ACTG 11 Chapter 1 Lecture Notes.doc - Chapter 1 Notes 1...

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Chapter 1 Notes 1. Types of Business Entities (Supplement A) o Not for Profit: Charities, Municipalities, Schools o For Profit: Sole Proprietorships, Partnerships, Corporations o Accounting is done for each entity, don’t mix owner’s individual transactions. 2. Sole Proprietorship o unincorporated business that is owned, and usually managed, by only one person o only the sole proprietor receives all income or loss, and is liable for all business obligations 3. Partnership o unincorporated business that is owned by two or more persons o actions of any partner obligate the partnership as a whole o Income is divided between partners in some equitable manner o Law firms, dentists, are common examples of partnerships 4. Similarities between Sole Proprietors/Partnerships o owners have unlimited liability for business debts, meaning the personal resources of the owner(s) are available to pay off business obligations o easy to form, commonly used for small businesses o require clear distinction between the transactions of the business and the owner(s) o the business and the owner are one and the same for legal purposes, meaning the life of the entity is typically tied to the ongoing participation or life of the owner. If an owner dies, it often times means the sole proprietorship, or partnership, is altered, or even ended. o are not subject to income taxes, rather income is taxed on the owner(s) personal income tax return 5. Corporations o Ownership in corporations is evidenced by shares of stock. Each share represents a fractional interest in the company. If there are 100 shares of stock, and you own 1, you own 1% of the company. o If shares of stock for a corporation are traded on a stock exchange (i.e. available to anyone who wishes to be an owner) then the company is said to be “publicly” owned or traded. o If shares of stock for a corporation are only available to private investors (i.e. venture capitalists, founders, etc.) and are not traded on a stock exchange, then the company is said to be “privately” owned. o When a “private” company decides to go “public” it sells shares of stock to the general public for the first time, called an Initial Public Offering (IPO). Thereafter its shares are traded on a stock exchange and available to anyone who wishes to buy or sell them. o Public companies sometimes go “private”, by buying up all the outstanding shares of their stock. 6. Characteristics of Corporations o Owners (called Shareholders, or stockholders) have limited liability . They are liable for the company’s debts only to the extent of their investment o Continuity of Life . A corporation’s existence continues on, though the individual owners of the corporation may change. o Ownership is easily transferred , via the sale of shares of stock.

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