Your Entity Menu : Part 4

Own Your Own Corporation : Why the Rich Own Their Own Companies and Everyone Else Works for Them
by Garrett Sutton, Esq.

(Page 4 of 11)

Other General Partnership Disadvantages

As if all of the risk and double the exposure were not bad enough, there are other disadvantages to operating as a general partnership:

Termination. A partnership terminates when one partner dies, leaves, or goes bankrupt. You may be surprised by some unexpected event.

Sale. Most sophisticated buyers do not want the risk of being in a general partnership. This will hinder the ability to sell your interest in a general partnership.

Rich Dad Tip

• The longer you operate as a sole proprietorship or general partnership the longer you are going to be personally responsible for every bad thing that can happen in your business.

• If you are currently operating as a sole proprietorship or general partnership, see a professional immediately about switching to a good entity.

• If you are considering getting into a business, do not start out on the wrong foot by using a bad entity.

Good Entities

• C corporations
• S corporations
• Limited liability companies (LLCs)
• Limited partnerships (LPs)

To succeed in business, to protect your assets, and to limit your liability, you will want to select from one of the good entities listed above. Each one has its own advantages and specific uses. Each one is utilized by the rich and the knowledgeable in their business and personal financial affairs. And, depending on your state's fees, each one can be formed for $900 or less so that you can achieve the same benefits and protections that sophisticated business people have enjoyed for centuries.

Before we discuss the relative strengths of corporations, LLCs, and LPs, it is important to know the language of each. While their basic structure is similar, the terms for each structural facet are different. Here then is the language for the good entities.

Corporations

The best place to start the discussion of good entities is with corporations. They have evolved over the last five hundred years to become the most commonly used entity for conducting business.

As Robert Kiyosaki learned during his study of admiralty law, corporations came into common usage in the 1500s to protect investors in maritime ventures. Prior to the popular use of corporations, investors would come together as a partnership, outfit a ship, and send it out for trading purposes. If the ship was lost at sea, the investors could not only lose everything but also be personally sued by various creditors. Of course, this exposure deterred people from risk taking and discouraged economic activity. Seeing this, the English Crown and courts allowed for the charter of corporations whereby risks and liabilities could be limited to the corporation itself.

The shareholders, the investors in the corporation, were liable only to the extent of their contribution to the business. This was a significant development in world economic history.

Case No. 3-The English Rose/Sir Richard Starkey

In the late 1500s maritime activity was increasing. The New World beckoned with the promise of riches and opportunity. The then small segment of Europeans with money were investing in sailing ships to pursue trading opportunities. If your ship could make it across the Atlantic with supplies, sell them or trade them for commodities, and return with a valuable cargo, you could make a fortune. This scenario was the origin of the phrase: "When my ship comes in."

During this time, two groups of London promoters were soliciting investors to outfit a ship and send it to the Caribbean in search of trading opportunities. A ship known as the Royale Returne had just recently arrived at the London docks and its investors had reaped profits of 1,000 percent. Investors were excited by these opportunities. The first group was outfitting a ship known as the English Flyer. The promoters brought investors in as general partners, offering 10 percent of the profits in exchange for £250. In Elizabethan England, as today, there was no special requirement to get permission to operate as a general partnership.

Two British gentlemen, Sir Richard Starkey and Master John Fowles, were potential investors. Master John Fowles was astounded by the profits the Royale Returne had generated for its investors. He wanted to invest in the very next ship set to sail. It didn't matter that the English Flyer was a partnership. The personal liability of a general partnership did not trouble him - not when huge profits were in sight. Master John Fowles invested £250 in the English Flyer as soon as he could.

The second group of promoters was outfitting the English Rose. They wanted the limited liability of a new entity called a corporation. The problem was that, like today, it cost extra money to form and you had to wait for the Crown to give you a charter. But the second group of promoters was more careful than the first. They did not want to put themselves or their investors at risk in case the ship never returned. Sir Richard Starkey, being prudent and cautious, chose to invest in the English Rose. He knew there was risk in venturing across the Atlantic. He wanted to limit his exposure to just £250.

Copyright © 2001 by Garrett Sutton, Esq.

About the Author

Garrett Sutton, Esq. has over twenty five years experience assisting and advising entrepreneurs, families and business in selecting the appropriate corporate structures to limit their liability, protect their assets, build their credit and advance their personal and financial goals through real estate investments and other means of wealth creation. Sutton is the owner of Sutton Law Center, Sutton Law which has offices in Reno, Nevada, Jackson Hole, Wyoming and Sacramento California.