1. Forms of Business Organization
CHAPTER 2
Forms of Business Organization 2 2

2. Legally only the corporation is considered separate from its owners.
Forms of Business Organization
Simplest form of accounting
*Sole proprietorships
Legally only the corporation is considered separate from its owners.
*Partnerships
*Corporations
Accountants should recognize each form as an
economic unit separate from its owners.
In this book, we only show accounting for the sole proprietorship.

3. Sole Proprietorship
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 industry
Handicrafts
Forestry
Agriculture
Fishery
Other service and family workshops

5. single proprietorship
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.

6. Sole Proprietorship
The owner directs business activities and may supply all management and labor used by the business.

7. Sole Proprietorship
Profits
Losses

8. Sole Proprietorship For business and financial management purposes,
it is better to maintain completely separate records
for the business and the household.
Business affair
Bank accounts
Credit arrangements
Family affair

9. Sole Proprietorship Flexibility Simplicity
Advantages of Sole Proprietorship
A sole proprietorship can be set up, modified, bought, sold or terminated very quickly.
Flexibility
Simplicity
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.

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

11. Partnerships
Partnership

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.

13. Partnerships
Profits
Losses
Partner
Partner
Partner

14. Most partnerships are organized as general partnerships.
Limited partnership

15. Public notice of the partnership agreement is not required.
Partnerships
General partnership
Limited partnership
written partnership agreement
The 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 agreement
It must contain the method how to distribute profits
and losses to each owner.
Profits
Losses
30%
Partner A
30%
40%
Partner B
40%
30%
Partner C
30%

17. Partnerships Profits Losses
Partnership agreement
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.

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
Relatively unlimited opportunities for family members to
work together in starting or operating a business
Simple record-keeping and income tax filing requirements

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.

20. Corporations
Corporations

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.

22. Corporations
Stockholder
Cash or
other
resources
Share
Corporation

23. Declaration of dividends
Corporations
Decide on the major business policies, authorizes contracts, determines on executive salaries and arranges major loans with banks.
Shareholders
Elect
Board of directors
Declaration of dividends

24. Execute the company’s policies and carry out day-to-day operations.
Corporations
Several officers of
the corporation and
several outsiders
Board of directors
Appoint
Execute the company’s policies and carry out day-to-day operations.
Managers

25. President, vice presidents, controller, treasurer, and secretary
Corporations
Board of directors
Shareholders
President, vice presidents, controller, treasurer, and secretary
Report the
financial results
financial results
Report the
Management

26. Corporations Advantages of Corporations Continuous life
Lack of mutual agency
Separate legal entity
Ease of capital generation
Limited liability
Professional management
Centralized authority and responsibility

27. Corporations Limitations of Corporations High organizing costs
Negative influence of the requisition of personal guarantees
from corporate officers as a condition of supplying credit
Internal conflicts
Restrictions on the sale of stock
More paperwork to prepare
Double taxation

28. WE ARE SAILING RIGHT ALONG!!