Chapter 4 Forms ofOrganization

PART THREE

Chapter 3 Forms of Organization

3.1 Forms of organization

As with types of businesses, the way in which the accounting information is reported will depend on the type of ownership.There are three forms of business ownership. The main types of ownership are listed as below.

3.1.1 Sole proprietorship

a business consisting of a single owner (which may itself be a business entity), not in a separately recognized business form.

3.1.2 Partnership

Under this type of ownership, two or more people decide to pool their skills and resources and go into business together. A partnership, like a sole proprietorship, has unlimited liability. Indeed, one partner may be responsible for getting the partnership into debt but another partner may have to pay those debts out of their personal funds. A partnership type of ownership is common among lawyers and doctors as they are bound by the ethics of their profession to

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suffer unlimited liability. Accountants can now form companies, with the exception of Auditors.

3.1.3 Company

An important feature of a company is that it is a separate legal entity from its owners (shareholders). Since the company is a legal entity in its own right, it is responsible for its own debts and losses. This means that once the shareholders have paid whatthey agreed to pay for the shares, their obligation to the company and the company?s creditors is satisfied. This is of great importance to the shareholders since they know their liability is limited. Another feature of a company is that its life is not limited by the life of the shareholders. Shares may be sold by an existing shareholder to another person who wishes to become a shareholder. When a shareholder dies, that person?s shares pass to the beneficiary of his or her estate.

3.1.4 COMPARISON OF OWNERSHIP

Sole Proprietor Not a separate legal entity

Partnership Not a separate legal entity

Company Separate legal entity

Legal Status of Business Entity

Risk of Ownership

Owner?s personal assets at risk Partners? personal assets at risk

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Limited liability

Duration of Life

Transferability of Ownership Interests

Sources of Finance Profit Sharing

Ownership

Capital

Liability for firm’s debts

Management

Expires by owner?s choice or death of owner

If proprietor sells his interest, the business is reconstituted under new ownership Owner?s funds and loans

All accrue to owner

One owner Provided by owner

Unlimited Owner

Expires by choice Perpetual or withdrawal of succession partner

Partnership share Usually cannot be sold transferable without agreement of other partners: new partnership

formed Partners? funds Shares, and loans debentures,

loans Shared according Dividends to partnership declared by agreement or

directors

Partnership Act 1908 Two or more

One or more

Partners contribute Divided into according to shares partnership agreement Unlimited Limited to the amount outstanding on

sharecapital

Each partner

Appointedbyshareholders

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2.2proprietorship

2.1.1 Introduction of proprietorship

A sole proprietorship, also known as the sole trader or simply

a proprietorship, is a type of business entitythat is owned and run by one natural person and in which there is no legal distinction between the owner and the business. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debts, loans, loss etc.

2.1.2 Features of sole proprietorship

The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. It is a \partnerships (which have at least two owners).

A sole proprietor may use a trade name or business name other than his, her or its legal name. They will have to legally trademark their business name, the process being different depending upon country of residence.[1]

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2.1.3 Featureof Proprietorship

A permitted exceptionto the sole proprietor (single owner) stipulation is made by the Internal Revenue Service (IRS) permitting the spouse of a sole proprietor to work for the business. They are not classified as partners in the enterprise, or an independent contractor, enabling the business to retain its sole proprietorship status and not be required to submit a partnership income tax return. Registration of a business name for a sole proprietor is generally uncomplicated, unless it involves the selection of a name that is fictitious, or “assumed.” The business owner is required to register with the appropriate local authorities, who will determine that the name submitted is not duplicated by another business entity. Furthermore, the business owner must complete a form submitted to the governing authority to acquire title as a “DBA” or \doing business as”. The authority in some states is the Secretary of State. The license for a sole proprietary business entitles the owner to hire employees and enlist the services of independent consultants. Although an employee or consultant may be requested by the owner to complete a specific project or participate in the company's decision-making process, their contribution to the project or decision is considered a recommendation under the law. Under the legal doctrine Respondeat superior (Latin: \answer\legal liability for any business decision arising from such a contribution remains upon the owner and cannot be renounced or apportioned. 5

This is transposed by the unlimited liability attached to a sole proprietary business. The owner carries the financial responsibility for all debtsand/or losses suffered by the business, to the extent of using personal or other assets, to discharge any outstanding liabilities.

