FORMS OF BUSINESS • 80% of all businesses

ORGANIZATIONS • Men 2x more likely than women to

start own business
Forms of Business Ownership
Advantages of a Sole Proprietorship
• Sole proprietorship
• Ease and cost of formation
• Partnership
• Secrecy
• Corporation
• Distribution and use of profits

• Flexibility and control of the business

• Government regulation

• Taxation

Disadvantages of a Sole Proprietorship

• Unlimited liability

• Limited sources of funds

• Limited skills

• Lack of continuity

• Lack of Qualified Employees

Various Forms of Business Ownership
Forms of Business Ownership
Sole Proprietorship
Businesses owned and operated by one
individual; the most common form of business
organization in the United States
• Many restaurants
• Hair salons
• Flower shops
• Dog kennels
• Independent grocery
stores
• 15-20 million in the U.S.
• Taxation
A form of business organization
defined by the Uniform Partnership
Act as “an association of two or more
persons who carry on as co-owners of
a business for profit”
• General partnership
• Limited partnership
A partnership that involves a complete
sharing in both the management and
the liability of the business.
A business organization that has at
least one general partner, who
assumes unlimited liability, and at
least one limited partner whose
liability is limited to his or her
investment in the business.

Articles of Partnership
Legal documents that set forth the
basic agreement between partners.
Articles of Partnership
1. Name, purpose, location
2. Duration of the agreement
3. Authority and responsibility of each
partner
4. Character of partners (i.e., general or
limited, active or silent)
5. Amount of contribution from each
partner
6. Division of profits or losses
7. Salaries of each partner
8. How much each partner is allowed to
withdraw
9. Death of partner
10. Sale of partnership interest
11. Arbitration of disputes
12. Required and prohibited actions
13. Absence and disability
14. Restrictive covenants
15. Buying and selling agreements
Partnerships Advantages &
Disadvantages
Advantages
• Ease of organization
• Capital & credit
• Knowledge & skills
• Decision making
• Regulatory controls
Disadvantages
• Unlimited liability
• Business responsibility
• Life of the partnership
• Distribution of profits
• Limited sources of funds
• Taxation of partnerships
Keys to Success in Business
Partnerships
1. Keep profit sharing and ownership at
50-50
2. Partners should have different &
complementary skill sets
3. Honest is critical
4. Maintain face-to-face communications
5. Transparency – sharing information
6. Awareness of funding constraints and
limited resources
7. To be successful, you need experience
8. Family is priority; limit associated
problems
9. Do not become too infatuated with
“the idea” think implementation
10. Couple optimism with realism in sales
and growth expectations
Legal entities created by the state
whose assets and liabilities are
separate from its owners.
Typically owned by many individuals
and/or organizations who own shares
of the business – stock (shareholders
or stockholders)
 Corporations
Stock – shares of a corporation that
may be bought or sold
Dividends – profits of a corporation
that are distributed in the form of
cash payments to stockholders
A Corporation is created (incorporated)
under the laws of the state in which it
incorporates. The individuals creating
the corporation are called
incorporators
Legal documents filed with basic
information about the business with
the appropriate state office (often the
secretary of state).
Articles of Incorporation
1. Name & address of corporation
2. Objectives of the corporation
3. Classes of stock (common, preferred,
voting, nonvoting)
4. Number of shares of each class of stock
5. Financial capital required at time of
incorporation
6. Provisions for transferring shares of
stock
7. Regulation of internal corporate affairs
8. Address of business office
9. Names and addresses of the initial
board of directors
10. Names and addresses of the
incorporators
Types of Corporations
Private corporation
Public corporation
Quasi-public corporation
Non-profit corporation
Private corporation – a corporation
owned by just one or a few people who
are closely involved in managing the
business
Public Corporation– a corporation whose
stock anyone may buy, sell, or trade.
Initial Public Offering (IPO) – A private
corporation who wishes to go “public” to
raise additional capital and expand. The
IPO is selling a corporation’s stock on
public markets for the first time.
Quasi-public corporation – Corporation
owned and operated by the federal, state,
or local government --
(NASA, U.S. Postal Service).
Non-profit corporation – focuses on
providing a service rather than earning a
profit but are not owned by a government
entity (American Red Cross)
Elements of a Corporation
• Board of directors
• Preferred stock
• Common stock
Board of Directors
Board of Directors – a group of
individuals elected by the stockholders
to oversee the general operation of the
corporation who set the corporation’s
long-range objectives.
Inside Directors – individuals who
serve on the board and are employed
by the corporation (usually executives
of the corporation).
Outside Directors – individuals who
serve on the board who are not
directly affiliated with the corporation
 (usually Executives of other
corporations).
Stock Ownership
Preferred stock – a special type of
stock whose owners, though not
generally having a say in running the
company, have a claim to profits
before other stockholders do.
Common Stock – stock whose owners
have voting rights in the corporation,
yet do not receive preferential
treatment regarding dividends.
• Advantages:
– Limited liability
– Transfer of ownership
– Perpetual life
– External sources of funds
