When a business owner registers their business with the government, there are many different business entities that they can register as and each one does their accounting a little bit differently. So as an accountant it's important to understand these differences and know which business entity you are working with. One of the simplest business entities is a sole proprietorship. In a sole proprietor business, the owner simply registers a name that they can do business as. For example, if Jill wanted to start her own computer consulting company, she could simply go to her state government and register herself as Jill, doing business as, Jill's IT Consultant.
So a sole proprietor is just a single owner business where the business and the owner are the same legal entity. and share the same risk. Many business owners use the sole proprietorship entity because it's so simple and inexpensive to start.
And because there is only one owner, that person gets all the profits that the company earns. However, because Jill and her business are both the same legal entity, just with different names, anything that happens to one automatically happens to the other. In other words, they share all of the same risk.
If someone sues the business, Jill also gets sued, and Jill is personally responsible for all of the business's debts. Sole proprietorships typically include hobby businesses and small local businesses. Another drawback to a sole proprietorship is that there can legally only be one owner because that owner and the business are the same person.
That means that Jill can't add owners or sell the business. If she wants more than one owner, she may need to look at a... partnership a partnership is similar to a sole proprietorship in that the owners should all share the same profits and risk of the business but now there can be more than one owner more owners mean that more people can put money into the business which is a good thing they can also contribute more talent but sometimes partners have very different ideas and may have disagreements about the direction of the company another problem with more partners is that all partners share the same unlimited risk for anything that happens within the company. Partners are typically found in service-based businesses like lawyers, doctors, accountants, and architects.
Another business entity that Joe could form is a corporation. Unlike a sole proprietorship and a partnership, a corporation is a business that is legally separate from its owners so that the owner's personal loss is limited only to the property they invest in the business. So with a corporation, Jill can register the company as a separate legal entity.
That way, if something happens to the company, Jill only loses the money she invested in it. But they can't come after her legally for the debts or obligations that the business was responsible for. That's pretty cool.
It also allows Jill to sell part of her business to others as a way to raise money and bring on more owners. However, there are some disadvantages to a corporation too. Because a corporation is a different legal entity, it gets taxed by the government just like Jill does. So, at the end of the year, the business pays taxes on its earnings before giving them to Jill, who then also has to pay taxes on the amount as her earnings.
This means that the earnings get taxed two different times. This is called double taxation. Corporations are also more expensive to start up and more complex to register and maintain.
They often require the assistance of a lawyer or accountant who is familiar with corporation laws. For this reason, corporations are often seen in larger public companies like many of the name brands you're familiar with. Now these are just three of the many different entities out there for businesses to register as.
While there are others, we will focus on these three in this course. In fact, For the first part of the course, we will focus just on sole proprietorships since they are the simplest of the three entities. To learn more about these business entities and other accounting topics, check out more of my videos on YouTube or visit TorreyNorman.com.