The owner is exclusively liable for all business activities conducted by the sole proprietorship and accordingly, entitled to full control all earningsassociated with it. The general aspect according to general business law is that this type of business ownership does not embody a “legal entity”. Furthermore, any attempted and unreliable distinctions of the business do not change the classification under this title.

According to the Small Business Administration (SBA) a sole proprietor and their business are considered as one and the same; therefore, the business is not subjected to separate taxation and regarded as the direct income of the owner. Income, losses and expenses may be listed on a Schedule C Download, which is then transferred to the personal tax return of the owner. It is the responsibility of the owner to ensure all due income taxes and self-employment contributions are paid.

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2.3Partnership

2.3.1 introduction of partnership

A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The partners in a partnership may

beindividuals, businesses, interest-based organizations, schools,governments or combinations. Organizations may partner together to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract. Partnership agreements can be formed in the following areas:

?

Business: two or more companies join forces in a joint venture[1] or a consortium to

i) work on a project (e.g. industrial or research project) which would be too heavy or too risky for a single entity,

ii) join forces to have a stronger position on the market,

iii) comply with specific regulation (e.g. in some emerging countries, foreigners can only invest in the form of partnerships with local entrepreneurs[2]).

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In this case, the alliance may be structured in a process comparable to a Mergers & Acquisitions transaction.

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Politics (or geopolitics): In what is usually called an alliance, governments may partner to achieve their national interests, sometimes against allied governments holding contrary interests, as occurred during World War II and the Cold War.

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Knowledge: In education, accrediting agencies increasingly evaluate schools, or universities, by the level and quality of their partnerships with local or international peers and a variety of other entities across societal sectors.

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Individual: Some partnerships occur at personal levels, such as when two or more individuals agree to domicile together, while other partnerships are not only personal, but private, known only to the involved parties.

Partnerships present the involved parties with complex negotiation and special challenges that must be navigated unto agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and succession, how success is evaluated and distributed, and often a variety of other factors must all be negotiated. Once agreement is reached, the partnership is typically enforceable by civil law, especially if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable typically draw up Articles of Partnership. Trust and pragmatism are also essential as it cannot be expected that everything can be written in the initial partnership agreement,

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therefore quality governance[3] and clear communication are critical success factors in the long run. It is common for information about formally partnered entities to be made public, such as through a press release, a newspaper ad, or public records laws.

While industrial partnerships stand to amplify mutual interests and accelerate success, some are collaboration may be considered ethically problematic. When a politician, for example, partners with a corporation to advance the latter's interest in exchange for some benefit, a conflict of interestresults;

consequentially, the public good may suffer. While technically legal in some jurisdictions, such practice is broadly viewed negatively or ascorruption. Governmentally recognized partnerships may enjoy special benefits in tax policies. Among developed countries, for example, business partnerships are often favored over corporations in taxation policy, since dividend taxes only occur on profits before they are distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liabilitythan they would as shareholders of a corporation. In such countries, partnerships are often regulated via anti-trust laws, so as to inhibit monopolistic practices and foster free market competition. Enforcement of the laws, however, varies considerably. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.

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2.3.2 features of a partnership

ease of formation (易于组建) limited life（有限的存续期） mutual agency (相互代理权) unlimited liability（无限责任）

co-ownership of partnership property and profits （共同分享合伙财产和利润） Nontaxable entity（非税主体）

A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be

individuals, businesses, interest-based organizations, schools,governments or combinations. Organizations may partner together to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract. Partnership agreements can be formed in the following areas:

?

