Greetings. Today I want to talk to you a bit about businesses, or firms, as we call them. So, what is a firm? Well, a firm is an entity that puts together inputs of some form, okay? It could be like labor, or say, oil, or some natural resources like, wood. Or just talented people, puts together those resources into something, we're going to call it production function. And out of that action, outputs come out, outputs are things that firms can sell. Sometimes they're things that are very concrete, like say, a car, or a can of soda. Sometimes they're less concrete likes a Consulting Services something like that, but that's what businesses do. And so and also it's very important to understand that business is also shoulder risk. Okay, so the business will bear risk by putting all these things together and producing a product and then hoping their fingers crossed that people are going to buy this product. Okay, so that they can make it an ongoing sustainable business because they make it people want it and you could just keep channeling money back in so that you have more money to buy more inputs and you can sell more outputs. Today we want to think about business organizations types of firms we have now, there's lots of different types of firms, but for our case, we're going to take just three general classes, okay. So I'm going to write out here that I want to look at types of firms and the three types of firms I want to think about are sole proprietorships, partnerships and corporations. So let's take them one at a time sole proprietorship. Is basically a single owner. A sole proprietorship is a business. It's owned by a person or family. Okay a single entity. Think about Larry I'm a University academic and I decided I need to really supplement my income a little bit. So what I do is I say, you know, what what I'm going to do is I'm going to go out to Home Depot and I'm going to buy a chainsaw and I'm going to start Larry's tree trimming service. I'll take a little ad out in the newspaper and say, you know, I can trim your trees and I'll just wait people will call me. I'll go trim their trees. That's a sole proprietorship. I have to report that income on schedule C of the tax return here the United States that would be called profit or loss for my business. Now the second type is partnerships and the partnership is kind of like what says it's a group owners. A partnerships is when different individuals come together and decide that they're going to work as an end as a single entity okay? So imagine that got Larry's tree-trimming shop and there's this guy in town. I'm Brian and Brian's got Brian's landscaping business and I go to Brian I say Brian, let's team up your Landscaping my tree trimming we can make a little money while Partnerships and Brian says sure we'll do that. Now what happens here is that we now have to put in our own money. Usually it's 50/50 sometimes. You say well, I'll tell you what Brian said your business is more successful you put in 70% and I'll put in thirty percent. I'm only working on weekends after all you can make that deal out, but we're going to jointly owned this and we're going to split the profits according to some rule. Okay, that's what a partnership is. Partnerships can be very small just like Brian and Larry's little business and champagne. They could be very large like say the big time accounting firms are partnerships with with hundreds and hundreds of partners spread around the world. And the last one is corporations now corporations are very special corporations are essentially independent entities. A corporation is a firm that's created. It's an independent entity on and of itself. Okay, and the people own the corporation is something called the owners. Are what we call shareholders. So if you look around in your closet. Find a few old dusty paper shares of stock of IBM. That means you are a co-owner of IBM your shares of stock means you're part owner and the prophets that IBM makes will come back to you according to the size of your stake in the company. So if you only got a hundred shares of IBM, you're not going to get a lot of those profits because there's millions of owners of IBM out there people all over the planet have IBM stock. All right, and they all get their share depending on how much it those shares of stock they have remember this cup is corporation is an independent entity. So, in a way I could do this too instead. I could say yeah, Larry's tree-trimming shop. You know what I think I'm going to do is I'm going to make it Larry's tree trimming shop ink, okay Larry's tree trimming shopping means I have to hire a lawyer not too expensive these days and the lawyer here will incorporate me in the state of Illinois okay? And in order to do that, I have to issue a few shares. Simple baby just issuing 10 shares each share is worth thousand dollars. Okay, and I can say let's say $100 will make it to cheaper business. Each share is worth $100. Well, like he's I have a that means I was ten shares. I have a thousand dollars of equity okay? Well, I'm going to sell a few of these may be that my friend Brian wants a piece of the action and Brian says I'd like five of those shares Larry and he gives me $500 and I say I'll take the other five and I put 500 dollars in we've got the thousand dollars of equity and we've got these ownerships rights, okay. I want to go out I make we do our business and then people will get the share of the profits according to how their Sheriff of ownership is in this little example I made up Brian gets 50% and I get 50% because we own each own 50% of the stock. Okay, so let's think a little bit about what this looks like. What's the lay of the land so to speak and so I went out to this great place here called the Statistical Abstract the United States. It used to come as a book every year and data Geeks like me people who economists who like data we used to get a copy of it and it's very big. Okay, it has data on just about anything. You can possibly imagine the Statistical Abstract the United States has lots and lots of data. It has data across all sorts of areas labor products. How many churches are there in your town all these sorts of things and it's got it longitude. It's not just this year. But how about a year before the year before all the way back to say the year 1880 or something like that? So they've got tons of data in this thing. This is a screenshot of the current version of it, which is online the Statistical Abstract of the United States and you if you have access to library privileges, which you don't be worried if you were a student at a major university, they will have an account with proquest and so you can just log in and take a look at some of that data. Well, they're going to give us some interesting data here. And so what I've done is I put this to get together this little table and it says that this is the detail of the 2013 data from the 2019 volume of the Statistical Abstract the United States. It's is the 2019 volume on this page. You can see up here. It says 2019, but unfortunately just because it's 2019 doesn't mean the data is kept up there a little behind in processing their data put this together. So the bones current date they have is date is 2013. Now you see on this picture that the sole proprietorships there's a lot of them 24 million sole proprietorships. There's three and a half million