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2-1
Forms of Business Organization
CHAPTER 2CHAPTER 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.
2-3
Sole Proprietorship
Sole Proprietorship
2-4
Sole Proprietorship
A business owned by one person is called a sole proprietorship or a single proprietorship.
Retail industry Handicrafts
Agriculture Forestry Fishery
Other service and family workshops
The sole proprietorship is prevalent in:
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.
2-6
Sole Proprietorship
The owner directs business activities and
may supply all management and labor used by the business.
2-7
Sole Proprietorship
Profits
Losses
2-8
Sole Proprietorship
For business and financial management purposes, it is better to maintain completely separate recordsfor the business and the household.
Bank accounts Credit arrangements
Business affair
Family affair
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.
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
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
2-11
Partnerships
Partnership
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.
2-13
Partnerships
Partner
Partner
Partner
Profits
Losses
2-14
Partnerships
Partnership
General partnership
Limited partnership
Most partnerships are organized as general
partnerships.
2-15
written partnership agreement
The partnership agreements in a limited
partnership must be registered with the
government.
General partnership Limited partnership
Public notice of the partnership agreement
is not required.
Partnerships
2-16
Partnerships
Partnership agreement
It must contain the method how to distribute profits and losses to each owner.
Partner AProfits
Losses
Partner B
Partner C
30%
40%
30%
30%
40%
30%
2-17
Partnerships
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.
Partnership agreement
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
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.
2-20
Corporations
Corporations
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.
2-22
Corporations
Cash or other resources
Share
Stockholder
Corporation
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
2-24
Corporations
Board of directors Several officers of
the corporation and several outsiders
Appoint
Managers
Execute the company’s policies and carry out day-
to-day operations.
2-25
Corporations
ManagementR
eport th
e fin
ancial resu
lts
Board of directors
Report the financial results
Shareholders
President, vice presidents, controller,
treasurer, and secretary
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
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
2-28
WE ARE SAILING RIGHT ALONG!!