Corporations

Topic

Forms of Business Organization

Accountants need to understand the basic forms of business organization: sole proprietorships, partnerships, and corporations. Accountants recognize each for as an economic unit separate from its owners, although legally only the corporation is considered separate from its owners. Other legal differences among the three forms are summarized in Table 1-1 and discussed briefly below. In this part, we first show accounting for the sole proprietorship because it is the simplest form of accounting. At critical points, however, we call attention to its essential differences from accounting for corporation and partnerships. Later we deal specifically with partnership accounting and corporation accounting.

Sole Proprietorships

A sole proprietorship is a business formed by one person. This for of business gives the individual a means of controlling the business apart from his or her personal interests. Legally, however, the proprietorship is the same economic unit as the individual. The individual receives all profits or losses and is liable for all obligations of the proprietorship. Proprietorships represent the largest number of businesses in the United States, but typically they are the smallest in size. The life of a proprietorship ends when the owner wishes it to, or at the owner^, s death or incapacity.

Partnerships

A partnership is like a proprietorship in most ways except that it has more that one owner. A partnership is not a legal economic unit separate from the owners but an unincorporated association that brings together the talents and resources of two or more people. The partners share profits and losses of the partnership according to an agreed – upon formula. Generally, any partner can bind the partnership to another party and, if necessary, the personal recourses of each partner can be called on to pay obligation of the partnership. In some cases, one or more partners may limit their liability, but at least one partner must have unlimited liability. A partnership must be dissolved if the ownership changes, as when a partner leaves or dies. If the business continues, a new proprietorship or partnership must be formed.

Corporations

A corporation is a business unit that is legally separate from its owners. The owners, whose ownership is represented by shares of stock in the corporation, do not directly control the operations of the corporation.

Table 1-1.Comparatuve Features of the Forms of Business Organization

	Sole Proprietorship	Partnership	Corporation
1. Legal status     2. Risk of ownership   3. Duration or life   4. Transferability of ownership   5. Accounting	Not a separate legal entity     Owner^’s personal resources at stake     Limited by desire or death or death of owner     Sale by owner establishes new company   Separate economic unit	Not a separate legal entity   Partners^, resources at stake     Limited by desire or death of each partner     Changes in any partner^’s percentage of interest requires new partnership   Separate economic unit	Separate legal entity     Limited to investment in corporation     Indefinite, possibly unlimited     Transferable by sale of stock   Separate economic unit

Instead they elect a board of director’s who run the corporation for the bene­fit of the stockholders. In exchange for limited involvement in the corporation's actual operations, stockholders enjoy liability. In corporation^’s actual operations, stockholders enjoy limited liability. That is their risk of loss is limited lo the amount paid for their shares. If they wish stock holders саn sell their shares to other persons without affecting corporate operations. Because of this limited liability, stockholders are often willing to invest in riskier, but potentially profitable, activities. Also because ownership can be transferred without dissolving the corporation, the life of the corporation is unlimited and not subject to the whims or health of a proprietor or partner.

Corporations have several important advantages over proprietorships and partnerships that make them very efficient in amassing capital for the formation and growth, of very large companies. Even though corporation are fewer in number than the proprietorship and partnerships, they contribute much more to the US economy in monetary terms. For example, in 1986 the General Motors generated more revenues than all ban thirteen of the world's countries.

Дата добавления: 2015-10-29