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2-1 Forms of Business Organization CHAPTER 2. 2-2 Forms of Business Organization *Sole proprietorships *Partnerships *Corporations Accountants should.

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Presentation on theme: "2-1 Forms of Business Organization CHAPTER 2. 2-2 Forms of Business Organization *Sole proprietorships *Partnerships *Corporations Accountants should."— Presentation transcript:

1 2-1 Forms of Business Organization CHAPTER 2

2 2-2 Forms of Business Organization *Sole proprietorships *Partnerships *Corporations Accountants should recognize each form as an economic unit separate from its owners. Legally only the corporation is considered separate from its owners. Simplest form of accounting In this book, we only show accounting for the sole proprietorship.

3 2-3 Sole Proprietorship Sole Proprietorship

4 2-4 Sole Proprietorship A business owned by one person is called a sole proprietorship or a single proprietorship. Retail industryHandicrafts Agriculture Forestry Fishery Other service and family workshops The sole proprietorship is prevalent in:

5 2-5 Sole Proprietorship Personal affair Business affair single proprietorship From the viewpoint of all legal rights and responsibilities, your sole proprietorship business and you are considered to be one and the same.

6 2-6 Sole Proprietorship The owner directs business activities and may supply all management and labor used by the business.

7 2-7 Sole Proprietorship Profits Losses

8 2-8 Sole Proprietorship For business and financial management purposes, it is better to maintain completely separate records for the business and the household. Bank accounts Credit arrangements Business affair Family affair

9 2-9 Sole Proprietorship Advantages of Sole Proprietorship Simplicity Flexibility A sole proprietorship can be set up, modified, bought, sold or terminated very quickly. The proprietor can change the size and management of the business unit, as he or she desires at any time. The involvement of family members in the business is relatively unrestricted.

10 2-10 Sole Proprietorship Limitations of Sole Proprietorship Limited liability Limited access to capital and business opportunities Problem of continuity Difficult to measure business financial performance, profitability and loss of equity

11 2-11 Partnerships Partnership

12 2-12 Partnerships Partnerships are set up by the owners who wish to combine capital or managerial talents for some common business purpose. In accounting, partnerships are considered as separate entities from the owners.

13 2-13 Partnerships Partner Profits Losses

14 2-14 Partnerships Partnership General partnership Limited partnership Most partnerships are organized as general partnerships.

15 2-15 written partnership agreement The partnership agreements in a limited partnership must be registered with the government. General partnershipLimited partnership Public notice of the partnership agreement is not required. Partnerships

16 2-16 Partnerships Partnership agreement It must contain the method how to distribute profits and losses to each owner. Partner A Profits Losses Partner B Partner C 30% 40% 30% 40% 30%

17 2-17 Partnerships ProfitsLosses If the agreement describes the method of distributing the profits but does not mention the losses, the losses are distributed in the same way as profits. If the agreement doesn't't describe the method of distributing the profits and losses, the profits and losses must be shared equally. Partnership agreement

18 2-18 Partnerships Advantages of Partnerships Easier to assemble financial and physical resources Specialize in management and operations according to the partners skills and interests The limited partners have limited liability Better access to capital and credit Simple record-keeping and income tax filing requirements Relatively unlimited opportunities for family members to work together in starting or operating a business

19 2-19 Partnerships Limitations of Partnerships Unlimited liability General partner No overall understanding of the financial position of the partnership. limited life withdraws, goes bankrupt, dies or retires Partners holding a minority interest can be alienated The interests of minority partners may be ignored.

20 2-20 Corporations

21 2-21 Corporations A corporation is a big company, or a group of companies acting as a single organization. A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it.

22 2-22 Corporations Cash or other resources Share Stockholder Corporation

23 2-23 Corporations Shareholders Elect Board of directors Decide on the major business policies, authorizes contracts, determines on executive salaries and arranges major loans with banks. Declaration of dividends

24 2-24 Corporations Board of directors Several officers of the corporation and several outsiders Appoint Managers Execute the companys policies and carry out day-to- day operations.

25 2-25 Corporations Management Report the financial results Board of directors Report the financial results Shareholders President, vice presidents, controller, treasurer, and secretary

26 2-26 Corporations Advantages of Corporations Continuous life Separate legal entity Limited liability Ease of capital generation Lack of mutual agency Centralized authority and responsibility Professional management

27 2-27 Limitations of Corporations Corporations High organizing costs Internal conflicts Restrictions on the sale of stock More paperwork to prepare Double taxation Negative influence of the requisition of personal guarantees from corporate officers as a condition of supplying credit


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