TYPES OF BUSINESSES Types of Businesses Throughout this semester, we will cover a variety of...

TYPES OF BUSINESSES

Types of Businesses

Throughout this semester, we will cover a variety of examples of businesses

We will look at – Different types of business

• Ie. West 49 vs. First Choice vs. Furniture manufacturer

– Different forms of ownership• Single owner, multiple, investors, etc.

All businesses fall into three general All businesses fall into three general categories…categories…

1.1. serviceservice

2.2. manufacturingmanufacturing

3.3. merchandisingmerchandising

Types of BusinessTypes of Business

Sells effort (ie. work, talent) that does not result in a material item. A haircut would be an example of a service. A service is often

viewed as an expense by the buyer.

Combines effort and materials to produce a new product. These products may be

viewed by the buyer as an expense (ie. fuel) or an asset (ie. car).

Purchases a manufacturer’s product and resells it to another customer for a higher

price. Again, such products may be viewed as assets or expenses by the buyer.

Forms of Business Forms of Business OrganizationOrganization

There are three forms of There are three forms of business organization. They business organization. They are:are:

• Sole ProprietorshipSole Proprietorship• PartnershipPartnership• CorporationCorporation

Business Ownership

Split into 6 groups (roughly 4 or 5 students each)

I will assign you a type of business ownership1) Come up with a list of as many

advantages/disadvantages your group can think of for that type of ownership

2) What differences in accounting practices do you think exist for your type of business?

Sole ProprietorshipSole Proprietorship

•An unincorporated business An unincorporated business owned by a single individual. owned by a single individual.

•The law does not distinguish The law does not distinguish between the business and the between the business and the owner.owner.

• great freedom from regulationgreat freedom from regulation

AdvantagesAdvantages

• low start-up costlow start-up cost

• all profits to ownerall profits to owner

• owner has complete controlowner has complete control

Sole ProprietorshipSole Proprietorship

DisadvantagesDisadvantages

Sole ProprietorshipSole Proprietorship

• difficult to raise capitaldifficult to raise capital

• unlimited liabilityunlimited liability

• limited to owner’s knowledgelimited to owner’s knowledge

• lack of continuitylack of continuity

• profits taxed at personal rateprofits taxed at personal rate

ACCOUNTINGACCOUNTING

Sole ProprietorshipSole Proprietorship

• no need to allocate equity to no need to allocate equity to different partiesdifferent parties

• simplesimple

• easy to liquefy the businesseasy to liquefy the business• Must ensure business stays Must ensure business stays separate from the owner’s separate from the owner’s affairsaffairs

GAAP OF THE DAY!

GAAP

G.A.A.P. – Generally Accepted Accounting Principles

Rules that all accountants and accounting procedures must follow

WHY ARE GAAP’S NECESSARY?

Business Entity Concept

The financial information can only be about one individual company

The owner’s financial dealings must remain separate from the business

PartnershipPartnership

•An unincorporated business An unincorporated business owned by more than one owned by more than one individual. individual.

•The law does not distinguish The law does not distinguish between the business and the between the business and the owners.owners.

PartnershipPartnership

• broader management skillsbroader management skills

AdvantagesAdvantages

• ease of formationease of formation

• limited regulationslimited regulations

• more capital resourcesmore capital resources

PartnershipPartnership

DisadvantagesDisadvantages

• possible disagreementspossible disagreements

• unlimited liabilityunlimited liability

• divided authoritydivided authority

• difficult to find partnersdifficult to find partners

• partners liable for each otherpartners liable for each other

PartnershipPartnership

ACCOUNTINGACCOUNTING

• Must allocate equity among Must allocate equity among partnerspartners

• Difficult to add and subtract Difficult to add and subtract partnerspartners

CorporationCorporation

•A business which is an individual A business which is an individual in the eyes of the law. in the eyes of the law.

•The law views the business as a The law views the business as a separate entity from the owner(s).separate entity from the owner(s).

CorporationCorporation

•Profits of the corporation are Profits of the corporation are distributed to the shareholders by way distributed to the shareholders by way of "dividends". of "dividends".

•The more shares one owns, the The more shares one owns, the more dividends they will receive.more dividends they will receive.

exampleexample

Dividends: Dividends: $1.00 / share$1.00 / share

Shareholder owns: Shareholder owns: 1000 shares1000 shares

Shareholder Shareholder receives: receives: $1,000.00$1,000.00

CorporationCorporation

AdvantagesAdvantages

•possible lower taxation ratepossible lower taxation rate

•limited liability of shareholders limited liability of shareholders (However, (However, directors and officers can be liable in directors and officers can be liable in certain circumstances.)certain circumstances.)

•continuity of businesscontinuity of business

•can sue / be sued in the corporate name can sue / be sued in the corporate name

•more prestigemore prestige

CorporationCorporation

DisadvantagesDisadvantages

•losses cannot offset personal incomelosses cannot offset personal income

•higher start-up costs and greater higher start-up costs and greater formalitiesformalities

•requires annual maintenance from requires annual maintenance from accountant and lawyeraccountant and lawyer

CorporationCorporation

ACCOUNTINGACCOUNTING

•If publicly traded – all can view If publicly traded – all can view financial documentsfinancial documents

•More difficult income distribution, More difficult income distribution, taxestaxes•Books remain relatively unchanged Books remain relatively unchanged with transfer of ownership or death of with transfer of ownership or death of ownersowners

CorporationCorporation

StructureStructure

Executive: (ie. President, Treasurer, Secretary. Run the day to day operations of the business.)

Directors: (Hire executive, guide mission, distribute profits between business & shareholders)

Shareholders: (provide capital, elect directors, receive dividends)

WITH YOUR GROUP

Brainstorm 5 businesses in Brantford for each type of ownership1) Sole Proprietorship

2) Partnership

3) Corporation