- To introduce the topic of corporate taxation,
we need to talk about business structure in general.
There are three general ways to structure business.
One is as a single person.
This is called a sole proprietorship.
That's just one person doing business.
Next, a group of connected people doing business
business is called a partnership.
is called a partnership.
And finally, a group of loosely connected
Finally, a group of loosely connected people doing business
people doing businessis called a corporation.
is called a corporation.
Sole proprietorship is easy to form.
You just start doing business.
Maybe you need a business license,
but there's no real process that needs to be gone through.
It's also easy to terminate a sole proprietorship.
You just stop doing business,
or you sell the business to somebody else.
Now, the downside of the sole proprietorship structure
proprietorship structureis unlimited liability.
is unlimited liability.
Legally, the acts of a person doing business
and the acts of a person in their individual life
a person in their individuallife are not separated.
are not separated,
so excess business obligations
that are created in doing business
business have to besatisfied through payments
have to be satisfied through payments from personal assets,
from personal assets, such asyour personal bank account.
such as your personal bank account.
A partnership is a little more difficult to form.
The partners 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?
Also, it's a bit more difficult to terminate
to terminate or change a partnership.
or change a partnership.
If a new partner wants to come into the partnership,
or if an old partner wants to leave,
all of the old partners have to agree.
A big downside of the partnership structure
structure is unlimited liability.
is unlimited liability.
Now, this is the same as with sole proprietorship,
but now it's a little bit worse,
because the partners are said to be
joint and separately liable
liable for the businessobligations of the partnership.
for the business obligations of the partnership.
Let's say that some of my partners
make a bad business decision,
decision and the partnershipnow owes lots of money.
and the partnership now owes lots of money.
if all my other partners have gone bankrupt
and I'm the sole remaining partner with any money,
I am completely legally obligated
to pay off all the debts of the partnership.
That is unlimited liability.
A corporation is a legal entity chartered by a government.
Ownership is represented by ownership 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 separate person
is a separate person under the law.
under the law.
This corporate structure results
in limited business liability.
If I'm a shareholder in a corporation,
and let's say I put in $10,000 into the corporation,
that's the most that I can lose.
If the corporation makes very bad business decisions
and loses lots of money,
I am not personally liable for anything more
for anything more than whatI put into the corporation.
than what I put into the corporation.
This limited liability is quite different
from the unlimited liability of a partnership.
Almost all large businesses in the world
are structured as corporations
because you can get hundreds, thousands,
get hundreds, thousands, millions,of shareholders together,
millions of shareholders together,
each with their little bit of capital,
and make a very large company.
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,
my partnership interest to somebody else,
all my other partners have to agree.
In contrast, if I'm a shareholder in a corporation
and I want to sell my shares to somebody else,
it literally takes just 10 seconds.
I go online,
I sell my shares to somebody that I don't even know,
that I don't even know,somebody in Azerbaijan,
somebody in Azerbaijan, somebody in Zimbabwe,
somebody in Zimbabwe and it happens
and it happens just like that.
(fingers snap) just like that.
10 seconds.
The biggest downside of the corporate structure of business
structure of business is double taxation.
is double taxation.
Income is taxed once at the corporate level,
and then when the remaining income is distributed
to shareholders asdividends, it's taxed again.
to the shareholders as dividends,
it's taxed again.
Double taxation makes the corporate structure of business
of business very interesting and important
very interesting and important
in our discussion of income taxes.