partnerships and there's about six million corporations. Why are there so many sole proprietorships? Because there's tons of people out there who make quilts and sell them on Etsy there's tons of people out there who do arts and crafts with with fleece and sell them on on eBay all these people are independent entities. They are businesses. They're producing a product. They may just be a middle person who got a shipment of of trial cologne and I'll put them out on eBay and sell these little tribe a try packs for just a couple bucks. They're just acting as a way of getting resources out there, but they have to report that they were a business that's sole proprietorships. Partnerships, we've already talked about those guys. What's think about the revenue side? Look at this. This is revenue and trillions of dollars and you can see that sole proprietorships while there's an awful lot of them. They don't make much money. Well 1.3 trillion is not bad, but 1.3 trillion over 24 million firms. They're not making very much money on it and on the bases now some of these are pretty successful. There are family-owned businesses that have that have multimillion-dollar returns. There are in Champaign here. There are some long-standing restaurants that have been from one family over and over and over and they're wildly successful restaurants okay? So those people are making a lot of money but the people who are selling quilts on Etsy not so much. Okay, but they're still they're still out there. Partnerships they make some money but look at these guys corporations have 26 trillion dollars okay? This is the one you're 27 trillion dollars in one year. And so what I did is I just took a percentage here of those so you can see of the total number of the total number of firms 72% are sole proprietorships and only 17% of corporations, but corporations get 80% of all the revenue. Okay, and sole proprietorships not so much. They're usually just ball mom-and-pop operations. Okay, and then you have these partnerships as I said some of the largest law firms on the planet who will have a thousands of lawyers. Those are all partners. Okay, so they can make a lot of money in these big-time operations. And and that's what that shows. Finally, I want to talk about something else. I want to talk about liability says here liability. It's important liability is risk. So think about this the first one sole proprietorships says full okay? So let's go back to my story about Larry's tree trimming shop. Larry's tree trimming shop. I got that chain saw and a guy take calls me up and says, hey, I need to take this dying tree off my yard. Let's say, you know, I want to get rid of it. What are you going to charge? So I give him what my quote is and he's a perfect come on out here. So I go out with my chainsaw trustee chainsaw that I got at Home Depot that's already and I take that tree off, but you know what? I'm a pretty good academic but not very good Woodsman and it turns out that what I cut that tree down. And it falls right down on the guy's house and totals it and the same time. It lands on his brand new BMW. It's a total of about three hundred thousand dollars in damages. How much of that do I have to pay? All it okay? I have full liability on that. Okay, I cause that damage. Hopefully I was smart enough to a bought some insurance to go in but still that was I have to pay premiums for that. So the insurance company is making me share the risk through making regular regular payments of partnerships that the same thing. Partnerships they still have to share the risk if Brian and I had joined in our little partnership where he Brian's Landscaping service and Larry's fly by Terry Larry's treetrimming shop decided to get together we're partners. Unfortunately for Brian if I went out to that guy stop and drop that tree down. So partnership still owes the $300,000 for ruin in the house and the car. But look at the SI corporations that says here at the end corporations have what we call limited liability. What's that mean? Well, you just what it says corporations are the liability corporations is limited to the equity in the company. So if I had taken that remember how I said I talked about incorporating. I take the I get myself. I put I incorporate with 10 shares and the chairs are $100 each. So I got $1,000 Brian gave me 500. I've got 500 in. Okay, I use that to buy a couple chainsaws. All right, so that I have different sized one big one and a little trimming one decide and and I got a little extra money to take out a few nicer ads in the newspaper about Larry's tree trimming service. I go out to this guy's house. Once again same thing happens. I dropped the tree falls on his house recks is BMW. It's $300,000. But you know what? I'm out maximum amount is the equity of the company the share values of all the shareholders would go to zero. Brian would be unhappy Larry's unhappy but you can't get blood from a turnip. That's all I owe okay? At that point they can sue the company but the company has no assets okay? They can't come back to me. Okay, that's why I Incorporated the first place. So we knew incorporate you take yourself out of the risk picture The Entity. Okay has risk. That's the corporation okay? Hopefully the corporation might even buy some insurance of it if they think sits thinks it's important, but I don't have to worry about that. Okay, the most I can get wiped out is the $500 I have five shares. I put $100 for each one. Brian's got five shares for $100 each one that value goes to 0 because the firm is they who have to give that much to the to the homeowner. So you might ask the question. Hey, why doesn't everybody incorporate the question is the reason about it really doesn't incorporate is because remember what I said earlier corporations are independent entities. Now, I've never met an independent entity that the government doesn't like to tax. So we have this thing in the United States called a corporate tax and the corporate tax is a G if you make profits of a thousand dollars and your Larry's sole proprietorship, you have to pay taxes on the thousand dollars. Okay, but if you're a corporation and make $1,000 first the government takes a corporate income tax on that takes the corporate income tax off. So instead of $1,000 you got roughly seven hundred eighty dollars left and then when the 780 goes back out to the ownership we pay taxes again too. because we have to report that our income. So corporations always involve double taxation. Okay corporations the Entity gets taxed first, which means that of those profits that you made suppose they made a thousand suppose they made a million dollars. If it was a sole proprietorship you can keep it all but if it's corporation the government's going to come in a lop off a big chunk at the start and then say now you can distribute that to the owners. But by the way, when you distribute it to the owner still have to pay tax again on that because because that's income that they were that they burn and so that's sort of reason is why you see people decide I'm not going to incorporate. I'm just going to go ahead and do my business. I mean, it's especially if you're if you're if you're just making quilts to sell on Etsy not a lot of risk in that business. Okay, so people will just opt for that. Okay, we'll talk more about this when we started turning our mind towards production, thanks.
