Week 5 Class Discussion
Having an understanding of business types or formations, the advantages and disadvantages of each, along with the tax, legal, and accounting implications of the businesses are necessary when considering how to structure a business. With accounting implications financial statements must be considered as they are key to understanding how healthy a business actually is.
What are the different types of financial statements that are associated with or specific to the different types of business formations?
Sole Proprietorship :
A sole proprietorship is a sort of business that has just a single proprietor. Even though bookkeeping has a different substance standard, under the law, the proprietor and the company are treated as very much the same, which means using the business implies suing the proprietor. So they don’t have different legal characters.
Advantages:
Complete control
Least government prerequisites since most sole ownership are little in capitalization and activity.Typically, special assessment rates are lesser than a corporate expense rate.
Disadvantages
The most negligible cash flow to be aggregated since there is just a single proprietor
Fewer skills to oversee a lot of the business since there is just a single proprietor.
As recently referenced, the business and the owner are treated as the same by the law; consequently, the owner can be exposed to limitless legitimate liabilities in association with the business.
Partnership :
A partnership emerges when at least two people tie themselves to contribute something to get benefit or rehearsing calling. The association has its juridical character and is treated as an alternate individual from its accomplices. Henceforth, a suit against the partnership doesn’t mean a claim against the partners. In accounting, the best change is that there will be more than one capital record. In like manner, there should be an agreement concerning confirmation, withdrawal, retirement, division of advantages, and liquidation.
Fundamentally, a partnership can be shaped even through verbal arrangement, yet there are not many exceptions in the law where an Articles of Partnership must be submitted. Likewise, general partnerships, considered for business and not for call training, are typically burdened like an organization.
Advantages:
Higher capital than proprietorship since more than one person is spending towards a business.More skills and talents to run the business.Restricted association offers and limited risk organizations offer accomplices a level of obligation insurance for accomplices.
Disadvantages
Partnerships except Limited Liability Partnership requires to have at least one partner to be a general liability (with unlimited liability)
It can be easily dissolved since ownership interest is not transferrable as the partnership is based on an agreement.
Corporation :
A corporation is a lawful substance made by law activity with rights, powers, and traits given by the law. For example, a corporation can have as many shareholders as it needs to raise an authorized capital. Along these lines, not all proprietors of capital stock can deal with the corporation. Therefore they vote in favor of a bunch of top managerial staff and officials who will oversee and regulate the activity of a corporation.
Henceforth, they have distinct lawful character and powers explicitly approved by law and episode to their reality. They are needed to obtain first the consent of the state before they work. And they are required to present an Article of Incorporation with support from the division to which their particular industry will fall under its chapter(for example, banks will be under the national bank, emergency clinics under the branch of wellbeing). This is only the primary necessity among many different papers needed by the public authority to allow its reality.
Advantages
Unlimited life span since stocks or shares can be transferred, sold,/donated.
Limited liability of stockholders as the liability of the corporation is not a liability of the stockholders Easiest among the three to raise capital
Disadvantages
Expensive and difficult to set-up Subject to double tax assessment as the benefit of the company and the profits it disperses to the investors are both exposed to personal expense.Subject to periodic filings and stricter regulations
Reference
Good discussion on each of the business organizations. When considering corporations, we learned in our readings this week corporations are formal and legal arrangement form of business. Corporations are also normally larger than a sole-proprietorship or partnership and therefore, needs a greater amount of capital for start up. What are some forms of financial capital that a corporations may use?