Business: two or more companies join forces in a joint venture[1] or a consortium to i) work on a project (e.g. industrial or research project) which would be too heavy or too risky for a single entity, ii) join forces to have a stronger position on the market, iii) comply with specific regulation (e.g. in some emerging countries, foreigners can only invest in the form of

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partnerships with local entrepreneurs[2]). In this case, the alliance may be structured in a process comparable to a Mergers & Acquisitions transaction.

?

Politics (or geopolitics): In what is usually called an alliance, governments may partner to achieve their national interests, sometimes against allied governments holding contrary interests, as occurred duringWorld War II and the Cold War.

?

Knowledge: In education, accrediting agencies increasingly evaluate schools, or universities, by the level and quality of their partnerships with local or international peers and a variety of other entities across societal sectors.

?

Individual: Some partnerships occur at personal levels, such as when two or more individuals agree to domicile together, while other partnerships are not only personal, but private, known only to the involved parties.

Partnerships present the involved parties with complex negotiation and special challenges that must be navigated unto agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and succession, how success is evaluated and distributed, and often a variety of other factors must all be negotiated. Once agreement is reached, the partnership is typically enforceable by civil law, especially if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable typically draw up Articles of Partnership. Trust and pragmatism are also essential as it cannot

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be expected that everything can be written in the initial partnership agreement, therefore quality governance[3] and clear communication are critical success factors in the long run. It is common for information about formally partnered entities to be made public, such as through a press release, a newspaper ad, or public records laws.

While industrial partnerships stand to amplify mutual interests and accelerate success, some are collaboration may be considered ethically problematic. When a politician, for example, partners with a corporation to advance the latter's interest in exchange for some benefit, a conflict of interestresults;

consequentially, the public good may suffer. While technically legal in some jurisdictions, such practice is broadly viewed negatively or ascorruption. Governmentally recognized partnerships may enjoy special benefits in tax policies. Among developed countries, for example, business partnerships are often favored over corporations in taxation policy, since dividend taxes only occur on profits before they are distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liabilitythan they would as shareholders of a corporation. In such countries, partnerships are often regulated via anti-trust laws, so as to inhibit monopolistic practices and foster free market competition. Enforcement of the laws, however, varies

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considerably. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.

2.3.3 Classification of partnership

General partnership Limited partnership

? Passive investors:they share in the profits of the business,but they do not participate actively in management and are not personally liable for debts of the business

Limited liability partnership (doctors, lawyers, accountants)

? General partnership

Under common law legal systems, the basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts.

? Limited partnership

Limited partnership (LP), in which certain limited partners relinquish their ability to manage the business in exchange for limited liability for the partnership's debts.

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limited partnership[edit] Main article: UK partnership law

A limited partnership in the United Kingdom consists of:

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One or more people called general partners, who are liable for all debts and obligations of the firm; and

?

One or of the firm beyond the amount contributed.

Limited partners may not:

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Draw out or receive back any part of their contributions to the partnership during its lifetime; or

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Take part in the management of the business or have power to bind the firm.

If they do, they become liable for all the debts and obligations of the firm up to the amount drawn out or received back or incurred while taking part in the management, as the case may be.

? Limited liability partnership

Limited liability partnership(LLP), in which all partners have some degree of limited liability.

There are two types of partners. ? General partners

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General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. ? Limited partners

The liability of limited partners is limited to their investment in the partnership. ? Silent partner

A silent partner is one who still shares in the profits and losses of the business, but who is not involved in its management, and/or whose association with the business is not publicly known; these partners usually provide capital in the expectation of a return on their investment.

Partnerships[edit] ?

General Partnership: is a partnership in which all the partners are jointly and separately liable for the debts of the partnership. In most U.S. states, it can be created by agreement without requiring a public filing. The partners may themselves be legal entities or individuals.

General partner

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?

The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e., they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership.

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As in a general partnership, the GPs have actual authority, as agents of the firm, to bind the partnership incontracts with third parties that are in the ordinary course of the partnership's business. As with a general partnership, \ordinary course the limited partnership's activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners.

