Unit14FormsofBusinessFormsofbusinessCorporationsSingleproprietorshipPartnership

BusinessorganizationsForaccountingpurposes,allthreeformsareseparatefromtheirowners.Legally,onlycorporationsareseparatefromtheirowners.

Ⅰ.Single

ProprietorshipDefinitionAsingleproprietorshipisanunincorporatedbusinessownedbyapersonandoftenmanagedbythesameperson.Nolegalformalitiesarenecessarytoorganizesuchbusinessesandusuallybusinessoperationscanbeginwithonlyalimitedinvestment.FeaturesTheownerissolelyresponsibleforalldebtsofthebusiness.Thebusinessisaseparateentityfromtheowner.Thus,singleproprietormustkeepthefinancialactivitiesofthebusinessfromtheirpersonalfinancialactivities.

Netaccumulatedinvestmentisnotrequiredtobedistinguishedfromprofitearned.Itistheowner’soptiontoinvestinthebusiness,withdrawfromthebusiness,anddistributeprofit.Ⅰ.Single

ProprietorshipAdvantageSoleproprietorshipiseasytostartup,subjecttofewerregulationsrelativetoothertypesofbusinesses,theownerhasfullautonomywithregardtobusinessdecisions.Anotheradvantageisthatonetakesalltheprofitsofthebusiness.Ⅰ.Single

ProprietorshipDisadvantageAbusinessorganizedasasoletraderwilllikelyhaveahardtimeraisingcapitalsinceithastomakeupforallthebusiness'sfunds.Theownerofthebusinesshasunlimitedliabilityasheisresponsibleforthebusiness'sdebtsbecausehehascontroloverthebusiness.EquityaccountsCapitalaccountshouldbeopened.Itisnotnecessarytoreclassifyequityinthesingleproprietorshipbecausetherearenolegalrestrictionsontheowner’sinvestmentorwithdrawals.Thereisnoneedtodistinguishinitialorcapitalfromsubsequentinvestment.Allfinalchangesoftheowner’sequityshouldbereflectedincapitalaccount.Ⅰ.Single

ProprietorshipWithdrawalasatemporaryshoulddemaintained.Itsdebitsiderecordsthepaymentfortheproprietor’spersonalactivities,withdrawalofcashorotherassetsbytheproprietorforpersonaluse.Itscreditsiderecordscashandcashequivalentswhichtheownerdepositintheproprietorshiptemporarily.

Ⅰ.Single

ProprietorshipⅡ.PartnershipDefinitionApartnershipisanassociationoftwoormorepersonsasco-ownerstocarryonabusinessforprofit.Itiswidelyusedinsomemid-sizeorsmallbusinesseswhichonlyneedcapitalfinancedbyseveralpersons,orsmall-scaledprofessionalfirmsuchasCPAfirm,lawyerfirm,anddoctorjoint-clinic.DefinitionTheformationandoperationofapartnershiparebasedonthecooperationandtrustbetweenpartnersandpartnershipagreementcontractedvoluntarilybypartners.Partnershipagreementservesasabasisfortheformation,operation,andliquidationofapartnershipandshouldbewrittentoavoidanymisunderstandingsordisagreements.However,partnershipcanbeformedwithoutawrittenagreement.Ⅱ.PartnershipFeatures(1)ExpandingfinancingchannelsandeasetoformationApartnershipexpandschannelstoraisefundsandcombinesspecialskillsofeachpartnerwhichhelpimprovedecision-makingandmanagement.(2)HigherinvestmentriskandlimitedequitytransferAsaninvestorofapartnership,isresponsibleforallthedebtsofthefirmregardlessofhowmuchheinvestedinthefirm.Apartnerhastherightbylawtotransferhisequity,thetransferislimitedandmustbeagreeduponbyotherpartners.Ⅱ.PartnershipFeatures(3)Mutualagency

Eachpartnerisanagentofthepartnership.Eachpartnerhasthepowertobindtheotherpartnerstoactwithinthescopeofnormaloperations.(4)UnlimitedliabilitiesEachpartnerisheldliableforallthedebtsofthefirmnomatterhowmuchhehasinvestedinthefirm.Thecreditordonothavetodivideddebtsamongthepartners.Butafterpayingthedebt,partnercanasktobereimbursedbyotherpartnersinthepartnership.(5)Co-ownershipofpropertyandprofitWhenapartnerinvestscashorotherphysicalassetsinapartnership,thepropertybecomesjointlyownedbyallthepartners.Ⅱ.PartnershipFeatures(6)NolegallimitationonwithdrawalanddistributionofprofitThewithdrawalanddistributionofprofitsareregulatedinthepartnershipagreementwhichmustbeabidedbyallpartners.(7)LimitedlifeApartnershipmaybeendedatanytime.Theterminationofapartnershipmaybecausedbythedeathorwithdrawalofanypartnermemberofthefirm,bankruptcyorincapacityofapartner,theexpirationoftheperiodspecifiedinthepartnershipcontract,orthecompletionoftheprojectforwhichthepartnershipwasformed.EquityaccountsCapitalaccountDrawingaccount

Attheendofanaccountingperiod,thenetincome(orloss)shouldbedistributedtoeachpartneraccordingtothemethodsspecifiedinthepartnershipagreement.Itisunnecessarytokeepretainedearnings.SubsidiaryaccountsforCapitalandDrawingshouldbesetupforeachpartnerbecauseapartnershiphavetwoormorepartners.Ⅱ.PartnershipⅢ.CorporationsDefinitionCorporationsacquiretheircapitalbyissuingstocks.Investorsbuystockstobecometheownersofthebusinesscalledstockholdersandreceivedividendattheendoftheaccountingcycle.Comparedwiththesingleproprietorshipandpartnership,incorporatedcompanyischaracterizedbythelimitedliabilityofitsowners.Features(1)Easytransferofownership

Stockholderscanselltheirstockstootherswithouttheneedofapprovalofotherstockholders.(2)Limitedliability

Inacorporation,thestockholdersarenotpersonallyresponsibleforthecorporation’sdebts;themaximumamountastockholdercanloseistheamountofhisinvestment.(3)Continuousexistenceofentity

Ingeneral,acorporationisthoughttobecontinuousoperation.(4)Easycapitalgeneration

Theeasytransferofownershipandthelimitedliabilityofstockholdersareattractivefeaturestopotentialinvestors.

Itisrelativelyeasyforacorporationtoraisecapitalbyissuingsharestomanyinvestors.Ⅲ.Corporations

Features(5)Profe