Forms of Business Organization CHAPTER 2 Forms of Business Organization 2 2

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

Sole Proprietorship Sole Proprietorship

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

single proprietorship 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.

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

Sole Proprietorship Profits Losses

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

Sole Proprietorship Flexibility Simplicity Advantages of Sole Proprietorship A sole proprietorship can be set up, modified, bought, sold or terminated very quickly. Flexibility Simplicity 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.

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

Partnerships Partnership

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.

Partnerships Profits Losses Partner Partner Partner

Most partnerships are organized as general partnerships. Limited partnership

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

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

Partnerships Profits Losses Partnership agreement Profits Losses 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.

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 Relatively unlimited opportunities for family members to work together in starting or operating a business Simple record-keeping and income tax filing requirements

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.

Corporations Corporations

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.

Corporations Stockholder Cash or other resources Share Corporation

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

Execute the company’s policies and carry out day-to-day operations. Corporations Several officers of the corporation and several outsiders Board of directors Appoint Execute the company’s policies and carry out day-to-day operations. Managers

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

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

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

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