Business Entities and Accounting

Overview

Understanding different business entities is crucial for accountants as each has unique accounting methods.

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Sole Proprietorship

• Definition: A sole proprietorship is a simple business entity where the owner registers a name to operate under.

• Example: Jill registers as "Jill's IT Consultant."

• Legal Entity: The owner and the business are considered the same legal entity.

• Pros:

  • Simple and inexpensive to start.
  • Owner receives all profits.

• Cons:

  • Unlimited personal liability; owner is personally responsible for business debts.
  • Cannot have more than one owner (no partners).
  • Common in hobby businesses and small local businesses.

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Partnership

• Definition: A partnership involves two or more owners sharing profits and risks.

• Benefits:

  • More capital and talent can be contributed by multiple partners.

• Challenges:

  • Potential for disagreements on business direction.
  • Unlimited personal liability for all partners.
  • Common in service-based businesses (lawyers, doctors, accountants, architects).

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Corporation

• Definition: A corporation is a legally separate entity from its owners, providing limited liability protection.

• Features:

  • Owners are only liable for their investment in the business.
  • Jill can sell parts of her business to raise funds.

• Pros:

  • Limited personal liability for owners.

• Cons:

  • Subject to double taxation (business and personal taxes).
  • More expensive and complex to start and maintain.
  • Often requires legal/accounting assistance.
  • Common in larger public companies.

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Conclusion

• The course will primarily focus on sole proprietorships, the simplest business entity.
• Additional resources:
  • YouTube videos
  • Website: TorreyNorman.com

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Key Takeaways

• Understanding business entities helps in proper accounting practices.
• Each entity has distinct advantages and disadvantages.