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LP Limited Partnership: a partnership where at least one partner (the general partner, which may itself be an entity or an individual) has unlimited liability for the LP's debts) and one or more partners (the limited partners) have limited liability (which means that they are not responsible for the LP's debts beyond the amount they agreed to invest). Limited partners generally do not participate in the management of the entity or its business.

?

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?

A limited partnership (LP) is a form of partnership similar to a general partnership, except that where a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited partner.

Limited partner

?

Like shareholders in a corporation, limited partners have limited liability. This means that the limited partners have no management authority, and (unless they obligate themselves by a separate contract such as a guaranty) are not liable for the debts of the partnership. The limited partnership provides the limited partners a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the

partnership agreement. General Partners thus bear more economic risk than do limited partners, and in cases of financial loss, the GPs will be the ones which are personally liable.

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Limited partners are subject to the same alter-ego piercing theories as corporate shareholders. However, it is more difficult to pierce the limited partnership veil because limited partnerships do not have a great many formalities to maintain. So long as the partnership and the members do not co-mingle funds, it would be difficult to pierce the veil.

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?

Partnership interests (including the interests of limited partners) are afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor?s share of distributions, without conferring on the creditor any voting or management rights.[citation needed]

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When the partnership is being constituted, or the composition of the firm is changing, limited partnerships are generally required to file documents with the relevant state registration office. Limited partners must explicitly disclose their status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the limited partners do not have inherent agency authority to bind the firm unless they are subsequently held out as agents (and so create an agency by estoppel); or acts of ratification by the firm create ostensible authority.

?

Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability. In some jurisdictions, the limited liability of the limited partners is contingent on their not participating in management.

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?

LLP Limited Liability Partnership: a partnership where a partner's liability for the debts of the partnership is limited except in the case of liability for acts of professional negligence or malpractice. In some states, LLPs may only be formed for purposes of practicing a licensed profession, typically attorneys, accountants and architects. This is often the only form of limited partnership allowed for law firms (as opposed to general partnerships).

? ?

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations.[1] In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from the traditional unlimited partnership under the Partnership Act 1890, in which each partner has joint and several liability. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.[2] In some countries, an LLP must also have at least one thing called as a \partner\have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as \individuals the legal responsibility to manage the corporation in the

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corporation's best interest. An LLP also contains a different level of tax liability from that of a corporation.

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Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries, the LLP is more suited for businesses in which all investors wish to take an active role in management.

?

There is considerable confusion between LLPs as constituted in the U.S. and those introduced in the UK in 2001 and adopted elsewhere (see below) as the UK LLP is, despite its name, specifically legislated as a corporate body rather than as a partnership. In Nigeria, limited liability partnerships have legal personality. However, one must register a partnership first before it can gain the status of limited liability partnership.

? ?

LLLP Limited Liability Limited Partnership: a combination of LP and LLP, available in some states.

?

The limited liability limited partnership (LLLP) is a relatively new modification of the limited partnership, a form of business entity recognized under United States commercial law. An LLLP is a limited partnership and as such consists of one or more general partners and one or more limited

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partners. Typically, while the general partners manage the LLLP, the limited partners' interest is purely financial.

? ? ?

LLLP versus LP[edit]

The difference between an LLLP and a traditional limited partnership lies in the general partner's liability for the debts and obligations of the limited partnership.

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In a traditional limited partnership the general partners are jointly and severally liable for its debts and obligations; limited partners are not liable for those debts and obligations beyond the amount of their capital contributions.

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In an LLLP, by having the limited partnership make an election under state law, the general partners are afforded limited liability for the debts and obligations of the limited partnership that arise during the period that the LLLP election is in place. Certain LLLP elections take the form of a limited partnership electing to be a limited liability partnership (this is the format used in Delaware, for example) while in other states the election is made in the certificate of limited partnership (examples

being Florida, Hawaii and Kentucky). Most states require that an LLLP identify itself in its name, but those requirements are not universal.

