Video Transcripts: Forms of Business Organizations

Hello and welcome back now we're going to discuss the forms of business.  Accountants frequently refer to a business organization as an accounting entity  or a business entity. A business entity is any business organization, such as a  hardware store, a grocery store that exists as an economic unit for accounting  purposes. Each business organization or entity has an existence separate from  its owner, its creditors, employees, customers and other businesses the  separate existence of the business organization is known as the business entity  concept. Thus, in the accounting records of the business entity, the activities of  each business should be kept separate from the activities of other businesses  and from the personal financial activities of the owner. Assume, for example,  that you own two businesses, a physical fitness center and a horse stable.  According to the business entity concept, you would consider each business as  an independent business unit. Thus you would normally keep separate  accounting records for each business. Now assume your physical fitness center  is unprofitable because you are not charging enough for the use of your  exercise equipment. You can determine this fact because you are treating your  physical fitness center and your horse stable as two separate business entities.  You must also keep your personal finance activities separate from your two  businesses. Therefore you cannot include the car you drive only for your  personal use as a business activity of your physical fitness center or the horse  stable. However, the use of your truck to pick up feed for your horse stable is a  business activity of that horse stable business. The four the types of businesses. One is a single proprietorship. It's an unincorporated business owned by an  individual and often managed by that same person. Single proprietors include  physicians, lawyers, electricians and other people in business for themselves,  many small service businesses and retail establishments are also single  proprietorships. No legal formalities are necessary to organize such businesses, and usually businesses operations can begin with only a limited investment in a  single proprietorship, the owner is solely responsible for all the debts of the  business for accounting purposes. However, the business is a separate entity  from the owner. Remember to always keep it separate from yourself. The single  proprietors must keep the financial activities of the business, such as receipt of  fees for selling services to the public, separate from their personal financial  activities. For example, owners of single proprietorship should not enter the cost of personal houses or car payments in the financial records of their business. A  partnership is an unincorporated business owned by two or more persons  associate associated as partners, often the same person who persons who own  the business also manage that business. Many small retail establishments and  professional practices such as dentists, physicians, attorneys and many CPA  firms are partners. A partnership begins with a verbal or written agreement. A  written agreement is preferably, is preferable because it provides a permanent  record of the terms of the partnership. However, you can have a verbal 

agreement with a partnership. You can have unlimited arrangements in the  agreement. These terms include the initial investment of each partner, the duties of each partner, the means of dividing profits or losses between the partners  each year and the settlement after the death or withdrawal of a partner, each  partner may may be held liable for all the debts of the partnership and for the  actions of each partner within the scope of business. However, as with a single  proprietorship for accounting purposes, the partnership is a separate business  entity. A corporation is the third form of business, and it is a business  incorporated under the laws of a state and owned by a few stockholders, or  1000s of stockholders. Almost all large businesses and many small businesses  are incorporated. The corporation is unique in that it is separate. Is a separate  legal business entity. The owners of the corporation are called stockholders, or  shareholders. They buy shares of stock, which are units of ownership in that  corporation. Should the corporation fail, the owners would only lose the amount  they paid for their stock the corporation, form of business protects the personal  assets of the owners from the creditors of the corporation. Stockholders do not  directly manage the corporation. They elect a board of directors to represent  their interests. The Board of Directors, select the officers of the corporation,  such as the president, the vice president, who manage the Corporation for the  shareholders or stockholders, accounting is necessary for all three forms of  business organizations, and each company must follow generally accepted  accounting principles, or in other words, GAP, as we call it, since corporations  have such an important impact on our economy, we use them in this text to  illustrate basic accounting principles and concepts.