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.

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Sole Proprietorship

Sole Proprietorship

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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:

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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.

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Sole Proprietorship

The owner directs business activities and

may supply all management and labor used by the business.

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Sole Proprietorship

Profits

Losses

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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

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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.

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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.

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Partnerships

Partner

Partner

Partner

Profits

Losses

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Partnerships

Partnership

General partnership

Limited partnership

Most partnerships are organized as general

partnerships.

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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

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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%

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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

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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

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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.

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Corporations

Corporations

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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.

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Corporations

Cash or other resources

Share

Stockholder

Corporation

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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

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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.

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Corporations

ManagementR

eport th

e fin

ancial resu

lts

Board of directors

Report the financial results

Shareholders

President, vice presidents, controller,

treasurer, and secretary

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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

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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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WE ARE SAILING RIGHT ALONG!!