Presentation on theme: "Forms of Business Organization"— Presentation transcript:
1 Forms of Business Organization CHAPTER 2Forms of Business Organization22
2 Legally only the corporation is considered separate from its owners. Forms of Business OrganizationSimplest form of accounting*Sole proprietorshipsLegally only the corporation is considered separate from its owners.*Partnerships*CorporationsAccountants should recognize each form as aneconomic unit separate from its owners.In this book, we only show accounting for the sole proprietorship.
4 Sole Proprietorship A business owned by one person is called a sole proprietorship or a single proprietorship.The sole proprietorship is prevalent in:Retail industryHandicraftsForestryAgricultureFisheryOther service and family workshops
5 single proprietorship Sole ProprietorshipPersonal affairBusiness affairsingle proprietorshipFrom the viewpoint of all legal rights and responsibilities,your sole proprietorship business and you are consideredto be one and the same.
6 Sole ProprietorshipThe owner directs business activities and may supply all management and labor used by the business.
8 Sole Proprietorship For business and financial management purposes, it is better to maintain completely separate recordsfor the business and the household.Business affairBank accountsCredit arrangementsFamily affair
9 Sole Proprietorship Flexibility Simplicity Advantages of Sole ProprietorshipA sole proprietorship can be set up, modified, bought, sold or terminated very quickly.FlexibilitySimplicityThe 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 Sole Proprietorship Limitations of Sole Proprietorship Limited liabilityLimited access to capital and business opportunitiesProblem of continuityDifficult to measure business financial performance,profitability and loss of equity
12 Partnerships Partnerships are set up by the owners who wish to combine capital or managerial talents for somecommon business purpose.In accounting,partnerships are consideredas separate entities fromthe owners.
14 Most partnerships are organized as general partnerships. Limited partnership
15 Public notice of the partnership agreement is not required. PartnershipsGeneral partnershipLimited partnershipwritten partnership agreementThe partnership agreements in a limited partnership must be registered with the government.Public notice of the partnership agreement is not required.
16 Partnerships Profits Losses Partnership agreementIt must contain the method how to distribute profitsand losses to each owner.ProfitsLosses30%Partner A30%40%Partner B40%30%Partner C30%
17 Partnerships Profits Losses Partnership agreementProfitsLossesIf the agreement describes the method of distributingthe profits but does not mention the losses, the lossesare distributed in the same way as profits.If the agreement doesn't't describe the method ofdistributing the profits and losses, the profits and lossesmust be shared equally.
18 Partnerships Advantages of Partnerships Easier to assemble financial and physical resourcesSpecialize in management and operations according to the partners skills and interestsThe limited partners have limited liabilityBetter access to capital and creditRelatively unlimited opportunities for family members towork together in starting or operating a businessSimple record-keeping and income tax filing requirements
19 Partnerships Limitations of Partnerships Unlimited liability General partnerNo overall understanding of the financial position of the partnership.limited life withdraws, goes bankrupt, dies or retiresPartners holding a minority interest can be alienatedThe interests of minority partners may be ignored.
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 isheadquartered, is considered by law to be a unique entity,separate and apart from those who own it.
23 Declaration of dividends CorporationsDecide on the major business policies, authorizes contracts, determines on executive salaries and arranges major loans with banks.ShareholdersElectBoard of directorsDeclaration of dividends
24 Execute the company’s policies and carry out day-to-day operations. CorporationsSeveral officers ofthe corporation andseveral outsidersBoard of directorsAppointExecute the company’s policies and carry out day-to-day operations.Managers
25 President, vice presidents, controller, treasurer, and secretary CorporationsBoard of directorsShareholdersPresident, vice presidents, controller, treasurer, and secretaryReport thefinancial resultsfinancial resultsReport theManagement
26 Corporations Advantages of Corporations Continuous life Lack of mutual agencySeparate legal entityEase of capital generationLimited liabilityProfessional managementCentralized authority and responsibility
27 Corporations Limitations of Corporations High organizing costs Negative influence of the requisition of personal guaranteesfrom corporate officers as a condition of supplying creditInternal conflictsRestrictions on the sale of stockMore paperwork to prepareDouble taxation