Partnerships vs. Corporations Essay Example

There are various types of business ownership structures. The basic types include sole proprietorship, partnership, private corporation, and limited liability company. Entrepreneurs have to consider differences in each category before selecting a preferred structure. Choosing the right company structure can have far-reaching implications for an enterprise. Prospective business owners have to evaluate the elements of accounting in each type to understand critical aspects that may affect operations. Some of the issues to consider include tax requirements, capacity to raise funds, and liability concerns. There are aspects of accounting that differ in partnerships and corporations. Understanding differences in financial accounting elements provide insight on how businesses ought to operate, terms of continuity, and transferability of ownership interests.

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A partnership refers to a business owned and operated by two or more people. It occurs when two or more people combine efforts to establish a business organization. A partnership cannot exceed a maximum of twenty people. The primary purpose of partners joining hands is to put resources together with the goal of earning profits from the venture ("Lesson 7 Partnership," n.d.). Depending on the agreements reached, business partners are responsible for raising the required capital to fund the enterprise, managing the business together as well as sharing responsibilities. The structure of the firm allows all or any of the partners acting for all to run operations ("Lesson 7 Partnership," n.d.). Entrepreneurs who prefer this structure make their decisions based on its advantages including ease of formation, risk sharing, and flexibility. Thus, it is a viable structure for setting up a business establishment.

During the inception of the firm, partners need to evaluate and determine the amount of capital required to start the business and keep it operational. Agreeing on initial investment is a crucial accounting decision that parties involved ought to consider ("Lesson 7 Partnership," n.d.). Partners may have to contribute a specified figure or percentage of capital depending on the size and needs of the organization. In most cases, each person provides finances that go into setting up the business. However, in other scenarios, partners can offer different resources. A good example is where one contributes money while another provides a piece of land. In such cases, accounting helps determine the value to ensure that parties involve draft an agreement that is accurate. A partnership agreement document with proper valuations can help resolve disputes that may arise later.

Partnerships need to establish a clear, specific profit and loss sharing ratio depending on the agreement reached between the partners. Financial accounting knowledge is critical at this stage to ensure that parties involved receive a fair amount of compensation based on the firm's performance. The ratio for sharing profits may vary depending on variation in each member's contribution at the start of the business ("Lesson 7 Partnership," n.d.). Similarly, should the enterprise incur losses, the members have an existing framework that guides how to share them. Accounting skills in partnerships can help in determining salaries or commissions payable to the partners. Deducing the correct figures is vital to avoiding unnecessary disputes that may come up due to dissatisfaction. Thus, knowledge is valuable in creating accurate financial records.

Tax exposure in partnerships is lower compared to other company forms of business structures. The taxation rates in this type are relatively fair. Organizations have to report their income for taxation purposes. However, they enjoy an exception as the business does not pay tax on earnings. Based on the partnership agreement, profits from the firm go directly to the partners. The income appears on every partner's tax returns. Taxation occurs on the proportion of benefits received from the partnership ("General Partnerships," n.d.). Business people need to understand the aspects of financial accounting that differentiate partnership tax rates from other types of business structures. Apart from the tax element, financial accounting helps determine individual accountability for the firm's debts.

A corporation is a legal entity that is separate from its owners. Business owners of a corporation are known as shareholders. Apart from its stakeholders, it comprises of directors and other officers who carry out various duties. A corporation has distinct rights and liabilities. For instance, a shareholder's debt is equal to the amount invested in the business enterprise ("Nature of Corporations," 2012). Thus, as a legal entity, it offers increased protection for the stockholders. Rules that guide formation of corporations dictate that entities should register with the relevant authority. There are various classifications of corporations namely stock and non-stock. Stock corporations are profit-oriented entities that can give out shares to source for capital while non-stock cannot trade shares in public stock exchange.

While stockholders own corporations, boards of directors are in charge of operations. Earnings generated by the organizations go to the individual shareholders as agreed in the articles of incorporation. Financial accounting knowledge is applicable in evaluating the benefits of adopting either form of corporation. Private corporations contend with double taxation. While the firm pays taxes as a legal entity and its stockholders, face taxation on dividends earned. An S corporation, on the other hand, does not pay taxes twice ("Corporations," n.d.). Taxation at the corporate and shareholder level negatively impacts the finances of an organization. Thus, it is essential to understand the tax obligations of different formats.

Awareness of the various factors involved when deciding on available options for raising capital is crucial. Corporations can raise funds by selling ownership stakes to interested buyers. Sales occur when companies offer stock options. There is a need for financial accounting to determine stock prices when firms opt to source for capital. Corporations can offer to sell shares at different times. Some may choose to sell stakes at the inception period while others hold Initial Public Offerings (IPOs) later on as in the life of the corporation("Corporations," n.d.). Financial accounting plays a critical role in determining the volume of shares that a company can issue and the appropriate price margins based on valuations.

Compared to other business entities, there is a higher level of regulation by various relevant authorities that govern the conduct and operation of corporations. Thus, owners have to ensure accurate recordkeeping of financial dealings. Detailed paperwork minimizes clashes and interference from federal and state agencies. Therefore, corporations rely on proper accounting to meet documentation and file keeping requirements. Besides governmental regulation, corporations incur a lot of expenses in terms of start-up, operating, and tax costs ("Corporations," n.d.). Therefore, there is a need to keep track of the various expenditures through financial accounting.

Conclusion

Overall, businesses rely on financial accounting services to ensure efficient operation. Information obtained from financial accounting can impact significant business decisions. For instance, entrepreneurs can select a type of business structure to use depending on the effect it will have on company finances. It is essential to have precise knowledge of details such as tax obligations and methods of arriving at ratios for sharing losses or profits. Accounting also influences decisions such as prices for selling shares to raise capital for a firm. Thus, understanding differences in financial aspects of partnership and corporation structures is a source of insight on how various businesses operate.

References

Corporations. (n.d.). Retrieved from https://law.richmond.edu/academics/clinics-skills/in-house/ip-clinic/pdf/business-corporation.pdf

General Partnerships. (n.d.) Retrieved from https://law.richmond.edu/academics/clinics-skills/in-house/ip-clinic/pdf/business-general-partnership.pdf

Lesson 7 Partnership. (n.d.). Retrieved from http://old.nios.ac.in/Secbuscour/cc07.pdf

Nature of Corporations. (2012). Retrieved from http://www.cengage.com/resource_uploads/downloads/0538473630_285622.pdf