Corporations and limited liability발음듣기
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Corporations and limited liability
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So we kind of have a sense of what they are, but I want to make that sense a little bit more precise in this video and also give an understanding of why corporations even exist.발음듣기
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And so a corporation, and you might already kind of have a feeling for this, it's a legal entity.발음듣기
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It's a legal entity that can kind of act ... that can act, that can act like a person ... like a person, I put the act in quotes because obviously there's some things that a person can do that a corporation can't.발음듣기
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And in my mind, there's two big reasons and the first reason and this is the real biggest one is limited liability.발음듣기
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Sounds like a very fancy word, but we'll see it with an example, it's not too ... it's not too fancy.발음듣기
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So there is limited liability and there's also kind of transferrable share ownership. Share ownership.발음듣기
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But what I want to do in this, which is you know essentially more than one person can own the corporation, they can transfer the shares between people, they can trade them.발음듣기
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But what I want to focus on is the limited liability because even if there's only one person who owns the corporation, if they own the whole thing.발음듣기
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That's very ... Well, cars can cost that much but let's be ... that's ... $50,000 is still a nice car.발음듣기
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Let's say that he has some investments, some investment properties or maybe some stocks that are worth another ... another $500,000 and let's say that he's interested, you know, he looks around his town, he sees that there's a lot of people who could use a ride.발음듣기
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So he goes out there and he doesn't think about starting a corporation and he just goes out there and he buys a car, let me call a cab, plus licenses.발음듣기
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You could ... could talk to a, the next time you're in a cab, it costs much more than the cost of the car, which would probably be $20,000 or $30,000.발음듣기
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Let's say he spends $1,000 on insurance, on liability insurance. He realizes, "Hey look, maybe you know, maybe something bad happens."발음듣기
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'"This is a cab I could run into somebody and I get sued. So, I want to get liability insurance."발음듣기
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So this is liability insurance, in case anything like that happens and let's say that it is a ... Let's say that it is a $100,000 policy. He says, "You know, how can I ...", you know, he ... he's maybe a little bit optimistic and he thinks that no one can sue him for more than $100,000.발음듣기
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Now, he goes out there. He starts driving that cab around, picking up people, dropping them off and by accident one day, he rolls over someone's foot and that person whose foot he just crushed happened to be a ... you know, a world-class soccer player.발음듣기
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So right here, here's the soccer ... the soccer player right over here, whose career is ruined or if you're watching this outside of the United States, a football player.발음듣기
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In fact, that's probably ... probably deservers more than that if he was a world-class player.발음듣기
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Well, he wouldn't have to sell his car because he has investments, sell his investments and give his house or the proceeds from his house and investment to the soccer player.발음듣기
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And so now all Bill is left with is a car and a cab and not much else, so what did this ... this cab business didn't work out too well for Bill.발음듣기
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Now, what Bill should have done is create a separate corporation, is create a separate corporation called ... called Bill's ... Bill's Car Service ... Car Service, Inc. and transferred enough money so that the cab, the licensees and the insurance could be owned by this legal entity, by this corporation.발음듣기
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So he would have transferred $80,000 to the corporation and the corporation would have bought it in the corporation's name.발음듣기
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It could also get the insurance, the $100,000 of insurance, maybe this is what people think is a reasonable amount for anyone who is running a cab business.발음듣기
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The reality is probably it's a much larger number than that and he spends $1,000 to have that policy and remember, this is $100,000 of liability insurance.발음듣기
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The soccer player's foot gets crushed, can't play soccer anymore, sues whoever owned that cab for a $1,000,000.발음듣기
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In this reality, Bill's assets wouldn't include the cab, the licenses and the insurance anymore.발음듣기
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So the asset is now the shares, the 100% ownership in this but this is a separate legal entity.발음듣기
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'"You ruined his career.", but unfortunate for the player and I guess fortunate for Bill, I don't want to take sides here.발음듣기
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This is just how reality is set up and this is what limited liability is, is that now all the car service can produce is ... Well, they could sell ...발음듣기
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They'll get $100,000 from the insurance, so all this corporation will be able to do is give the guy $180,000 and then the cooperation is just going to go bankrupt.발음듣기
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So this thing that Bill owed, this car service which maybe originally he could write on his books as being worth $81,000, had insurance policy and all this other stuff.발음듣기
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If he didn't have enough insurance or if he didn't ... if he was running this like his own personal business.발음듣기
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If this car service didn't have its own bank account or if it didn't ... if it was undercapitalized, if it didn't have enough money in it, then maybe the court would let the soccer player or kind of "pierce the corporate veil" they say, which is a very fancy way of still going after the owners of the corporation.발음듣기
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But as long as this corporation was reasonably capitalized, and I'm just made up these numbers here, the soccer player will only be able to go after this corporation.발음듣기
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The most he could lose as long as he ran the car service properly and had enough insurance and had enough money in the actual organization.발음듣기
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As long as he ran it in the right way, the most he could lose is the value of the organization.발음듣기
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If this organization, you know, hits somebody or rolled over their foot, and ... but he ran the organization properly, they can't go over the rest of his assets.발음듣기
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