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.
• Self-employment taxes. We will be discussing those darn Social Security and Medicare taxes throughout this book. Please note here that all general partners (even those not considered employees of the partnership) must pay self-employment taxes on their share of partnership income. Several good entities ahead offer ways to reduce such taxes.
With her life savings gone and her vision of her own business dashed, Louise unhappily went back to work at the department store.
As Case No. 2 illustrates, with a general partnership you have double the exposure of a sole proprietorship. Not only you—but your partner—can put your personal assets at risk. All of the risk and double (or triple or more depending on the number of general partners you have) the exposure is not a good way to do business.
As our first two cases point out, it is important to select the correct entity at the start. (And, please note, not all of our stories will be so dire. It is just that right now we are dealing with bad entities.)
Rich Dad Tips
• 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 or visit www.corporatedirect.com 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.
To succeed in business, to protect your assets and to limit your liability, you want to select from one of the good entities, structures that are truly separate legal beings. They are:
• C corporations
• S corporations
• Limited liability companies (LLCs)
• Limited partnerships (LPs)
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 $800 or less so that you can achieve the same benefits and protections that sophisticated business people have enjoyed for centuries. But beware of promoters claiming they can incorporate you for $99 or less. We will discuss the consequences of using such services in Chapter 18.
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. 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.
As it turned out, the English Rose and the English Flyer left London for the Caribbean at about the same time. As they set sail the risks to the investors in each enterprise were as follows:
| The English Player | The English Rose | |
| Business Entity | General Partnership | Corporation |
| Investment | £250 for 10% of general partnership interests | £250 for 10% of corporation’ shares |
| Liability | Unlimited joint and several | Limited to £250 |