Accounting for Business

Essay

Assignment Title: Types of Business Enterprises

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Introduction:
Entrepreneurs can create different forms of business organizations using sole traders,
partnerships and corporations for sustaining in the markets. The effectiveness of all these
business forms has been evaluated with rationality by giving proper examples in this essay. The
essay has also shown a comparison between two forms of share capital and two forms of long
term debts in terms of listed public limited companies in UK.

a) Why do think that three different types of business enterprise (sole traders, partnerships
and companies) exist? Use examples to illustrate your answer.

Not in UK but globally, there are different forms of business organizations such as sole traders,
partnership and corporations. According to the nature of capital and size of businesses, these are
categorized under the three forms. Sole traders are also called single ownership of businesses.
This refers to the process of initiating and running businesses with low amount of capital in a
local area(da Silva, Damian et al. 2012). The main purposes of this business form are to meet
local demands of people and gain profits through buying and selling of goods and services. The
main features of this business formation are having only one person in ownership, no or only one
service man, low amount of capital, higher risks and full profitability to owners. This type of
business organization exists for the simple initiation process, low amount of capital and tax
benefits etc.(Haldorai, Ramu et al. 2018) That means all the profits are received by owners and
low complexity of businesses. The business formation is chosen by many new entrepreneurs who
have low capital and wants to get business experiences initially. The liability of this enterprise is
large that is the main risk of the owner.

Another form of business is partnership that refers to the process of creating business agreements
between two or three entrepreneurs to do business what they chosen effectively. The members of
the businesses are called partners of the business. Some independent people work together by
sharing of capital, losses and profitability in terms of their agreements and partnership deeds
through partnership businesses. The main purpose of this business is to share of capital and
establish large scale of business enterprise. The business is locally owned and expanded into
overall territory of a country(Needle and Burns 2010). This can also be global and international.
The liability of this business is limited to partnership ownership but scope is large to every
partners. The main reason to establish this type of business is sharing of loss according to the
ratio of capital sharing of every partner. Entrepreneurs also choose this type of business for
having greater business concepts and ideas that lead to greater business expansion effectively.

Entrepreneurs also choose another form of business that is called corporations. This refers to the
process of starting of businesses by minimum numbers of entrepreneurs with large amount of
capital. This is attractive to owners for having limited liability. The business is fully separate
from its owners and having legal obligations. Entrepreneurs can raise their capital through share
issue and debenture issue(Nickels, McHugh et al. 2010). There are two types of corporations
such as public limited company and private limited company. Public limited company is
attractive to people as this can issue share to public to raise capital effectively. However, private
limited company cannot share issue to public(Segal 2011).

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b) Critically distinguish between two forms share capital and two forms of long-term debt
in the context of long-term sources of finance of listed public limited companies.

Distinctions between Common stock and Preferred stock:

Share capital is meant by the process of sourcing capital through the issuance of shares. The
shares can be issued by only public limited company for the purpose of raising capital for the
businesses. There are different forms of long term share capital sources like common stock,
preferred stock, perpetual stock and issued stock etc.(Nickels, McHugh et al. 2010) However, in
this section, the key differences between two forms of share capital such as common stock and
preferred stock have been outlined by the following table:

Common Stock Preferred Stock

This refers to the process of getting ownership This refers to the process of issuing shares to
of corporations by buying stock from some preferred investors in terms of fixed
company management. returns(Needle and Burns 2010).
The common stockholders get ownership The preferred stockholders do not get
certificate from company management. ownership certificate from company
management.
There is no limit of return of this type of share There is fixed return of this type of share
capital(Hotho and Champion 2011). capital.
The common stockholders get their return But preferred stockholders get their return after
after paying all debts and claims preferred paying debts immediately and before common
stockholders if any. stockholders payments.
The residual portion of net earnings is given The fixed rate return like 8% or 10% is given
to common stockholders(da Silva, Damian et preferred stockholders.
al. 2012).
Common stockholders have voting rights in Preferred stockholders have no voting rights in
the management. the management.

Distinctions between Debentures and Bonds:

However, for long term sources of finance, there are some forms of long term debts like
debentures, treasuries and bonds(Hatten and Hatten 2009). These have significant differences
those have been outlined by the following table:

Debentures
All debentures are treated as bonds by public
limited company(Needle and Burns 2010).
Debentures are not secured by the assets of
the issuing company.
Debentures are bought by the creditors on the
basis of creditworthiness and reputation of the
issuing company.
The rate of interest is higher
Debentures are issued by both private and
public limited companies(Hatten and Hatten
2009).
Bonds
But all types of bonds are not debentures.
Bonds are secured by the assets of the issuing
company.
But bonds are bought against the physical
assets supports of the issuing company(Hotho
and Champion 2011).
The rate of interest is lower.
Bonds are issued by governments and private
limited companies.

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Conclusion:
The main purposes of business form are to meet demands of people and gain profits through
buying and selling of goods and services. Both shares and debts are the main sources of funds for
corporations. For long term sources of finance, there are some forms of long term debts like
debentures, treasuries and bonds.

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References:

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da Silva, L. A., et al. (2012). "Process management tasks and barriers: functional to processes
approach." Business Process Management Journal.

Haldorai, A., et al. (2018). Social Aware Cognitive Radio Networks: Effectiveness of Social
Networks as a Strategic Tool for Organizational Business Management. Social network analytics
for contemporary business organizations, IGI Global: 188-202.

Hatten, T. S. and T. S. Hatten (2009). Small business management: Entrepreneurship and

beyond, Houghton Mifflin Boston.

Hotho, S. and K. Champion (2011). "Small businesses in the new creative industries: innovation
as a people management challenge." Management Decision.

Needle, D. and J. Burns (2010). Business in context: An introduction to business and its
environment, South-Western Cengage Learning Boston.

Nickels, W. G., et al. (2010). Understanding Business 9th ed.

Segal, S. (2011). Corporate value of Enterprise risk management: the next step in business
management, John Wiley & Sons.