As you will see shortly, the business entity concept applies to the three forms of businesses—single proprietorships, partnerships, and corporations. Thus, for accounting purposes, all threebusiness forms are separate from other business entities and from their owner(s). Since most largebusinesses are corporations, we use the corporate approach in this text and include only a briefdiscussion of single proprietorships and partnerships.A single proprietorshipis an unincorporated business owned by an individual and oftenmanaged by that same person. Single proprietors include physicians, lawyers, electricians, andother people in business for themselves. Many small service businesses and retail establishmentsare also single proprietorships. No legal formalities are necessary to organize such businesses, andusually business operations can begin with only a limited investment.In a single proprietorship, the owner is solely responsible for all debts of the business. Foraccounting purposes, however, the business is a separate entity from the owner. Thus, singleproprietors must keep the financial activities of the business, such as the receipt of fees fromselling services to the public, separate from their personal financial activities. For example, ownersof single proprietorships should not enter the cost of personal houses or car payments in thefinancial records of their businesses.A partnershipis an unincorporated business owned by two or more persons associated aspartners. Often the same persons who own the business also manage the business. Many smallretail establishments and professional practices, such as dentists, physicians, attorneys, and manyCPA firms, are partnerships.A partnership begins with a verbal or written agreement. A written agreement is preferablebecause it provides a permanent record of the terms of the partnership. These terms include theinitial investment of each partner, the duties of each partner, the means of dividing profits or lossesbetween the partners each year, and the settlement after the death or withdrawal of a partner. Eachpartner may be held liable for all the debts of the partnership and for the actions of each partnerwithin the scope of the business. However, as with the single proprietorship, for accountingpurposes, the partnership is a separate business entity.A corporationis a business incorporated under the laws of a state and owned by a fewstockholders or thousands of stockholders. Almost all large businesses and many small businessesare incorporated.The corporation is unique in that it is a separate legal business entity. The owners of thecorporation are stockholders, or shareholders. They buy shares of stock, which are units ofownership, in the corporation. Should the corporation fail, the owners would only lose the amount1When first studying any discipline, students encounter new terms. Usually these terms are set in bold. The boldface color terms are also listed and defined at the end of each chapter (see Key terms).