Various forms of business units

You are a semi senior member of staff at the Accounting firm “Turpin, Barker and Armstrong based in Sutton. You have been appointed to deal with a pair of new prospective clients who have inherited quite a substantial sum of money from their grandfather’s will.These two are brothers want to set up a business but have no knowledge as to what type of business they want to get into let alone the form of business entity available to them

1. As a Semi-Senior member of the accounting staff, you are required to write a report to be delivered by your firm to these brothers explaining the issues below:

2. Explain the different forms of business units(sole proprietorship, partnership, limited company) available, highlighting the benefits and limitations of each?

3. Explain financial accounting and management accounting, highlighting the differences between the two strands of accounting ?

4. Assuming that you have not been given any information about the inheritance of the brothers. Explain the sources of finance available to a business owner, looking at Short-term sources, Medium-term sources and Long-term sources of finance giving examples of each.?

The phrase management accounting means the skill of constructing the information of management and the fiscal reports which presents the specific and apposite economic and precise data essential by the members of the board of the firm to take squat tenure decisions (Jagels, Coltman and Coltman, 2004).

The term financial accounting means the skill which shows the yearly report for the stock holders of the firm for example the balance sheet of the entity and the statement of income of the entity. The data’s which are set by the company for the investors of the entity, the department of tax of the entity and also for the stake holders of the entity.

The research analyst analyzed from this research that the various categories of business units reachable in the corporate market and the conception of financial accounting and the notion of management accounting (Robbins and Coulter, 2005).

Sole Proprietorships:

An industry which is operated by an individual is known as the sole proprietorship firm. It is one of the ordinary and simplest types of a business. In this form of business the industry is able to manage a number of persons in relation to the concern business but as far as the proprietorship of the company are concerns it has to be one  and specific. This kind of entrepreneurship is quite easy to establish and the entire amount of the profit can be enjoyed by the owner  himself subject to some exceptions (Daily, 2008).

Procedure for formation of sole proprietorship business:

In a comparison to the other form of business, establishment of this form of business is very easy. At the primary level if a person would like to start a company then that person can establish a sole proprietorship company. For the purpose of establishment and controlling no special kind of license is necessary for the proprietor. In case of a sole proprietary business, it can be dissolved when the owner would like to dissolve it, it totally depends upon the will of the owner whether he would like to conduct the business procedure or not (Baldwin, Rispoli and Leung, 2011).

Advantages and disadvantages of partnership business

In comparison to the other industry a sole proprietary business has a lot more merits. A sole proprietary company acquires special advantages as to tax benefits as well as its operational field. Simple way of constructing the company is one of the major operational benefits of the sole proprietary companies. In this kind of companies the owner runs the business single handedly and looks after all the factors relating to the conducts of the business.

In case of a sole proprietary company, payment of diverse tax is not essential, the taxable amount depends upon the total gain of the company and it is filed by the income tax form of the concern owner himself (Batten, 2011).

In comparison to other industries, operational demerits and demerits relating to the liability of the company exists in a vast manner. One of the main disadvantage of this form of business is the owner of the business is liable for the liabilities of his business, it is possible that in spite of dissolving the business the owner have to discharge the liabilities of the business at his own responsibility (Harden, 2011).

Another demerit of this kind of business is that the owner cannot include in the concern business another owner then that will not remain as the sole proprietorship business any more. If the owner of the business is not so well capable in relation to the conducts of the business then it is possible that the business may run on loss as the operational functions of the business mainly depends upon the credential of the owner of the concern business.

This form of business dissolves at the will of the owner, whenever the owner of the business would like to stop running the business then the business dissolves itself.

