Section 2 A little more about accounting rules and Choice of Business Entity Module 2.a.

What is GAAP Generally accepted accounting principles Set of standards that is generally accepted and universally practiced How to report economic events

Who makes the rules Securities and Exchange Commission Financial Accounting Standards Board American Institute of Certified Public Accountants International Standards Committee

FASB Financial Accounting Standards Board 7 members Five year terms

The Big Five Becomes the Final Four* Deloitte & Touche Deloitte & Touche (Tohmatsu) (6.13 billion) Deloitte & Touche Ernst & Young Ernst & Young (4.49) Ernst & Young KPMGKPMG (3.17) KPMG PricewaterhouseCoopersPricewaterhouseCoopers (8.06) PricewaterhouseCoopers Arthur Andersen Arthur Andersen (4.30) Arthur Andersen *Fiscal 2001 core business revenues

The Conceptual Framework Aids accountants in their task of interpreting and communicating Serves as foundation for specific rules Assumptions –Economic entity –Cost principle –Going concern –Monetary unit –Time period

Objectives of financial reporting Primary – To Provide economic information to permit users of the information to make informed decisions Secondary – –Reflect prospective cash receipts to investors and creditors –Reflect prospective cash flows to the enterprise –Reflect the enterprise’s resources and claims to its resources

What makes accounting information useful The Qualitative Characteristics –Understandability –Relevance –Reliability Verifiability Representational faithfulness Neutrality –Comparability and Consistency –Materiality –Conservatism

Types of business organizations ProprietorshipPartnership S Corporation C Corporation Limited Partnership LLPLLC

Proprietorship Unincorporated business owned by an individual No legal formalities Owner is sole source of capital and has unlimited liability Often requires limited capital Usually small in size and volume Files Schedule C with Form 1040 Tax year same as owner’s

Partnership Business is owned by 2 or more persons Partnership agreement is highly recommended Unlimited liability Files Form 1065 with K-1 to partners Owners report income in their tax year with or within which the entity’s tax year ends

Corporations Owners are called stockholders or shareholders Closely held Public corporation How to incorporate Corporate charter Stockholder rights Domestic, foreign, alien Proxy

Corporate structure Stockholders Board of Directors Corporate Officers Employees

Corporations Limited liability Easy to raise capital Easy to transfer ownership Specialized management Continuity of life No privacy if public Government regulation if public

C corporations Organized under Subchapter C of IRC Files form 1120 Double taxation Top corporate rate 35% Can choose tax year

S Corporations Only individuals, estates, and certain trusts can be owners Maximum shareholders 75 Only one class of stock allowed Files Form 1120S with Schedule K to shareholders Taxed as if partnership Usually a calendar year TP Limited liability

Limited Liability Company Limited liability of corporation but taxed like a partnership Owners are called members Recognized by all states Allows foreign investors, unlike the S Corp Some states require 2 owners (25%) One member LLC taxed as proprietorship Disadvantage is that state statutes are not uniform

Limited Liability Partnership Similar to LLC but designed for professionals who normally do business as partners in a partnership. Personal liability protection for Partner but not joint liability. Taxed as a partnership All states have LLP statutes

Limited Partnership At least one general partner Limited partners cannot participate in management Limited partners’ liability limited to amount invested Only general partners liable to creditors Often used for acquiring capital in a real estate venture

Choosing the right form Ease of creation Liability of owners Tax considerations Need for capital