– Expansion potential
• Disadvantages:
– Double taxation
– Forming a corporation
– Disclosure of information
– Employee-owner separation
Other Types of Business
Ownership
• Joint Ventures
• S Corporations (S-Corp)
• Limited Liability Companies (LLC’s)
• Cooperatives (Co-op’s)
• Joint Venture -- a partnership
established for a specific project or for
a limited time
• (Audi & Volkswagen joint venture)
• S-Corporation (S-Corp) – corporation
taxed as though it were a partnership
with restrictions on shareholders. Very
popular with entrepreneurs.
• Limited Liability Company (LLC)–
form of ownership that provides
limited liability and taxation like a
partnership but places fewer
restrictions on members. (Segway)
• Cooperative (Co-Op)– an
organization composed of individuals
or small businesses that have banded
together to reap the benefits of
belonging to a larger organization.
Trends in Business Ownership
• Mergers
• Acquisitions
• Merger – the combination of two
companies (usually corporations) to
form a new company
• Acquisition – the purchase of one
company by another, usually by buying
its stock and/or assuming its debt.
• Leveraged buyout (LBO) – a purchase
in which a group of investors borrows
money from banks and other
institutions to acquire a company (or a
division of one) using the assets of the
purchased company to guarantee
repayment of the loan.
 THE ACCOUNTING EQUATION
What is the basic accounting
equation?
• Basic Accounting Equation states that
the business resources (assets) are
attributable to the amount owed to
creditors (liabilities) and capital
invested by the owners (equity). It is
formulated as follows:
• ASSET = LIABILITY + EQUITY
Asset
• Asset pertains to the resources
available and used in sustaining the
operation of the business. It includes
cash, accounts receivable, inventory,
office supplies, equipment, building,
land, goodwill, patent, etc.
Liability
• Liability refers to the amount of debts
owed to outside person or entity,
known as creditors. It represents the
claim of creditors in the assets of the
business. It includes accounts payable,
loans payable, notes payable, bonds
payable, unearned revenue, etc.
Equity
• Equity is the amount of capital or
resources invested in the business by
the owner(s). It represents the claim of
owners in the assets of the business. It
consist of capital, drawing, common
stock, additional paid in capital,
preferred stock, retained earnings, net
income, net loss.
• Note: Total amounts on both sides are
equal. The business, NOY Company,
has total assets amounting to P1,000,
amount of debt and capital totaling
P250 and P750, respectively.
• Asset = Liability + Equity
P1,000 = P250 + P750
P1,000 = P1,000
• For every valid business transaction
recorded should affect or change two
accounts. It means that in every value
received, another value is given up.
This is also referred to as double-entry
recording.
• Look at the following instances:
a. Increase in asset account should
have an equivalent increase in liability
or equity account. As shown in
Example 1 and 2.
Example No. 1
Noynoy, sole proprietor of NOI
Company, invested cash amounting to
P10,000 to start and operate his
accounting software company.
• Asset = Liability + Equity
Cash P10,000 = 0 + P10,000 Noynoy,
Capital
• Note: The cash invested affected two
accounts which are cash (asset) and
capital (equity) account.
Example No. 2
• XYZ Company was granted a bank loan
from ABC Bank amounting to P4,000.
• Asset = Liability + Equity
Cash P4,000 = P4,000 Loans Payable + 0
• Note: The cash loan received from
bank affected two accounts which are
cash (asset) and loans payable
(liability) account.
• Decrease in asset account should have
an equivalent decrease in liability or
equity account. As shown in Example 3
and 4
 Example No. 3
• Yosef Carreon withdraws cash
amounting to P500 from the business
for his personal use.
• Asset = Liability + Equity
Cash (P500) = 0 + (P500) Yosef Carreon,
Capital
• Note: The cash withdrawal of Yosef
indicates that it was used for personal
purposes, as such, it is considered as
capital withdrawal.
• Parenthesis () represents decrease in
amount or value.
Example No. 4
• XYZ Company paid in cash the partial
amount of its loan to ABC Bank
amounting to P2,500.
• Asset = Liability + Equity
Cash (P2,500) = (P2,500) Loans
Payable + 0
• Note: The amount of cash paid to ABC
Bank represents payment of bank
loans. As such, there will be an
equivalent decrease on both cash
(asset) and loans payable (liability)
account.
Example No. 5
• Increase or decrease may affect two
accounts on one side of the equation.
As shown in Example # 5.
•
XYZ Company purchased office
supplies amounting to P250 paid on
cash.
• Asset = Liability + Equity
Cash (P250) = 0 + 0
Office Supplies P250 = 0 + 0
• Note: The example affected both asset
accounts. Cash decreased by P250
while office supplies increased by P250.
Business transaction
• Business transaction is an economic
activity or event which affects and
changes the financial condition and
performance of an individual, business
or organization. It involves an
exchange of values – wherein one
value is received in exchange for
another value given up. Furthermore, a
recorded business transaction should
only include activity or event that
pertains to the business, and should
not include those personal
transactions of the owner, in
compliance to the accounting principle
named business entity concept – which
states that the business transaction is
separate and distinct from the owner
or owners.
Double Entry-Bookkeeping
• The business transaction must always
have a dual effect and that is for every
value received there is an equal value
parted. This gave rise to the
bookkeeping system called Double
Entry Bookkeeping or the Venetian
Method.