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1、2-1Forms of Business Organization CHAPTER 2CHAPTER 22-2Learning objectivesl1.Distinguish the three basic forms of business organization.l2.Be aware of the advantages and limitations of the three basic forms.2-3Forms of Business Organization*Sole proprietorships*Partnerships*Corporations Accountants
2、should recognize each form as an economic unit separate from its owners.Legally only the corporation is considered separate from its owners.Simplest form of accounting In this book,we only show accounting for the sole proprietorship.2-4Sole Proprietorship Sole Proprietorship 2-5Sole Proprietorship A
3、 business owned by one person is called a sole proprietorship or a single proprietorship.Retail industryHandicraftsAgricultureForestryFisheryOther service and family workshopsThe sole proprietorship is prevalent in:2-6Sole Proprietorship Personal affairBusiness affairsingle proprietorship From the v
4、iewpoint of all legal rights and responsibilities,your sole proprietorship business and you are considered to be one and the same.2-7Sole Proprietorship The owner directs business activities and may supply all management and labor used by the business.2-8Sole Proprietorship ProfitsLosses2-9Sole Prop
5、rietorship For business and financial management purposes,it is better to maintain completely separate recordsfor the business and the household.Bank accounts Credit arrangements Business affairFamily affair2-10Sole Proprietorship Advantages of Sole Proprietorship Simplicity Flexibility A sole propr
6、ietorship can be set up,modified,bought,sold or terminated very quickly.The proprietor can change the size and management of the business unit,as he or she desires at any time.The involvement of family members in the business is relatively unrestricted.2-11Sole Proprietorship Limitations of Sole Pro
7、prietorship Limited liabilityLimited access to capital and business opportunitiesProblem of continuityDifficult to measure business financial performance,profitability and loss of equity2-12Partnerships Partnership 2-13Partnerships Partnerships are set up by the owners who wish to combine capital or
8、 managerial talents for some common business purpose.In accounting,partnerships are considered as separate entities from the owners.2-14Partnerships PartnerPartnerPartnerProfitsLosses2-15Partnerships PartnershipGeneral partnership Limited partnership Most partnerships are organized as general partne
9、rships.2-16written partnership agreement The partnership agreements in a limited partnership must be registered with the government.General partnership Limited partnership Public notice of the partnership agreement is not required.Partnerships 2-17Partnerships Partnership agreement It must contain t
10、he method how to distribute profits and losses to each owner.Partner AProfitsLossesPartner BPartner C 30%40%30%30%40%30%2-18Partnerships ProfitsLossesIf the agreement describes the method of distributing the profits but does not mention the losses,the losses are distributed in the same way as profit
11、s.If the agreement doesntt describe the method of distributing the profits and losses,the profits and losses must be shared equally.Partnership agreement 2-19Partnerships Advantages of Partnerships Easier to assemble financial and physical resourcesSpecialize in management and operations according t
12、o the partners skills and interestsThe limited partners have limited liabilityBetter access to capital and creditSimple record-keeping and income tax filing requirementsRelatively unlimited opportunities for family members to work together in starting or operating a business2-20Partnerships Limitati
13、ons of Partnerships Unlimited liability-General partnerNo overall understanding of the financial position of the partnership.limited life-withdraws,goes bankrupt,dies or retiresPartners holding a minority interest can be alienated The interests of minority partners may be ignored.2-21Corporations Co
14、rporations 2-22Corporations A corporation is a big company,or a group of companies acting as a single organization.A corporation,chartered by the state in which it is headquartered,is considered by law to be a unique entity,separate and apart from those who own it.2-23Corporations Cash or other reso
15、urces ShareStockholderCorporation2-24Corporations ShareholdersElect Board of directors Decide on the major business policies,authorizes contracts,determines on executive salaries and arranges major loans with banks.Declaration of dividends 2-25Corporations Board of directors Several officers of the
16、corporation and several outsiders Appoint ManagersExecute the companys policies and carry out day-to-day operations.2-26Corporations ManagementReport the financial results Board of directors Report the financial resultsShareholdersPresident,vice presidents,controller,treasurer,and secretary2-27Corpo
17、rations Advantages of Corporations Continuous lifeSeparate legal entity Limited liability Ease of capital generation Lack of mutual agency Centralized authority and responsibility Professional management 2-28Limitations of Corporations Corporations High organizing costsInternal conflictsRestrictions on the sale of stock More paperwork to prepareDouble taxationNegative influence of the requisition of personal guarantees from corporate officers as a condition of supplying credit2-29WE ARE SAILING RIGHT ALONG!