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.
Corporation
Incorporating a business leads to a separate legal entity i.e. the company and its owners are two different persons.
Advantages
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.
Disadvantages
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
Advantages
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)
Disadvantages
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.
Partnerships
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)
Advantages
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.
Disadvantages
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.
Recommendation
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.
Accounts
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
Ledgers
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
http://sbinfocanada.about.com/cs/startup/a/formsbusiness.htm
Alco Corporate Services, 2008 Types of Businesses retrieved on 15/1/2008 from
http://www.alcoinc.com/Web/General%20Information/Types%20of%20Businesses.htm
