Garrett Sutton explains: We don’t have to get too legal to know that investing involves risk. When investing involves unlimited risk, the chance that out of the blue you’ll lose absolutely everything you own, fewer people will invest. But when you can hedge your bets and shield some of your assets, more people will put their money to work. It started with corporate charters granted by the English Crown in the 1500s. The wealthy and well-connected were able to take risks that others could not, and the English economy flourished. In time, governments realized that limited-liability entities should offer an equal opportunity for protection.1 The fact that tax revenues greatly increased with such an expansion of rights certainly helped governments make the right decision. Today, states such as Nevada, Wyoming, and Delaware provide favorable risk-protection laws and affordable fees, and generate huge sums of money for their treasuries. And, in one of the bigger win-wins out there, they allow investors to legally hedge their bets through state-chartered limited-liability entities which has allowed the economy to grow and more taxes to be collected. Much can be explained by examining self-interest. Ironically, while providing for the good entity choices, governments also offer bad entity choices and don’t tell you which ones to use. The paternalistic nanny state so many complain of certainly had not come to entity selection. The government doesn’t teach it or warn about it,2 and they’ll let you make the wrong decision. The bad entity choices, and the ones that offer no protection from claims and thus no minimization of risk, are sole proprietorships and general partnerships. You will not enter into businesses or protect your wealth
Petitioning the Crown for a corporate charter was time-consuming and unseemly, and more than a few monarchs cared nothing for “business.” But their regents saw it clearly. Perhaps we are not ready to see the following: Government Warning: (1) According to the Department of Justice, use of a sole proprietorship may expose all of your assets to the risk of immediate loss. (2) Use of a sole proprietorship impairs your ability to build business credit and may stunt any future economic opportunities.
by Rich Dad, Robert Kiyosaki