Alright. So now let's discuss some of the most common ways you can form a business. We're going to discuss these four in the chart at the top: a sole proprietorship, a partnership, an LLC, and a corporation. Two things I want to focus on here are the ownership—how the ownership of this business is split up—and the second is personal liability. Now, when I talk about personal liability, this means if the company loses so much money, can the creditors, can the bank come after you personally as an owner? Can the bank come after you and your assets? Can they take your house? Can they 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 keyword here is sole, 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. However, the downside of this business type is the personal liability that I just mentioned. That proprietor, if the business debts become too large, or if he gets sued for something severe, could potentially 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.
Next, let's move on to the partnership. A partnership is very similar to a sole proprietorship, except there's more than one owner. There are going to be two or more proprietors, we're going to say. These partners are each a proprietor of the business. So, we're going to have multiple proprietors here. In this case, the partners can still be held liable. There are different types of partnerships, but we don't need to get into it in this course. In general, the partners of a business can be held liable in the same way that a proprietor can if the business goes underwater.
The next one is an LLC. An LLC is kind of a hybrid business organization. We won'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. So, we have members in an LLC, but now with personal liability, it's actually only the business that can lose money. 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 what's in the business itself. So now, you have some separation of the business from you personally.
Similarly, with the corporation—as we will see here—the corporation is going to have two or more. This is a very common business model. I'm sure you've heard of a corporation before. There are going to be two or more stockholders. So, we have stockholders and they hold stock in the company. There are so many shares of stock in the company, and the owners hold shares of stock. Now, what about personal liability? Think about it. If you owned a share of, say, Apple stock, and Apple suddenly got into a huge lawsuit, do you think that those suing are going to come after you personally? No. They're going to sue the business. You, as 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 is no liability personally to the owners of the business. There's a separation there as well.
So, let's go through a little more detail here on each of these, and nothing too crazy here, so let's just talk about it. The income of a sole proprietorship, when there's only one owner, it completely passes through to the owner. There's no taxation for the business. The business, whatever money it makes, it just gets put on the owner's tax return. That's why there's no separation there. And like we said, the owner of this business, we're going to say, has unlimited liability. There's no limit to what liability. If there's a huge lawsuit against him, they can come after all his stuff.
And like we said, a partnership is generally the same as a sole proprietorship. Except now we have multiple owners. So it's going to be similar to the sole proprietorship, but there are multiple owners. And just like we said, the owners of this business are generally going to have unlimited liability as well.
Next, let's talk about the corporation. A corporation is a separate entity. 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 own artificial person. It has a person status. The characteristics of a corporation, first, they have unlimited life. They go on longer. If you have a share of stock, you can give it to your grandson. Any stock can be handed down and the corporation lives on and on. You can easily transfer ownership. If you don't want to own the stock anymore, you can sell it to someone else. 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 going to private tutor anymore, well, I can't really just pass on the ownership of that business to someone else. Because I'm a huge part of the business when I'm private tutoring. So it doesn't really have that transferability there. And last, the owners have limited liability. This is one of the big advantages of making a corporation—is the separation that the owners have from the corporation.
And last here is the hybrid business organizations. This is like the LLC that we talked about above. So such as an LLC. Well, they're going to 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 an LLC—by the way, means limited liability company—and LLP in my example is a limited liability partnership. So, the idea here is that there are special rules. So in this LLP in my example, a doctor can't be sued when there's another doctor in the LLP, so they are partners. These two doctors are partners. If one of them commits malpractice, well, they can't come after the other doctor. So, they have this limited liability from each other's malpractice.
So, nothing too crazy there. Don't get too caught up in the hybrid business organization. You just want to be aware of these. So, that being said, let's go ahead and move on to the next video.
