Is limited liability or double taxation fair?발음듣기
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Is limited liability or double taxation fair?
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[Voiceover] After watching the last video on corporations and limited liability, you might be asking yourself was that fair if Bill had owned the cab himself and got sued, the soccer player who's career was ruined would have gotten his actual million dollars.발음듣기
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Because Bill set up this corporation and put the assets of the cab company in this corporation, he was able to limit his liability.발음듣기
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The soccer player was only able to get a $180,000, the corporation declared bankruptcy but Bill's liability was limited to what he had contributed to the corporation.발음듣기
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He might say, "My God, this guy over here his life was somewhat ruined and he's not able to kind of get compensated for I guess how bad his life was ruined."발음듣기
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He should give him the money, so he should say this is kind of an unfair way that this corporations are a way for well off people or wealthy people to protect their assets.발음듣기
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I want to think about in this video is the trade-offs and really this is just a balance that society has to pick.발음듣기
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If you had talked to Bill, Bill might have said well, "That's right, corporations are kind of limiting liability for someone like me."발음듣기
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He'd say, "Look I wouldn't have started ..." or maybe he wouldn't have started the cab company if he didn't have that limited liability.발음듣기
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He said, "Look, if I had a hundred million dollars and I didn't have the option of starting a corporation, I would have not have started the cab company because just for a little bit of small profit that I could have gotten from $80,000 cab I wouldn't have wanted to jeopardize the rest of my empire."발음듣기
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'"If I didn't have limited liability, I wouldn't have started the business to begin with and that would not have been good for society."발음듣기
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Another argument Bill might make and I'm not going to take sides here, I'm just saying these are the bounds, these are the things that you have to weigh when you set up a legal code in the society, is that Bill said, "Look, whoever starts a cab business," this cab business that roughly you could start with 80, 90, or $100,000.발음듣기
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Maybe Sal right over here, maybe my only assets are the cab plus licenses and I have 80K over there, and the insurance which is 1K.발음듣기
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What Bill would say is, "Look, me and Sal could both open the exact same cab business and if there were no corporations, if I had to own ..."발음듣기
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If Bill had to own the assets of the cab company or I should say the cab company, I should say Bill had to directly own the assets, the cab and licenses.발음듣기
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Even though Bill's and Sal's upside from the business, the profit they could make would be the same.발음듣기
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Maybe that would make Bill get a bigger policy so that a $100,000 policy, maybe he would want to get a million dollar policy.발음듣기
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Then a million dollar policy will probably cost 10 times more, it would cost $10,000 to have that policy.발음듣기
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If you view it from that way, in order to protect his other assets, his cost of business would be higher just because he happens to have other things.발음듣기
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It would again be a reason why someone with assets would be less inclined to start another business which may not be great for society.발음듣기
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Then the other thing that Bill might argue is that look, in exchange for limited liability he might have to be double taxed and this is an interesting discussion here because you'll probably hear this term a lot, double taxation.발음듣기
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It's not necessarily going to happen but if it's a large corporation, the type of corporations that are publicly traded this will happen.발음듣기
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It does not happen with things called S corps and I'm not going to go in detail here in what this are.발음듣기
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S corps, LLC which stands for limited liability corporation, LP which stand for limited partnerships or limited liability partnerships, LLPs.발음듣기
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It doesn't apply to any of these things but what happens in double taxation, is let's say you have some corporation, some C corp.발음듣기
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Since this is being treated as kind of a legal entity that's kind of like a person by the government, it gets taxed like a person.발음듣기
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They're going to have to pay 30% or 35% or whatever the corporate tax, the marginal corporate tax rate for this corporation is going to be.발음듣기
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Then let's say this corporation, whatever it has left over after taxes so this is, let me make it clear, this is pretax.발음듣기
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Let's say it then dividends that out to its shareholders, so then it gives it to its shareholders.발음듣기
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That one shareholder, he's getting $700 in income based on the fact the he owns this corporation.발음듣기
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$210 in taxes to the government based on this net income from his dividend that he's getting out from the C corporation.발음듣기
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Actually I want to be very careful here, I don't want to get into the details but dividends can sometimes be taxed differently then straight up income.발음듣기
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This is the idea of double taxation, the corporation is used as legal entity, it pays taxes, and then after those taxes it's able to give its money back to shareholders and then those shareholders have to pay money on that income again.발음듣기
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'"If you don't like paying those double taxes don't set up a corporation and then just accept the full straight up liabilities."발음듣기
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Let me be clear here, This applies mainly the large corporations, if you want the limited liability but you don't want to have to do this double taxation any of these other corporate structures are available.발음듣기
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These are usually available to smaller, less complicated companies I should say than what's going on with the C corp.발음듣기
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They stop lasting as soon as one of the partners of the corporation, one of the owners of the corporation pass away or declare bankruptcy, so there are limitations here.발음듣기
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These do get the benefits of limited liability and the profits get pass through to the owners without getting taxed first.발음듣기
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Going back to the fairness issue, if Bill was smart when he started this company he probably would set this up as a limited liability corporation or as an S corporation or something where he doesn't have to get double taxed and still he would avoid having to pay the soccer player the full million dollars.발음듣기
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Let's say the car service becomes huge and he wants to make it public one day then he would have to make it a C corporation and then he would have to do the whole double taxation.발음듣기
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It's something to think about, it's interesting to think about, is it fair to have something like this?발음듣기
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It kind of levels the playing field regardless of however many side assets you have, you have the same liability for a certain amount of business.발음듣기
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There's usually certain rules that you have to have a certain amount of money in the corporation, a certain amount of insurance in the corporation.발음듣기
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That at least for large corporations, the general electrics and the Google's and the Microsoft's of the [world] they do pay a fee for this limited liability and that's in terms of this double taxation.발음듣기
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