2010

SUBJECT:

FINANCIAL ACCOUNTING MAAM SIDRA ALVEENA BATOOL

SUBMITTED TO: PREPARED BY: CLASS:

BBA-II (A) 09-ARID-878

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Business
A business (company, enterprise or firm) is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies. Most businesses are privately owned. A business is typically formed to earn profit that will increase the wealth of its owners and grow the business itself. The owners and operators of a business have as one of their main objectives the receipt or generation of a financial returns in exchange for work and acceptance of risk. Notable exceptions include cooperative enterprises and state-owned enterprises. Businesses can also be formed not-forprofit or be state-owned.

Types of business: Sole proprietorship

The sole proprietorship is the oldest, most common, and simplest form of business organization. A sole proprietorship is a business entity owned and managed by one person. The sole proprietorship can be organized very informally, is not subject to much federal or state regulation, and is relatively simple to manage and control. A sole proprietorship also called the sole trader. All profits and all losses accrue to the owner (subject to taxation). All assets of the business are owned by the proprietor and all debts of the business are their debts and they must pay them from their personal resources. This means that the owner has unlimited liability. It is a "sole" proprietorship in the sense that the owner has no partners. Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. The paperwork and formalities, however, are substantially less than those of corporations, allowing sole proprietors to open a business quickly and with relative ease from a bureaucratic standpoint. It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors. A sole proprietor may do business with a trade name other than his or her legal name. This also allows the proprietor to open a business account with banking institutions. There are some advantages and disadvantages of Sole Proprietorship which are given below:

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Advantages of a Sole Proprietorship

y y y y y A sole proprietor has complete control and decision-making power over the business. Sale or transfer can take place at the discretion of the sole proprietor. No corporate tax payments. Minimal legal costs to forming a sole proprietorship. Few formal business requirements.

Disadvantages of a Sole Proprietorship

y The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. All responsibilities and business decisions fall on the shoulders of the sole proprietor. Investors won t usually invest in sole proprietorships.

y y

If the business is conducted under a fictitious name, it's up to the sole proprietor to file all applicable forms under the fictitious name or under doing business as (DBA). This, however, does not mean that the business is a separate entity from a legal standpoint. The sole proprietor remains liable even if he or she is doing business under a fictitious name. Most sole proprietors rely on loans and personal assets to initially finance their business. Some will elect to incorporate once the business has started to grow, while other business owners maintain their sole proprietorship for many years.

Partnership
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation. The partnership is the simplest and least expensive co-owned business structure to create and maintain. However, there are a few important facts you should know before you begin.

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Limited life
A partnership may be ended at any time by the death or withdrawal of any member of the firm. Other factors which may bring an end to a partnership include the bankruptcy or incapacity of a partner, the expiration of the period specified in the partnership contract, or the completion of the project for which the partnership formed. The admission of a new partner or the retirement of an existing member means an end to the old partnership, although the business may be continued by the formation of a new partnership.

Mutual agency
Right of all partners in a partnership to act as agents for the normal business operations of the partnership, and their responsibility for their partners' business related (but not personal) actions. The partnership is bound by the acts of any partner as long as these acts are within the scope of normal operations. The factors of a mutual agency suggest the need for exercising great caution in the selection of a partner.

Unlimited liability
It s obvious that before you form a partnership with somebody, you should make sure that he or she is a person you can trust and have confidence in. What s not necessarily as obvious is exactly how much you must trust this person before forming a partnership actually becomes a good idea. The liability of the owner of a business for all the obligations of the business. An owner's personal assets can be seized if the business's assets are insufficient to satisfy claims against it. The placement of personal assets at risk is a great disadvantage of proprietorships and general partnerships. The ability to limit the amount of liability to which an owner is subject is a major reason for the formation of limited partnerships. Compare limited liability.

Limited partnerships
In addition to general partnerships, there is another form of partnership known as the limited partnership. Generally speaking though, whenever somebody simply uses the term partnership, he s referring to a general partnership. Limited partnership taxation works the same way as general partnership taxation. The difference between the two structures is that, in a limited partnership, there are two types of partners: General partners and limited partners.

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General partners have unlimited liability for the debts of the partnership while limited partners do not. Limited partners (much like shareholders of a corporation) cannot lose an amount greater than their initial investment in the partnership. A limited partnership can have as many or as few of each type of partner as it wants, with the one notable exception that there must be at least one general partner. One important rule about limited partnerships is that the limited partners cannot participate in managerial decisions or the day-to-day operation of the partnership. If they do, they ll lose their limited liability. As such, in many limited partnerships, the general partners are the original founders, and the limited partners are outside investors.

Co-ownership of partnership property and profits

When a partner invests a building, inventory, or other property in a partnership, he or she does not retain any personal right to the assets contributed. The property becomes jointly owned by all partners. Each member of a partnership also has an ownership right in the profits.

Partnership Advantages
y y y y y

Business Partners are jointly and individually liable for the actions of the other partners. Profits must be shared with others. Since decisions are shared, disagreements can occur. Some employee benefits are not deductible from business income on tax returns. The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Partnership Disadvantages
y y y y y

Business Partners are jointly and individually liable for the actions of the other partners. Profits must be shared with others. Since decisions are shared, disagreements can occur. Some employee benefits are not deductible from business income on tax returns. The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Corporation
The most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those

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owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships. Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation, they can "die" when they lose money into insolvency. Corporations can even be convicted of criminal offences, such as fraud and manslaughter.

Type of corporation
There are different types of corporations for tax purposes, and you have to select the one that accurately describes your corporation type at the end of the tax year.

Private companies
A private company limited by shares, usually called a private limited company (though this can theoretically also refer to a private company limited by guarantee), is a type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of public limited companies. "Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

Advantages
y Limitation of Liability: The private limited company advantages are that the company is a separate corporate body and liability for payment of debts stops with the pvt ltd company, the owners, shareholders are not personally liable. Lower Taxes: The private limited company advantages come from the flexibility of being able to determine the proportions of salary and dividends taken compared with a sole trader whose basic accounts are subject to tax at fixed tax rates and thresholds.

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Additional financial considerations: Because a director is also officially an employee of the pvt ltd company this gives rise to a number of considerations in determining the extent of a private limited company advantages. Administration, management and business standing: A sole trader basically pleases themselves with regard to the administration and management of the business. A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts, statutory books and management as stated in the articles of association

Disadvantages
y y y

The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts. Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill. They face unlimited liability if the business fails.

Public companies
A public company or publicly traded company is a company that has permission to offer its registered securities (stock, bonds, etc.) for sale to the general public, typically through a stock exchange, or occasionally a company whose stock is traded over the counter (OTC) via market makers who use non-exchange quotation services.

Advantages
y It is able to raise funds and capital through the sale of its securities. This is the reason publicly traded corporations are important: prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises. In addition to being able to easily raise capital, publicly traded companies may issue their securities as compensation for those that provide services to the company, such as their directors, officers, and employees. In comparison, privately held companies may also issue their securities as compensation for services, but the recipients of those securities often have difficulty selling them on the open market. Securities from a publicly traded company typically have an established fair market value at any given time as determined by the price the security is sold for on the stock exchange where the security is traded. The financial media and city analysts will be able to access additional information about the business.

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Disadvantages
y Privately held companies have several advantages over publicly traded companies. A privately held company has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. Publicly traded companies are also required to spend more for certified public accountants and other bureaucratic paperwork required of all publicly traded companies under government regulations.