 Hello and welcome to the session. This is Professor Farhad and the session would look at the characteristic of various forms of businesses. This topic is covered in financial accounting, basically an introductory accounting course. This topic is covered on the CPA exam, but this is a basic review of the topic. Now the reason we're learning about this topic is because in the prior session, if you remember, we talked about something called the business entity principle. Let's take a look at the business entity principle again, just to see where this fits together. We talked about the business entity principle and we said a business is accounted for separately from other business entities, including its owners. So we need to, what we need to explain here is when you run a business, you can run a business under various, under various, various characteristics, various forms, various forms. And we're going to be looking at those characteristics of those forms. 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The number of owners any particular business could have, how is it taxed? What is the owner's liability, legal liability and business life? Starting with the sole proprietorship, the word sole means one. So you have one owner by the by the by the by the definition of the term. The good thing about sole proprietorship, it's easy to set up. You don't need any paperwork. You just open a place, put a sign and start your business. For example, this individual is starting a tax service business. Business taxation, simply put, how is the business taxed? Well, guess what? The sole proprietorship, no additional business income tax. What does that mean? It means you have the owner, let's assume the business, you have the owner here and you have the business, two separate entities. The business makes a profit by the business makes a profit by generating revenues, by generating revenues minus expenses, you know, 150,000 of revenues. 100,000 of expenses. We have a profit of 50,000. Guess what? The business don't pay taxes. The 50,000 goes to the owner. Then the owner pay taxes on that profit. So no additional business income tax. So who paid the tax on this profit? Who paid the tax on this 50,000 profit? The owner will pay the tax. Owner's liability. If you are the owner of a business and it's a sole proprietorship, you have unlimited liability, which is risky. Risky. Why is it risky? It means you could be responsible for everything. Owner is personally liable for proprietorship debt. So if there's any debt involved, the owner is liable for that. Legal entity, it's not a separate entity. As far as legal, not accounting, as far as legal. Those two individuals are the same under the law. And that's why you have unlimited liability, because they're the same individual. The business life, how long does a sole proprietorship last? Well, the business end with the owner death or choice. If the owner decided to close the business, they can close it. Or if they die, the business technically no longer exist. Partnership. Two or more, two or more. You need two or more people to form a partnership. These people are called partners. It's easy to set up. Easy, yes and no. We have many types of partnership. We have general and we have limited. Now, I'm not going to go into the difference between general and limited because it's beyond the scope of discourse, but just need to know there are many types of partnerships. So in here, we are talking about a general partnership. No additional business income tax. What does that mean? The same concept as the sole proprietorship. Basically, a partnership and general partnership are technically the same. The profit goes from the business to the owners or to the partners. Same thing, unlimited liability. If we are talking about the general partnership, partners are jointly liable for partnership debt. Legal entity, same thing. No separate legal entity. Notice it's the same characteristic, the same characteristic. And what, when does the business end with the partner's death sometime or the partner's choice? They decide to let go. Now, again, I did not talk about limited partnership because the limited partnership owner's liability will change. Some owners liability will change, but again, it's beyond the scope of discourse. Corporation, you could have one owner or more, could have hundreds of thousands of owners called stockholders, can get many investors by selling stock or share of corporate ownership. When the corporation is only one class of stocks, we call it common stock or capital stock. Business taxation, this is different. This is a little bit different than the prior two. What happens here is this, you have the owners, here we go. And you have many owners and you have the corporation. Now, the corporation makes a profit. The corporation pay taxes on the profit. Then after paying taxes, the money goes to the shareholders because the shareholders are the owners. Then these individuals, they pay taxes again. So what we have here is something called double taxation. The fact that the tax is paid twice on the same amount of money. What does that mean? It means the corporation paid the taxes first time on the income. The corporation paid the taxes. Then the owners of the corporation paid the tax on the same amount. The benefit of a corporation is limited liability. In contrast to the other two, limited liability means if something happened to the business, the owners, the shareholders, are only liable up to the amount that they invested. They're not liable for corporate acts and that they can only lose what they invested in the business. That's different than partnership. That's different than sole proprietorship. It's a separate legal entity with the same rights and responsibilities as a person. The word corporation comes from the Latin word corpus. Corpus means a body. And that's why it's as far as the law is concerned, it's a legal entity. That's why it's a corpus. It's a body as far as the law is concerned. Business life, it have an indefinite business life. It have an indefinite business life. Now we're going to talk about limited liability company or LLC, limited liability company. One or more. So you could have one or more. They are called members, not partners, not owners. They're called members under LLC, limited liability company. No additional business income tax. They get treated like partnership. They get treated like sole proprietor. There is ship for taxes. So the taxes are paid by the owners. Notice, just like the corporation, it has a limited liability for the owners, also called members. If you think about LLC, it's a hybrid. It has, it's a hybrid. What do I mean by hybrid? It has the benefit. It has the benefit. It has the benefit of a corporation when it comes to the liability and it has the benefit of a sole proprietorship and a partnership when it comes to taxes. So it has it both, the both of good, the both of good words. It's a separate legal entity with the same right and responsibilities as a person. It's a kind of, it's a corporation. It has a limited liability and the life is indefinite. So notice LLC is a hybrid LLC is hybrid and no wonder why they are popular form of business. Okay. Now this is an overview. Again, this is an overview for a financial accounting course, as always I would like to remind you to go to my website for additional resources. If you're an accounting students, invest in your career. If you're a CPA candidate, it's you study one time in your lifetime for your CPA exam. Also as an accounting students, invest in your education. In the next topic, we would look at the important account and equation, which is assets equal to liabilities plus owners equity. Good luck and study hard.