PETER C. BRONSTEIN: The next topic that we're going to discuss is business formation. What does that include? Well, there are many different ways that a business can be formed and operated.

We have the sole proprietorship. Sole proprietorship is where one party owns the business exclusively. There are no partners. There's no shareholders. There's no one else involved in the company. It's basically you own the company 100% exclusively.

The next concept is partnership. Partnership generally includes more than one person. So you generally will have at least two people-- could be three, five, could be an unlimited amount of partners. In a partnership, the partnership is typically governed by what's called a partnership agreement. Why do you need governance? Because now you have more than one party involved in the transaction.

Partnerships have been around for hundreds of years. Partnerships allow parties to expend more sums of money in raising capital. Why? Because instead of having one person put all the money into the business to start and operate and begin the business, you can have multiple parties putting money in.

You also have multiple decisions. You also have multiple issues that have to be dealt with, which is why you need a partnership agreement. The partnership agreement itself will govern how things are determined and what happens when there are deadlocks among the partners.

A third form of business ownership is incorporation. Incorporation is basically not necessarily the big corporations out there on the S&P 500 and the Dow. We're talking about usually small corporations, closely-held corporations by two or three people. But it can be thousands and even millions of shareholders.

Basically, the way a corporation is done-- that requires you to file a copy of articles of incorporation with the Secretary of State of your state. Once the articles of incorporation are filed, you now have a valid corporation. When you have a valid corporation, that is a shell. You have nothing in your corporation. Once a corporation is formed, you need to obtain various information, like a taxpayer ID number.

You have to then prepare minutes. What are minutes? Minutes are basically determining who shall be the directors of the corporation, who should be the officers of that corporation that actually run the corporation, where your bank account is going to be, who your accountant is going to be-- there are many, many different types of matters that can come up in minutes. And minutes need to be documented. Failure to document your minutes can make you an invalid corporation.

Now, one of the big advantages for corporations, in addition to raising much more capital than even a partnership can typically do-- and certainly, more than a sole proprietor can do, unless you're an actual billionaire-- the reality is that you get what's called limited liability protection. What does that mean?

Limited liability protection means that if somebody were to come after the corporation or a creditor were to come after the corporation, that creditor can only come after the maximum value that's within the corporation, the assets. If a corporation has $100,000 or $10,000-- if those are all the assets that the corporation has, then that is all that a party can seek and collect.

However, when you're dealing with a partnership, there are two issues there, one of which is unlimited liability. A creditor or somebody that was coming after the partnership can come after all the partners-- not only that they can come after all the partners to collect monies and go after your personal assets, like your home and your bank accounts and your stock portfolios, but in addition to that, a creditor can actually go after one partner and collect all of the debt.

What does this mean? Well, if there was a creditor out there that was owed $300,000 and there are two partners that have nothing and one partner has $300,000, the creditor can go after solely the party that has the $300,000. There is no requirement after receiving a judgment or going after a judgment to collect. It's called joint and several liability. It's a very, very important factor-- many, many reasons why partnerships or partners decide to become shareholders and form a corporation.

A newer form of ownership which has only been around, believe it or not, since 1979 is the limited liability company. It is now very, very common, and nearly every state has a limited liability company. A limited liability company actually, in the state of California, did not come about until 1995-- again, a relatively new concept.

What is a limited liability company? A limited liability company is a hybrid between a partnership and a corporation. It has the aspects of limited liability protection that the corporation holds, OK? So in that respect, it is like a corporation.

However, it is governed by what's called an operating agreement, which is similar but not exactly the same as a partnership. Therefore, that agreement will govern the rights and duties and responsibilities of the parties in the entity. You don't have to prepare annual minutes if you form an LLC, although you have the ability to do so.

Limited liability companies is very well known, and many, many people like the LLC route because you don't have to keep up the corporate formalities. However, it is still a relatively new concept, having in California only been around since 1995. And in the United States, the first LLC act was actually committed in 1979.

Now, in the state of California, one of the aspects of limited liability companies is they do have a tax based on gross receipts. You do not have a gross receipts tax based on corporations. However, limited liability companies are a lot easier to run, a lot easier to manage, and many, many people select that option.

That is our segment on business formation.