If two or more person together takes an initiation to form a business jointly with an object of sharing profit or loss among them, then it will be considered as the partnership business. The persons who jointly establish the company are known as the partners of the concern company (Weiss, Serlis-McPhillips and Malafi, 2011). The partners of a partnership business are responsible to introduce the required capital in the business as specified proportionate and they may distribute the workload of the business among them. At the time of opening a partnership company the owners or the partners have to make sure some of the necessary decisions, like the proportion of profit or loss, amount of capital and it proportions among them, their post and role in the conduct of the business and many other major and minor factors are to be decided by the partners. To avoid conflicts and for the purpose of legal enforceability a partnership agreement as to the business is formed by the partners where all the necessary terms and conditions in relation to the partnership business in clearly mentioned, in this agreement it is also mentioned that if one partner dies what will be the future aspect in this regard. By virtue of the terms of the agreement partners used to control the conduct of the business, this agreement is known as partnership deed, it must be in writing instead of oral agreement for avoiding future ambiguities (Gage, 2004).

1. More than one member: In a partnership form of business there must be at least two members but this number of two members may be increased. In this form of business two or several persons jointly construct the business and run the business with an object of earning profits. These persons are known as the partners of the business (Biech, 2007).

Advantages and disadvantages of limited liability company (LLC)

2. Partnership deed: In a partnership business there must be an agreement among the partners of the concern business where all the necessary terms and conditions relating to the partnership of the business are mentioned, this agreement is known as the partnership deed (Pelle, 2007).

3. Legality: In a partnership business the subject matter of the business and the conduct of the business must be lawful, and no illegal work is permissible within the scope of a partnership business. All the partners of the business are lawfully bound under the partnership deed (Jasper, 2001).

4. Competency of partners: For the purpose of entering into a partnership agreement as well as a partnership deed the partners must be competent to contract like the partners must have attained the age of maturity, is of sound mind and enough capable of understanding the terms and conditions of the partnership deed.

5. Distribution of profit or loss: In a partnership business all the partners are entitle to share the profits of the business in accordance to the terms of the partnership deed and in absence of any such term in the partnership deed then all the partners are entitle to share the profits equally. In case of a loss in the business all the partners are liable to share such loss in accordance to their proportion into the profit of the business.

In a partnership business, capital introduction is quite easy as it is introduced by several partners in a proportion. Operational functions are also very business friendly in nature. Risks and liabilities of the business get low as it is distributed among all the partners (Cavusgil, Knight and Riesenberger, 2012).

There are some demerits in this form of business like there is no limitation as to the debt of the partnership firm. There is possibility of lack of efficiency from the partners. The process of profit shifting is very rigid in nature. There is no assurance of the future existence of the partnership business (Kimmel, Weygandt and Kieso, 2011).

The establishment of incorporation that confines the entire measure of accountability should be underneath unease of the stockpile holders of the business. The explanation of this type of establishment of a commercial company is adept in the European nations. It is usually famous in name of Limited Liability Company. Subsequently, this type of business is recognized as Liability Company (Clayton, 2008).

In the corporate sector there are two kind of limited company exists namely private limited company and the other one is public limited company. The virtual scope of limited companies is very vast, even a lot of limited companies are running from more than one generation.

For the purpose of establishing a limited company the initiators have to register the name of the company with the House of Companies in accordance to the company laws of the nation. The registration of the company falls under the Companies Act 2006. In 21^st century there are more than a couple of million companies within the territory of Europe. According to the provisions of the Companies Act 2006 every company must have at least one director and one company secretary (Hannigan, 2009).

Financial accounting and management accounting

The scope of the limited companies is very vast and the conducts of the limited companies are quite prompt. It does not get dissolved by the wish of the directors but it has a separate legal entity in the eyes of the law.

The procedure for establishment of a limited company is quite difficult in comparison to other form of companies. In this kind of business huge amount capital is needed which may put a hurdle in the formation of the company. Limited companies influence CENVAT in the field of legislations. 

The term management accounting consist the method of constructing the information of financial records and management that assists the administrators in taking short term decisions by taking into consideration such suitable information (Hamada, 2010). 

Financial accounting means a method that shows the financial condition of a company for a specific period of time, for example, balance sheet, manufacturing account, P/L account etc.

