Accounting & Bookkeeping Concepts - Business Structures

Choosing a business structure is only one part of Accounting and Bookkeeping Concepts, but is an important part nonetheless. There are 3 main types of business structures available. Each structure has its own pros and cons.

1. Sole proprietorship
2. Partnerships
3. Companies


Sole proprietorship

This type of structure is owned by only one person. He or she contributes assets such as cash to the business. This owner is entitled to all profits and is liable for all losses and debts of the operation as this business structure is not considered a separate legal entity. In the event the business is unsuccessful and is liquidated, and the proceeds from the sale of all assets don’t cover all the debts of the business then the remainder of the debt must be settled by the owner's personal (non business) assets. This is the concept of unlimited liability. Another disadvantage may include a lower ability to raise capital.

On the up side, a sole proprietorship benefits from less stringent reporting regulation and therefore is able to adopt a less costly accounting system. Small businesses in certain countries are able to claim small business tax benefits and concessions.

Being the sole owner can also have its advantages in the form of an easier and faster decision making process as they do not need to consult others. Sole owners have the best interest of the business in mind as the business's success reflects on his/her personal financial performance.


Partnerships

A partnership is a business owned by two or more individuals, who are referred to as partners. The owners generally draw up a legally binding contract called a partnership agreement, which helps to solve internal disputes when they arise. The partnership agreement will address details such as the purpose and nature of the partnership, how profits/losses are to be distributed, value of individual owner's contributions, division of duties etc.

As with a sole proprietor, partnerships are not considered separate legal entities, so in the event of liquidation, partners are responsible for all debts.

An advantage of partnerships over sole proprietorship can include access to a larger capital base (through partner's contributions and larger borrowing capacities) and introduction of expertise and skills that one partner alone may not have.


Companies

Unlike the other 2 structures examined so far, a company is a separate legal entity. This means the company can in its own name own assets, enter into contracts, sue and be sued. A major advantage of companies is the limited liability concept. Meaning the liability of a shareholder is limited to the amount of shares they have in that company. In the event a company liquidates, a shareholder at most can only lose the value of his/her shares in that company and any additional debt owed by that company, is the responsibility of that company and not the shareholders. Other advantages include a larger borrowing capacity, more alternatives for raising funds and for larger scale operations, a more favorable tax rate.

However the tougher regulations imposed upon companies can make reporting, compliance and liquidation rather expensive and is a factor which must be considered when choosing a business structure.

In summary, there are positive and negative sides to each business structure. Ultimately the best structure for you will depend on your expectations, personal situation and goals.

For an extensive step by step guide on accounting and bookkeeping concepts please go to the website here: Bookkeeping Concepts