have to form a partnership agreement who
is going to contribute what to the partnership how are the earnings going
to be distributed who’s going to do what and it’s somewhat easy to terminate or
change a partnership but not really easy if a new partner wants to come into the
partnership all of the old partners have to agree if a partner wants to leave the
partnership all of the partners have to agree on the terms of how that’s going
to work a partnership has limited life when a partner dies that formal
partnership is terminated and a process needs to be gone through to reconstitute
the partnership but the biggest downside of the partnership structure of a
business is the unlimited liability same as with the sole proprietorship but now
it’s a little bit even worse because the partners are said to be joint and
severally liable for the business obligations of the partnership so if
some of my partners make some bad business decisions so that now the
partnership always lots of money then if all my other partners have gone bankrupt
and don’t have any money and I’m the sole remaining partner I am completely
obligated pay off all the debts of the partnership
so that’s the downside of the business structure of a partnership a corporation
the third general way the structure of business is a legal entity chartered by
a state the ownership is represented by ownership shares shares of stock and the
actions of the corporation as a business are legally separate from the personal
actions of the owners or shareholders of the business in essence the corporation
is a person under the law the corporate structure has many very interesting
attributes let’s briefly talk about each one of them
one is there is limited business liability if I’m a shareholder in a
corporation and I put $100,000 into the corporation that’s the most that I can
lose if the corporation makes very bad business decisions and loses lots of
money the worst that can happen to me as I
lose my hundred thousand dollars I am NOT personally liable for anything more
than what I put into the corporation that’s limited liability that’s quite
different from a partnership with a corporation it’s easy to raise capital
that’s why almost all large businesses in the world are structured as
corporations because you can get hundreds thousands millions of
shareholders together each with their little bit of capital and make a very
large company incorporation because corporations are created as separate
legal entities by governments they are closely regulated by governments a very
huge benefit of the corporate structure is the fact that it’s easy to transfer
ownership if I’m a partner in a partnership and I want to sell my
partnership interest to somebody else lots of paperwork all my other partners
have to agree it’s a big deal if I’m a shareholder in a corporation and I want
to sell my shares to somebody else it really literally takes ten seconds I go
online I saw my shares to somebody that I don’t even know somebody in Azerbaijan
somebody in Zimbabwe and it happens just like that in ten seconds the biggest
downside of the corporate structure of business is double taxation income is
taxed first once at the corporate level then when the remaining income is
distributed to shareholders and dividends its tax
again double-taxation makes the corporate structure of business very
interesting and important in our discussion of income taxes you