Different accounting
treatments are applied depending on the nature, structure and types of the
business. In this lesson, we will cover the different types of business for you
to grasp the necessary accounting requirements and treatments for these.
Actually, the types of
business can be enumerated as to 1)
organization and as to 2) activity. In this lesson, we will tackle the types of
business as to its organization.
This lesson will cover the three types of business as to organization namely:
- Sole Proprietorship
- Partnership
- Corporation
SOLE PROPRIETORSHIP
Ease of
organization and the enjoyment of profit
This type of business is run by a single owner. The
structure is from small to medium. Sole proprietorship is indeed easy to
organize and the net income is enjoyed purely by the owner called the proprietor.
Ability to
raise capital
However, there are several disadvantages
in a sole proprietorship. The ability to raise the capital is very limited
because there is only one person who can contribute money or properties. Truly
the growth will have to be slower.
Decision
making
Another disadvantage is the
lack of managerial strategies. Sole proprietorship is limited as to ideas on how
to run and manage the business well. The decision solely depends on the
proprietor and he is not exposed to some improvisations, suggestions and other
alternatives. However, the good side of this is that the proprietor can do
whatever he wants without consulting the ideas of the others.
Unlimited
liability
Business creditors can run
after personal assets the sole proprietor just to satisfy their claims in case
of bankruptcy.
PARTNERSHIP
Definition
and Perfection
The law defines the
partnership as the association of two or
more persons who bind themselves together to contribute money, property and
industry to a common fund with the intention of dividing the profit among
themselves. A partnership is perfected as soon as the partners have
stipulated a partnership contract, verbally or written.
If you do not have the
money, you can be a partner as long as you have a property to contribute. If
you do not have a property, you can still be a partner as long as you have a
special talent or expertise to contribute. In other words, anyone can be a
partner.
Partnership
as a juridical person
A partnership has a
juridical personality separate and distinct from its owners. A partnership can
acquire a property on its name, can sue and be sued and can incur obligations
and bring civil or criminal actions in conformity with laws.
Mutual Agency
and Decision Making
Partnership has the
characteristic of mutual agency. Mutual
agency means that the decision of one binds the decision of the
partnership. Say majority of the partners want to sell idle equipment but the
other partner disagrees, even though he is only one against the majority, the
partnership cannot sell the equipment because they are bounded by the latter’s
decision.
To surmise it, partnership
requires the vote of all of the partners for whatsoever decisions they would
have.
Partnership is open for
many ideas and suggestions as to management because it is run by two or more
partners. However, as stated before, all of the partners must be consulted and
must have agreed.
Transferability
of interest
In case a partner wants to
terminate his privilege as a partner, he can retire anytime unless otherwise
stipulated in the contract when shall he retire. As soon as a partner retires,
the partnership is automatically dissolved and if the other partners want to
continue the business, there shall be a birth of a new partnership.
In any case a partner wants
to transfer his interest to another person, all of the other partners must
agree, otherwise he cannot transfer the interest. Even though he will just
transfer his interest to another person, the partnership is deemed to be
dissolved as well.
The reason for the
automatic dissolution is because the partnership is contracted only among the
“original” partners and not among the people who are not involved in the
contract.
Unlimited
Liability
Just like the sole
proprietorship, the partners are personally liable in times of bankruptcy.
CORPORATION
Definition
A corporation is composed
of board of directors/trustees and shareholders/members. The terms directors and shareholders are applied
only to a stock corporation while the terms trustees
and members are applied to a non-stock corporation. We shall distinguish the
two in our Basic Accounting Part II.
A board of director is
essentially a shareholder so we can say that all board of directors are
shareholders. However, the converse is not true. We cannot say that all
shareholders are board of directors.
Actually, board of
directors are elected. They are the ones who control corporation’s cash and
properties and they are engaged in management. Shareholders aside from the
board of directors, idly earn income in the form of dividends.
Corporation
as juridical person
Just like the partnership,
a corporation can own/acquire a property, can sue and be sued and can incur
obligations and bring civil or criminal actions in conformity with laws.
Commencement
of juridical personality
Corporation’s juridical
personality is perfected upon the issuance of certificate of incorporation of
the Securities and Exchange Commission (SEC) under its official seal.
Limited Liability
Unlike the first to types of business, corporation has limited liability. The stockholders are not personally liable to the creditors. They are only liable up to the amount of the capital contribution.
Terms of
existence
Sole Proprietorship and
Partnership can exist for as long as they want unless otherwise stipulated or
they are terminated by the law. However, corporation’s maximum term of
existence is only fifty years. Corporation’s term of existence can be extended
depending on the governing law. For example in the Philippines, the term can be
extended not before five years of the expiration of the term.
Transferability
of interest
Stockholders own a part of
the company in the form of shares. These shares can be sold and transferred to
anyone without consulting the other shareholders.
This is just the first part
of the types of business. In our
next lesson, we will discuss to you the other types of business as to activity and they are:
servicing, merchandising and manufacturing. Stay tune buddy!
You might also want to test
your understanding with our free test materials! Click here.
PHOTO REFERENCES
http://www.realmagick.com/sole-proprietorships/
http://www.iccwbo.org/about-icc/policy-commissions/banking/partnership/
http://www.telegraph.co.uk/technology/google/10343014/Googles-UK-division-paid-12m-in-corporation-tax-in-2012.html
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