TYPES OF BUSINESSES
Types of Businesses
Throughout this semester, we will cover a variety of examples of businesses
We will look at – Different types of business
• Ie. West 49 vs. First Choice vs. Furniture manufacturer
– Different forms of ownership• Single owner, multiple, investors, etc.
All businesses fall into three general All businesses fall into three general categories…categories…
1.1. serviceservice
2.2. manufacturingmanufacturing
3.3. merchandisingmerchandising
Types of BusinessTypes of Business
Sells effort (ie. work, talent) that does not result in a material item. A haircut would be an example of a service. A service is often
viewed as an expense by the buyer.
Combines effort and materials to produce a new product. These products may be
viewed by the buyer as an expense (ie. fuel) or an asset (ie. car).
Purchases a manufacturer’s product and resells it to another customer for a higher
price. Again, such products may be viewed as assets or expenses by the buyer.
Forms of Business Forms of Business OrganizationOrganization
There are three forms of There are three forms of business organization. They business organization. They are:are:
• Sole ProprietorshipSole Proprietorship• PartnershipPartnership• CorporationCorporation
Business Ownership
Split into 6 groups (roughly 4 or 5 students each)
I will assign you a type of business ownership1) Come up with a list of as many
advantages/disadvantages your group can think of for that type of ownership
2) What differences in accounting practices do you think exist for your type of business?
Sole ProprietorshipSole Proprietorship
•An unincorporated business An unincorporated business owned by a single individual. owned by a single individual.
•The law does not distinguish The law does not distinguish between the business and the between the business and the owner.owner.
• great freedom from regulationgreat freedom from regulation
AdvantagesAdvantages
• low start-up costlow start-up cost
• all profits to ownerall profits to owner
• owner has complete controlowner has complete control
Sole ProprietorshipSole Proprietorship
DisadvantagesDisadvantages
Sole ProprietorshipSole Proprietorship
• difficult to raise capitaldifficult to raise capital
• unlimited liabilityunlimited liability
• limited to owner’s knowledgelimited to owner’s knowledge
• lack of continuitylack of continuity
• profits taxed at personal rateprofits taxed at personal rate
ACCOUNTINGACCOUNTING
Sole ProprietorshipSole Proprietorship
• no need to allocate equity to no need to allocate equity to different partiesdifferent parties
• simplesimple
• easy to liquefy the businesseasy to liquefy the business• Must ensure business stays Must ensure business stays separate from the owner’s separate from the owner’s affairsaffairs
GAAP OF THE DAY!
GAAP
G.A.A.P. – Generally Accepted Accounting Principles
Rules that all accountants and accounting procedures must follow
WHY ARE GAAP’S NECESSARY?
Business Entity Concept
The financial information can only be about one individual company
The owner’s financial dealings must remain separate from the business
PartnershipPartnership
•An unincorporated business An unincorporated business owned by more than one owned by more than one individual. individual.
•The law does not distinguish The law does not distinguish between the business and the between the business and the owners.owners.
PartnershipPartnership
• broader management skillsbroader management skills
AdvantagesAdvantages
• ease of formationease of formation
• limited regulationslimited regulations
• more capital resourcesmore capital resources
PartnershipPartnership
DisadvantagesDisadvantages
• possible disagreementspossible disagreements
• unlimited liabilityunlimited liability
• divided authoritydivided authority
• difficult to find partnersdifficult to find partners
• partners liable for each otherpartners liable for each other
PartnershipPartnership
ACCOUNTINGACCOUNTING
• Must allocate equity among Must allocate equity among partnerspartners
• Difficult to add and subtract Difficult to add and subtract partnerspartners
CorporationCorporation
•A business which is an individual A business which is an individual in the eyes of the law. in the eyes of the law.
•The law views the business as a The law views the business as a separate entity from the owner(s).separate entity from the owner(s).
CorporationCorporation
•Profits of the corporation are Profits of the corporation are distributed to the shareholders by way distributed to the shareholders by way of "dividends". of "dividends".
•The more shares one owns, the The more shares one owns, the more dividends they will receive.more dividends they will receive.
exampleexample
Dividends: Dividends: $1.00 / share$1.00 / share
Shareholder owns: Shareholder owns: 1000 shares1000 shares
Shareholder Shareholder receives: receives: $1,000.00$1,000.00
CorporationCorporation
AdvantagesAdvantages
•possible lower taxation ratepossible lower taxation rate
•limited liability of shareholders limited liability of shareholders (However, (However, directors and officers can be liable in directors and officers can be liable in certain circumstances.)certain circumstances.)
•continuity of businesscontinuity of business
•can sue / be sued in the corporate name can sue / be sued in the corporate name
•more prestigemore prestige
CorporationCorporation
DisadvantagesDisadvantages
•losses cannot offset personal incomelosses cannot offset personal income
•higher start-up costs and greater higher start-up costs and greater formalitiesformalities
•requires annual maintenance from requires annual maintenance from accountant and lawyeraccountant and lawyer
CorporationCorporation
ACCOUNTINGACCOUNTING
•If publicly traded – all can view If publicly traded – all can view financial documentsfinancial documents
•More difficult income distribution, More difficult income distribution, taxestaxes•Books remain relatively unchanged Books remain relatively unchanged with transfer of ownership or death of with transfer of ownership or death of ownersowners
CorporationCorporation
StructureStructure
Executive: (ie. President, Treasurer, Secretary. Run the day to day operations of the business.)
Directors: (Hire executive, guide mission, distribute profits between business & shareholders)
Shareholders: (provide capital, elect directors, receive dividends)
WITH YOUR GROUP
Brainstorm 5 businesses in Brantford for each type of ownership1) Sole Proprietorship
2) Partnership
3) Corporation
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