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Characteristicsof partnership

Partnerships have the following common characteristics: 1) A partnership firm is not a legal entity 2) Partnership is a concurrent subject 3) Unlimited Liability

The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of

partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm. 4) Partners are Mutual Agents.

The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ?agent? of all the remaining partners. Hence, partners are ?mutual agents?.

5) Oral or Written Agreements. Partnership Agreement is to be in written or oral format. Thus the general rule of the Contract Act applies that the contract can be in be 'oral' or 'written' as long as it satisfies the basic conditions of being a

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contract i.e. the agreement between partners is legally enforceable. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. 6) Number of Partners is minimum 2 7) Mutual agency is the real test.

Accounting practices in partnerships

1．Opening the accounts of a new partnership

Dr. cash\\accounts receivable\\inventory\\plant assets Cr. Name of partner, capital Name of partner, capital

2. Additional investment Dr. cash

Cr. Name of partner, capital

3. Sharing agreement ? A fixed ratio

? Interest allowances to partners, with remainder in a fixed ratio ? Salary allowances to partners, with remainder in a fixed ratio

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? Both

the formula of dividing partnership profits and losses

the relative investments of the partners—the beginning or average capital ratio for the year;

the services performed by the partners—a salary allowance both—a salary allowance and interest allowance

4. Closing the accounts of a partnership at year-end ? Dr. income summary

? Cr. Name 1 of partner, capital ? Name 2 of partner, capital ? Dr. Name of partner, capital

? Cr. Name of partner, withdrawal ?

5. Withdrawal cash from partnership o Dr. Partner’s name, withdrawal Cr. Cash

6. Financial statements of a partnership

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? Statement of partners’ capital o Beginning balance o Additional contribution o Distributed Net income o Less: withdrawals o Ending balance

Assume that the Ames and Baker partnership had a profit $ l8,000 for the year and that the partners, relative capital balances before any profit distribution at the end of the year were as follows:

Ames, Capital Baker, Capital 2013 2013

Jan.1 30000 Jan.1 10000 July1 10000

Ames and Baker have the following sharing agreement: salaries of $ 6,000 to Ames and $ 4,000 to Baker; 8% interest on average capital balances; and the remainder of net income to be divided equally. The net income $ 18,000 would therefore be divided as follows. Ames &Baker

Earnings to be divided 18，000 25

Salary allowances：

Ames $ 6，000

Baker $4000 10，000 Allowances for Interest on average capital balances： Ames（$30,000×0.08）2,400

Baker[$10,000+10,000×6÷12）×0.081,200 3，600 ＄4，400 Remainder(（$4，400）divided equally) 2,200 2,200 Each partner’s share $10,600 $7,400

The closing entry would be： Dr. Income Summary 18，000 Cr. Ames，Capital．10，600 Baker，Capital 7，400

If Ames and Baker had withdrawn cash equal to their salary allowances，their withdrawal accounts at the end of the year would show debit balances of＄6，000and＄4，000 respectively．The entry to close the withdrawal accounts would be：

Dr. Ames, Capital 6,000 Baker，Capital．4，000

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Cr. Ames，withdrawal6，000 Baker，Withdrawal4，000

AMES AND BAKER

Statement of Partners’ Capital

For the year 1993 Ames Baker Total

Capital Balances, Jan.1,1993 $ 30，000 $ 10，000 $ 40，000 Add：Additional Contributions 10，000 10，000 Net Income for 1993 10，600 7，400 18，000 Less: Withdrawals 6,000 4,000 10,000 Capital balance, Dec.31,1993 34,600 23,400 58,000

Field, Mahoney and Sack established a partnership ,they have the following sharing agreement:$5000 salary to Sack and 8% interest on average capital balances and remainder to share equally. The capital balances are listed below: Field: 1.1 $18000;7.1 $12000 Mahoney:1.1$36000;9.1 $36000 Sack:1.1 $8000

The credit balance of income summary on Dec.31 is $21000

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Please share profit of foregoing partnership. Field:$5120 Mahoney:$7040 Sack:$8840

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