Businesses may all look the same when you look at
the building in which they operate, the employees they hire and the
product they sell. However, they can be very different when it comes to
their legal structure. The legal structure determines the type of entity
they are which in turn determines the rules that will be applied to
them. Here is a list of the types of entities and their relevance to
accounting.
Sole Proprietorship
Sole Proprietorship is when there is one owner of the business. The
owner does not need to register his firm with the government. The
proprietor has unlimited liability. The proprietor can withdraw funds
from the organization at will. This is called drawings. The proprietor
need not seek anybody’s permission before making such withdrawals.
Partnership
Partnership is when there are multiple owners of a business. The
partners may have a equal share of profit or loss or as decided amongst
them. Partners in profits only are also legally allowed. The partners
too have joint unlimited liability. Their withdrawals from the firm are
however controlled. They can withdraw money only to the extent decided
in the partnership agreement. If they require more than the above
amount, they may be required to attain explicit consent of the other
partners.
HUF
Hindu Undivided Family (HUF) is a type of entity which exists in
India only. It has a head of the business called the “karta” who has
decision making powers and unlimited liability. In a HUF, the rules for
the functioning of the organization are laid down by the “Karta”. These
rules include rules on drawings.
Joint Venture
Joint Venture is when two organizations come together for a specific
purpose. It is like a partnership, except for the fact that it is meant
to achieve a common purpose after which the parties to the joint venture
proceed their own way.
Corporations
The most common type of organizations today is corporations. This is
because corporations have limited liability. This feature helps their
owners separate the ownership and management of the business. There are
two types of corporations:
- Private Limited Corporation: A private limited corporation may not be required to disclose its information to outside parties.
- Public Limited Corporation: A public limited company solicits money and other resources from the general public and hence results pertaining to its performance must be made public.
Apart from the following there are co-operative organizations, not
for profit organizations etc. They too are different types of entities.
The type of entity has a profound effect on the accounting system of the
organization.
