Business entity

 Definition:A business entity A business entity is a commercial organisation that aims to

make a profit from its operations.
 Characteristics of business All businesses share certain characteristics.
 Businesses exist to make profits.
 Businesses make profit by supplying goods or services to others (customers).
 Businesses that supply goods might make those goods or buy them from other parties (for
example, food retailers buy food off food producers and sell it to their customers).
 Profit is the reward for accepting risk
 The profit of a business belongs to its owners.
Main types of business entity

 a sole proprietorship
 a business partnership
 a company (a limited liability company).
A sole proprietorship

 The business of a sole trader is owned and managed by one person. Any individual, who
sets up in business on his/her own, without creating a company, is a sole trader
 There is no legal distinction between the proprietor and the business. It means
 The owner of the business is personally liable for any unpaid debts and other obligations of
the business.
 The profits of a sole proprietor business are treated as income of the owner, for the purpose
of calculating the amount of tax payable on income.
 The proprietor is wholly liable for the debts of the business, borrowing money in his/her own
name.
contd

 When a sole proprietor dies the business ceases to exist (there is no perpetual succession
as the business does not exist independently of the owner).
 The profits of the business belong to the sole proprietor.
 The assets of the business belong to the sole proprietor.
 The sole proprietor can extract cash and other assets from the business (known as
drawings).
 The business may be financed by a mixture of owner's capital and loans
Partnership

 Def:A business partnership is an entity in which two or more individuals (partners) share the
ownership of a business. Each partner contributes funds (‘capital’) to set up the business.
 Important features of a partnership are as follows:
  There must be an association of two or more persons to carry on a business.
  The owners of the business are personally liable as individuals for the unpaid debts and
other obligations of the business.
  The profits of a partnership are shared between the partners in an agreed way, and each
partner’s share of the profits is treated as personal income, for the purpose of calculating the
amount of tax payable on his or her income.
  When a partner dies the partnership comes to an end (there is no perpetual succession).
contd

  The profits of the business belong to the partners in an agreed ratio.  The assets of
the business belong to the partners in an agreed ratio.
  The partners can extract cash and other assets from the business (known as drawings).
  The business may be financed by a mixture of partners' capital (including retained
earnings) and loans.
  A partnership might employ many people but it is usual for the partners to take a very
active role in the business exercising a high degree of control.
  A partnership can be sold as a going concern by its owner.
Company (limited liability company)

 A company is a special form of business entity. Nearly all companies in business are limited
liability companies with liability limited by shares.
  Ownership of the company is represented by ownership of shares.
  A company might issue any number of shares, depending largely on its size. A large stock
market company will have millions of shares in issue.
  If a company has issued 100 shares, ownership of 40 shares would represent 40% of the
ownership of the company.
  Large companies usually have a large number of shares in issue, and a large number of
shareholders. This means that the owners (the shareholders) do not manage the business.
Managers are employed (the executive directors of the company) to run the company on behalf
of the shareholders. This is sometimes referred to as the ‘separation of ownership from control’.
contd

 Unlike a sole trader or a partnership, a company has the status of a ‘legal person’ in law.
  A company can be the legal owner of business assets, and can sue or be sued in its own
right in the law.
  A company is also taxed separately from its owners (the profits of a sole trader and
business partners are taxed as personal income of the business owners).
  A company is liable for its own debts. The liability of shareholders is limited to the
amount of capital they have invested or agreed to invest in the company.
Purpose of financial accounting (reporting)

 When the shareholders are not the managers of their company, it becomes essential that
information about the position and performance of the company should be reported
regularly by the management to the shareholders. This is the main purpose of financial
accounting (reporting).
END