 Oh, and welcome to this session. This is Professor Farhad. In this session, we would look at form of business organization. And this topic is covered in introduction to corporate finance, as well as CPABEC section. As always, I would like to remind you to connect with me on LinkedIn. YouTube is where I have all my lectures, 1,500, accounting, auditing, tax, as well as finance lectures. I have a lot of finance lectures if you're a finance student. So make sure to check my website. This is my website. On my website, you can find additional resources. Please check my website. If you're interested, you'll have access to additional resources. Also, if you're looking for a study body, if you're studying for your CPA or CFA, you could check out studypal.co. It's an artificial intelligence-driven study body platform that match you with another individual. They have users in 85 countries and 2,800 cities in the US from LA to New York. So let's go ahead and take a look at the form of business organization. So as a business, how can you operate? How can you operate? So, well, we're going to look at the different type, different form. Then we will look at the disadvantages and disadvantages for each type of business, starting with sole proprietorship. Now, once you hear the word sole, hopefully, sole means one. So sole proprietorship is basically a business that's owned only by one individual. It's a business owned by one person. This is the simplest type of business. You don't need to file any paperwork. Any individual could be a sole proprietorship. Depending where you live, you might be able to start by doing little or more than getting a business license and sometimes no business license whatsoever if you don't need a license to operate that business. So obviously, for this reason, there are many, many, many type of small business that are considered sole proprietorship. Sole proprietorship keeps all the profit, okay? The bad news is they have unlimited liability. So if you open a deli or a restaurant or any type of a business, what happened if you are sued, if it's a sole proprietorship, the business and you are the same individual. This means the creditors can look beyond business assets, also the creditors, and also if you are being sued, also they can sue you personally. So if you owe money, if the business owe money, you owe money personally. The business is not separate. The good news is all the income is taxed once, tax on their personal level. So when the company makes a profit, revenue minus expenses, you know, 10,000, 100,000 in revenues, 40,000 of expenses, you made a profit of 60,000. This profit goes to the owner and the owner pay taxes on that money that you say, I don't know, whatever, 20%, okay? I'm just making this number up and they'll have to pay the taxes. So the money is only taxed once. So the life of a sole proprietorship is limited to the owner's lifespan. This is a disadvantage because once the owner passes away, the business is really gone and the amount of equity can be raised is limited to the amount of proprietary's personal wealth and connection. So how much money can we raise? Well, how much money can I chip in or how much money I can borrow from other people, okay? This limitation often means that the business is unable to exploit new opportunities because you may not have enough money. So that's the disadvantage, okay? The ownership of sole proprietorship business can be difficult, especially if the owner is also the manager. So if you manage the business, it's gonna be difficult to transfer. So this is one type of business which is sole proprietorship. The other type of business, it's very similar to sole proprietorship, but it's called partnership. Well, here's what I want you to think. Think of a partnership as multi-sole proprietorship for simplicity, but we will emphasize. So it's similar, it's similar. Let me just take this one out. It's similar to proprietorship, except there are two or more partners. Now it's similar, but not really, okay? If we have a general partnership, something called general partnership, all partners share in gain and losses proportionately to their ownership. So if you own 10%, you'll get 10%. If you own 30, 30, and they all have unlimited liability for all partnership, that not just some particular share. So even if you own 10% and you're a general partner, you're responsible for everything. The way partnership gain and losses are divided is described in a partnership agreement. The agreement can be informal, oral, just let's start a loan-mown business, okay? Or a lengthy written document by a lawyer. So to start the partnership agreement, you just have the, as long as you have the intention, the mind, and because this is what the court's gonna go by, if you have no written agreement, but you guys are working together, two individuals are working together, you're sharing the profit, guess what, you have a partnership, okay, this doesn't have to be in writing. Now, this is what we're talking about, general partnership, limited partnership. Again, one or more general partners will run the business and have unlimited liability. So in a general partnership, all general, all the partners are general, and they're all responsible for everything. If you have a limited partnership, well, you need at least