Management accounting helps the administrators to take short term decisions and it comprises the part of financial accounting of the company itself but financial accounting helps the company in analyzing the financial condition of the company and the amount of profit or loss earned by the company in a financial year.

3: In accordance with the character of the foundation of finance, they are chiefly categorized as inner resource and outer resource. However, they are also classified as a short tenure resource of finance, intermediate tenure resource of finance and lengthy tenure resource of finance.

Short tenure resources of finance are obtainable merely for a single year. Likewise, intermediate tenure resources of finance are obtainable for trade up to five consecutive years and lengthy tenure resources of finance are obtainable for a term of more than five years.

Private resources of finance are able to be classified in accordance with either of three of the above specified heads. On the other hand, regular share capital is the most important lengthy tenure resource in the field of finance. Additionally, bank loan, venture capital, and loan capital are too measured as the lengthy tenure resource of finance. Then again, numerous loan capitals also considered as the intermediate tenure resource of finance. Yet again, one of the major short tenure resources of finance is bank overdraft.

Whilst taking into consideration any resources in relation to finance whether it is short tenure, intermediate tenure or lengthy tenure, there desires to mull over the lawful construction of the trade association resembling whether it is Limited or Private Limited Company. For instance, Limited and Private Limited Company are able to sell their shares, but sole proprietors; even business of partnership firm is unable to do this. Hence, depending upon the lawful construction of the industry, the resources of finance might be altered.

Likewise, the utilization of finance also shows what type of resource desires to be utilized. For instance, for establishing a fresh business the proprietor must go for lengthy tenure resource of finance. Additionally, the revenue level points out what type of resource of finance have to be used. In this context, the echelon of hazard or risk enchanting competencies, inclination of the proprietors, the echelon of sum necessary mostly influence the accessibility of the resources of finance.

Conclusion:

In this context various forms of business and their advantages as well as disadvantages has been highlighted. Apart from that the purpose of management accounting and financial accounting is also been discussed with the assistance of various references.

Every form of business has some merits and some demerits, the trader should take into consideration of the business he is looking for and should take necessary adaptions for encountering demerits of the business.

References:

Baldwin, J., Rispoli, L. and Leung, D. (2011). Labour productivity of unincorporated sole proprietorships and partnerships. Ottawa, Ont.: Statistics Canada, Economic Analysis Division.

Batten, D. (2011). Gale encyclopedia of American law. Detroit, Mich.: Gale.

Biech, E. (2007). The business of consulting. San Francisco: Pfeiffer.

Cavusgil, S., Knight, G. and Riesenberger, J. (2012). International business. Upper Saddle River, N.J.: Prentice Hall/Pearson.

Clayton, P. (2008). Forming a limited company. London: Kogan Page.

Daily, F. (2008). Tax savvy for small business. Berkeley, CA: NOLO.

Gage, D. (2004). The partnership charter. New York: Basic Books.

Hamada, K. (2010). Business group management in Japan. Singapore: World Scientific.

Hannigan, B. (2009). Company law. Oxford: Oxford University Press.

Harden, B. (2011). The adviser’s guide to S corps, C corps, partnerships, LLCs, and sole proprietorships. New York: American Institute of Certified Public Accountants.

Jagels, M., Coltman, M. and Coltman, M. (2004). Hospitality management accounting. Hoboken, N.J.: J. Wiley.

Jasper, M. (2001). Law for the small business owner. Dobbs Ferry, N.Y.: Oceana Publications.

Kimmel, P., Weygandt, J. and Kieso, D. (2011). Accounting. Hoboken, N.J.: Wiley.

Pelle, S. (2007). Understanding emerging markets. New Delhi: Response Books.

Robbins, S. and Coulter, M. (2005). Management. Upper Saddle River, NJ: Pearson Prentice Hall.

Weiss, L., Serlis-McPhillips, S. and Malafi, E. (2011). Small business and the public library. Chicago: American Library Association.