02 - Business Kinds Flashcards
Types of Organizations
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- for profit - private sector - sole traders, partnerships, limited companies
- (not in this module) - public sector organisations, charities
Definition Sole Proprietorship
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- individual entering a business alone
- business might be intertwined with personal life
- for accounting purposes, the business is… a seperate economic entity
- sole trader takes risk of the bad times and the benefit of the good times
Accounting information will be needed by….
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- accounting information will be needed by government (tax authorities) for tax collecting purposes
- the bank for the purpose of ledning money to the business
- a person intending to buy the business when the existing owner retires
Definition Partnership
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- two or more individuals carrying on business together
- intention is to make profit
- for accounting purposes: partnership is seen as a seperate economic entity, owned by the partners
Why is accounting information needed in Partnerships?
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- ensuring that every partner receives a fair share of the profits
- for banks and tax authorities
- other persons who may be invite to join the partnership
What is the major risk that is attached to either a sole trader or a partnership?
losing their personal property and possessions including the family home, in case that the business fails
What are the advantages of a partnership compared to a sole trader?
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- fully liable and limited partner
- sharing burden and risk
- additional expertise and capital
- specialization
- more creditworthiness
- ability to raise capital
What are the disadvantages of a partnership compared to a sole trader?
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- risk of acquiring unsuitable partners
- limits on individual decision making
What are the disadvantages of a partnership compared to a sole trader?
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- risk of acquiring unsuitable partners
- limits on individual decision making
Why do owners might need Limited liability company?
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- to encourage the development of larger business entities they need the protection of limited liability
- this means: business fails, owners lose all money they had put into the business, but the personal wealth would be safe
What does Plc and Ltd stand for?
- ltd: limited, for a private limited company
- plc: for a public limited company
What is a ltd NOT allowed to do?
- offering its shares to the public
What does the public limited company (plc) have to do in order to offer its shares to the public?
- it has to satisfy more onerous regulations
Explain the formation of…
- a partnership
- a limited liability company
- by agreement but not necessarily in writing
- registering the company under the companies act | memorandum and articles of association setting out the powers allowed to the company
Explain who runs the business…
- partnership
- limited liability company
- all partners are entitled to share in the running of the business
- shareholders appoint directors to run the business
Explain the accounting duties of…
- a partnerhsip
- a limited liability company
- not obliged to make accounitng information available to the public
- must make accounting information available to the public through registration of companies | annual financial statement (the accounts)
Advantages of a
partnership compared to a limited company?
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- Simple to set up: A partnership is easy to set up, and the legal formalities are minimal
- Shared responsibility: share of workload and responsibilities
- Flexibility: greater flexibility than limited companies in terms of decision-making and running the business
- Tax benefits: benefit from tax advantages as profits are distributed to partners and taxed at individual tax rates
Disadvantages of a partnership compared to a limited company
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- Unlimited liability: Partners have unlimited liability, so they are personally responsible for all the debts and obligations of the partnership
- Lack of continuity: partnership ends when one of the partners dies or leaves
- Disagreements can be difficult
- Limited capital as they cannot issue shares to the public
Organisation of Businesses
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- finance from owners (shareholders) and lenders (e.g. banks)
- ## appointment of a board of directors to manage do business on their behalf (owners dont do daily running in business) | setting overall direction and strategy, controlling activities, communication with shareholders
What is the financial objective of a business?
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- enhancing the wealth of the owners
- generating wealth is NOT seeking to maximze current year´s profit
- other objectives related to the needs of others associated with the business (employees, local community)
- strong economic forces in market economy
Identify groups of main users of accounting
information for a university.
For what purposes
would different user groups need information?
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- University Management and Administration | making informed decisions and ensuring financial health / allocating resources, setting budgets
- Students | understanding cost of education and seeking info about financial aid, scholarships / ensuring that they can afford education
- donors | evaluate financial stability and effectiveness of university / ensuring that donations are used efficiently and in aligment with university´s stated goals
Why might someone in a sole proprietorship be reluctant to disclose financial information?
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- value of privacy (no separation between owner and business entity)
- vulnerable to creditors or legal actions because of unlimited personal liability
- competitive advantage of other because of revealing financial strategies or weaknesses