one general partner, one GP. Why? Because if you have a partnership, you need at least one individual responsible for everything, and that individual is the general partner, okay? And you need it, otherwise you cannot have a limited partnership, but there'll be one or more limited partner who will not actively participate in the business. Now, the limited partners, they don't make a decision, they basically invest the money. So simply put, let's assume we have an LP, a limited partner, and a general partner. Why would we have those type of organization? The general partner is with someone with an idea, but no money. They need money. So they'll go to a limited partner, someone with money, and they would say, well, I have this great idea, I just need money, and we could both make money. The limited partner would say, look, I have the money, but I have no clue what your business is. I can give you some money, but I don't want to have unlimited liability. Then they will agree to form a limited partnership, LP and GP. What happens is if the business goes down, the limited partner can only lose whatever he or she invested. The general partner has unlimited liability. So the limited partner has limited liability, but they have no saying in the business. The advantages and disadvantages of a partnership they're basically like the sole proprietorship. Partnership based on relatively informal agreement and easy and expensive forms. General partners that have unlimited liability for the partnership debt and the partnership terminate when the general partner wishes to sell out or dies. All income is taxed once to the partner, just like you remember the 100,000 minus the 40,000 example, and we said, we have a profit of 60,000. Well, if we have two partners and each one gets 30K, they'll have to pay taxes on that money, okay? So the money is only taxed once, just like, again, sole proprietorship, okay? Because a partner is a general partnership can be held because a partner in a general partnership can be held responsible for all partnership debt. Have an agreement is important, especially if you want a limited partnership, you have to have agreement. If at the general partnership, you don't need to have an agreement, but for a limited, we need to know who's the limited partner and who's the general partner. Failure to spell out the rights and duties frequently leads to misunderstanding later on. And many, many problems happen between partners in the real world, okay? Although they might have a written agreement that still partnership is, I don't like partnership. That's a personal preference. Only if you are a limited partner, you must not become deeply involved in the business unless you are willing to assume the obligation. You have to be very careful if you are a limited partner. If you keep making decision and the business go down, the general partner might say, it's you who I'm going to blame. And if you're standing in court and the judge determined that, guess what, you were making all of this business decision, your status could be changed from limited to a general. But again, this is something that the court will have to decide upon. But simply put, if you're a general partner, you are responsible for everything you make the decision. If you're a limited partner, sometimes limited partner, they take the word silent. Silent means don't make a decision, otherwise you get yourself into trouble, okay? So simply put, if we want to summarize, the primary disadvantage of a sole proprietorship and a partnership is unlimited liability. They're responsible for everything, especially for the business debt, limited life of the business and the difficulty of transferring ownership. The three disadvantage add up to a single central problem, the ability of such businesses to grow, which is if you have a problem like this, then you can grow, okay? So especially if you want to raise money. Now, what do you want to do if you want to raise money and have more people involved, you will form a corporation. So that's the third line of business we're going to look at is corporations. Let's take a look at what is a corporation and advantages and disadvantages of such a business? Okay? So corporation and it's coming, corporation coming from the word corpus. Corpus Latin is for body, so corpus. Corpus is a body. Body means it's a person. The corporation is a person as far corpus, it's like a corpus, a body. So as far as the law is concerned, the corporation is a person, okay? It's the most important form in terms of size of business. The corporation is a legal person. It's a separate and distinct from its owners and it has many rights and duties and privileges, okay? It's just like an actual person as far as the law is concerned. Corporation can borrow money, own property, can sue and be sued and can enter into a contract. So when you enter into a contract with a corporation, it's like entering a contract with a person as far as the law is concerned. The corporation can even be a general partner or a limited partner in a partnership. So also a corporation can invest money with another partner. So you'll be a partner with a corporation whether it's limited partner or a general partner. And the corporation obviously can own stocks in another corporation. So the corporation have extra money