Question

In: Accounting

i) Discuss the differences that exist between the three types of service entities.

i) Discuss the differences that exist between the three types of service entities.

Solutions

Expert Solution

The three types of business/ service entities are as follows;

1. Sole Proprietorship

2. Partnership ( General and Limited )

3. Corporation

The differences between each of the entity models is explained as follows:

(Note : Advantages of one entity type will become dis-advantages for other entity type)

1. Sole Proprietorship:

This type of service entity is simple to run by an sole individual for his own benifit.they dont have separate legal existence or ownership apart from the sole individual i.e. the individual is solely responsible for all the deeds and liabilities without any separate existence to the business. Since it is carried on by a sole person the activities are usually small in scale compared to other entities.All his personal assets will be liable for the business.

Advantages and Dis-advantages:

1.Ease of exist at the will of the owner

2.Minimum legal procedures and ease of doing business

3.Difficulty in raising capital apart from his investment

4.Unlimited liability even though he employs part of his investment

5.simplest form of running the businness with no restrictions and procedures.as the owner is the boss making all the decisions , enjoying all profits and liable for all losses and debts.

2.Partnership (General and Limited)

Partnership is a form of businnes / service entity where their will be an agreement between 2 or more partners whether expressed or implied who have joined together to carry on a business venture or services for profit.All the partners will contribute capital , time , skills , labour and share the profit and loss equally or as per the agreement.Each partner has unlimited liablity toward the business expect in case of limited liablity partnership .LLP is a new form of partnership recognised by the statutory authorities to remove the difficulties in partnership.

Advantages/disadvantages :

1. More capital can be raised compared to sole proprietorship

2.Unlimited liablity among the partners

3. Large scale operatons can be carried out compared to sole proprietorship as their are greator resources for decision making , support and creativity towards business

4.the partners can share the responsiblities among themselfs which speeds up the operations and ease of doing business

3. Corporations

All the disadvantages of partnership can be avoided by establishing a corporation,

A corporation is a separate legal entity govered by the statue with a legal name and scope of activities . All the members of the entity should act as per the Articles of Association and Memorandum of the entity. The members have limited liablity restricted to their capital contribution

Advantages / Disadvantages:

1. Separate legal entity exist to the company , the members can enter contracts on the name of the company and company will be liable for all deeds and acts of its members

2. Large capital can be raised and large scale operations can be carried on with ease of expansion and greater capacity to raise capital by public issue

3.Transfer of ownership among the members and has higher liquidity can sell their shares when desired if there is a market

4.Perpectual life as the shares can be transfered to easily to their heirs,

5.More procedural aspects and huge costs of incorportion and legal duties compared to other forms of entities

Apart from these the service entities can run as trusts, Non profit organisations if they are not for profit in Service


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