Forms of Businesses

A business start-up can be formed either in any of the following forms; a partnership, sole proprietorship or a corporation. Each of the business forms above has distinct advantages and disadvantages.


Incorporating a business leads to a separate legal entity i.e. the company and its owners are two different persons.


Separate legal entity creates a limited liability to the owner since both the company and the owner are separate entities. Therefore, if the company incurs liabilities, it does not extend to the owners. The corporate entity can initiate legal proceedings and can be sued also.

Corporations can be listed in the stock exchange and can also issue shares and therefore can obtain capital by issuing shares as compared to sole proprietorship which ca not issue shares. A corporation can also borrow loans.

Since corporations are separate legal entities, distinct from their owners, then their existence does not depend on the owners. Corporations can continue to exist even the owner die or the business is sold off. Sole proprietorships and partnerships can cease in case of the death of owners.

Other advantages of incorporating a company include the fact that the company may be granted some tax allowances which is given to small business.

The corporations accounting year (the date of preparation of books) is determined by the company and hence the company may receive tax savings by designing their financial year to end when the taxes are lower.

Incorporation also leads to greater business for the company since other business or customers prefer to deal with companies rather that sole proprietorships or partnerships because of their perceived stability.


The initial start-up and registration of the corporation is costly and includes a lot of complexities hence making partnership or sole proprietorship less expensive in this regard.

The owner is forced to file two tax returns since the company and the owner are separate legal entities. The preparation of separate tax returns increases the costs to the owner.

When borrowing a loan, the lender may demand for extra guarantee from the owner and therefore in case of default, the limited liability may not apply.

Other disadvantages include lack of tax credits to the corporations in case of losses, high costs due to increased paper work and reduced tax flexibility (Ward S Pg 3)

Sole proprietorship

This is a form of business run by a one person under his or her name or a name of their choosing. It is a simple form of business to run and set-up


A sole proprietorship is simple to run as its operations are not huge as compared to a corporation. Hence it is less costly to operate. The sole proprietorship set-up is less expensive because it lacks all the complexities of a corporation or a partnership.

The other advantage of a sole proprietorship is that of not filing a separate tax return and therefore in case of losses, the owner can reduce his tax liability by the amount of the loss (Ward pg 1)


The lack of separate legal status between the sole proprietorship and the owner will lead to unlimited liability in case of debts by the sole proprietorship and therefore the owners assets are subject to liability.

Another disadvantage is that of limited access to capital because it cannot issue shares in the stock market and even bank loans will require large collateral which the business may not have.


It is a legal association between two or more persons carrying out activities with the aim of making profits. A partnership is a legal entity and hence can enter in to contract etc. There are two forms of partnerships; the limited partnership and general partnership.

In the limited form, the liability of the partners is pegged on the amount contributed to the partnership. The limited partner can opt not to participate in the operations of the company.

The general partnership allows the liability of the partners to extend their personal assets also the general partner can participate in the operations of the partnership and hence can be held responsible for the operations of the partnership (Ward pg 2)


Partnerships are not required to file separate tax re turns and therefore saves on costs to the partners.

Liabilities are shared amongst partners and therefore no one single partner can mismanage the partnership because he knows he will bear the loss.


The main draw back of a partnership is the fact that the liability of the partners is unlimited in general partnership and limited to the amount contributed in limited partnership.


Natalie can opt for a sole proprietorship because it is easy to set up with less complicated operations. The initial start-up cost is also much lower as compared to corporation or partnership.

Accounting information

Yes. The accounting information she will require include the cost of offering the services to the customers, the cost of hiring extra staff to run the school and cost of premises (rent)

Natalie requires all these information because it will help her in decision making e.g. setting the price to charge per person or session so as to cover the costs.

The accounting information should be available regularly decisions need to be made in a timely manner.


Asset accounts

Appliances account- for recording the appliances used in the business.

Fees account- for recording the amount charged for the services.

Liabilities account

Creditors account –to record the items taken on credit

Equity accounts

Capital account- record amount injected in to the business

Income retained- amount of profits the business made


Need for separate bank account

Natalie will need a separate bank account. A separate bank account will be used to deposit cash from different sources apart from the business. It will be used to pay personal expenses.

The business bank account should be separate in that Natalie will want to determine how the business is performing and by combining the cash from her personal activities with that the business, it will be difficult to do so.

Journal entries

Date                details                                                  Dr                                Cr

Nov 11                        investment a/c-common stock             500

Bank account                                                             500

To record the investment in common stock

11             expenses a/c- brochures                       95

Bank a/c                                                                      95

To record payment of expenses

14              assets a/c-baking equipment                300

Capital a/c                                                                   300

To record the capital injected into the business

16              Bank account                                      2000

Notes payable                                                             2000

To record the receipt of cash from notes

17               Asset a/c- baking equipment               900

Cash- bank a/c                                                             900

25               Bank account                                      25

Income in advance                                                      25

To record the receipt of income in advance

29              Bank a/c                                              100

Income a/c                                                                   100

To record receipt of income

30              Asset a/c –website                              600

Expenses a/c- website design                                      600

To record the creation of website

30             Insurance prepaid                                1200

Bank a/c                                                                      1200

To record prepayment of insurance premiums



Common stock a/c- investment

Balance 500


Notes payable a/c

Bank a/c 2000

Baking asset- investment a/c

Capital a/c 300

Cash-bank 900


Capital a/c

Baking asset-investment a/c-300

Income in advance a/c

Bank a/c 25


Prepaid insurance a/c

Bank a/c 1200


Bank account

Notes a/c 2000                  common stock 500

Income in advance 25       expenses a/c-brochures 95

Income a/c 100                 baking assets 900

Prepaid insurance 1200




Expenses- brochures a/c                  

Bank a/c 95      website a/c 600



Income a/c

Bank a/c 100


Website a/c

Expenses a/c 600


Works cited


Ward S, 2007. Choosing a Form of Business ownership About Inc. retrieved on 15/1/2008 from


Alco Corporate Services, 2008 Types of Businesses retrieved on 15/1/2008 from