and that's mostly through an old corporation. What they do is they take some of that money and they invest in another company and another company that's called an investment, okay? So Apple might buy stocks in Amazon or they might buy stocks in Home Depot or PepsiCo or whatever, okay? So starting a corporation is somewhat more complicated and more challenging but it's not really that complicated than a small sole proprietorship or a partnership business. Former corporation involve preparing articles of incorporation and set a set of bylaws, okay? The articles, they must contain a number of things including the corporate name, it's intended life, the business purpose, the number of shares that can be issued, okay? This information must be normally supplied to the state. So corporations are born in a state. For most legal purposes, the corporation is a resident of that state. So in most corporation, most corporation incorporate in the US in Delaware because they don't have state income tax, not sales tax, they don't have sales tax but no state income tax. The bylaws are the rules describing how the corporation regulate its existence. So who's responsible for what, how do we vote for the board of directors, so on and so forth. The bylaws describe how the directors are elected, maybe a simple statement of a few rules and procedure may be quite extensive for a large corporations. And the bylaws can be amended, can be changed or extended from time to time by who, by the stockholders, by the owners. If the owners decided to change a rule, they will vote on it and that will be that. In large corporation, the stockholders and the manager are usually separate group and this is gonna create a problem which we're gonna talk about in a moment. The stockholders elect the board of directors who then select the managers, managers are charged for running the business on a day-to-day basis. So in principle, the stockholders to control the corporation, remember when we looked at that chart in the prior session, I said, stockholders are on the top but they would vote for the board of directors. As a result of the separation of ownership, the corporate form have several disadvantages. Ownership can be readily transferable, this is an advantage and the left of the corporation is therefore not limited. Think of Steve Jobs. When Steve Jobs passed away, the founder of Apple, Apple did not close, they did not close their door, they kept on going. The corporation borrows money and its own name. As a result, the stockholder and the corporation have limited liability. And this is why people like to invest in corporation because they are not responsible. They are not responsible for the corporate debt. Simply put, they are limited to the money that they invest. So the most that they can lose is the money that they invested. Also the relative ease of transferring ownership. So if you own stocks, you can easily sell them, transfer them, give them to your kids and hurt them, give them to someone, it's very easy. If a corporation needs no equity, it can sell new shares of stocks to attract a new investor. So if the corporation needs money, they can go ahead and sell stocks and get money. Apple is an example. The company was a pioneer in the personal computer business as demand for its product exploded. It had to convert to the corporate form of organization to raise more money. Now the number of owners can be huge. For example, large corporations that have many thousands or even millions of stockholders. For example, GE, General Electric, had four million stockholders, different stockholders and about 10.1 billion shares. So many, many people owns GE, four million different people and the more shares you have relative to the others, the more power you have in a corporation. So those are three, four of corporations. Now bear in mind, we have C corporation and we have S corporation in the real world. What we talked about here is C, C is in Charlie. S corporations are a little bit different, are a little bit different. They are dealt with in an attacks course, S corporation. Just now they are more like a partnership and a corporation, but that's all that you need to know. Now for corporation, just to give you an international outlook, when you see the word AG, for example, Bayeric, Motoren work, I don't know how to pronounce this, BMW. If you'd see the word AG, it means this is a German company, okay? It means this is a corporation. It's a German corporation. If you just see the name like this, then it's a limited liability company. PLC, this is for United Kingdom, it means it's a public limited company. Again, if you see LT, Shell, LTD, it's a corporation, it's a UK corporation. NV, LunarLiver NV, this is Dutch or a Netherlands company. It's a joint stock company, NV. Fiat, the car company, SBA, that's an Italian company. SBA is a joint company stocks, and Volvo AB, that's AB, you see AB, it's a Sweden company, it's a joint stock company, and Peugeot SA, that's French, that's a joint stock company. Just gonna give you an international perspective about if you saw a name of a company and you saw those letters, so this is not the US company and something else. In the US it's Inc, Inc, and yes, it's Inc. So basically, this is an overview. 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