7 Types of Business in Accounting: A Guide for Entrepreneurs
Are you thinking of starting a business or expanding your existing one? If so, you need to know the different types of business in accounting. Accounting is the process of recording, summarizing, analyzing and reporting financial transactions of a business. Different types of business have different accounting rules and requirements. In this article, we will explain the 7 types of business in accounting and their advantages and disadvantages.
Sole proprietorship
A sole proprietorship is the simplest and most common type of business in accounting. It is a business owned and operated by one person, who is responsible for all the profits and losses. The owner does not need to register the business with the government or file separate tax returns. The owner can use his or her personal bank account and assets for the business.
The main advantage of a sole proprietorship is that it is easy and cheap to set up and run. The owner has full control over the business decisions and can keep all the profits. The main disadvantage is that the owner has unlimited liability for the business debts and obligations. This means that if the business fails or faces a lawsuit, the owner’s personal assets can be seized to pay off the creditors.
Partnership
A partnership is a type of business in accounting that involves two or more people who agree to share the profits and losses of a business. The partners can be individuals, corporations, trusts or other entities. The partners need to register the partnership with the government and file a separate tax return for the partnership income.
The main advantage of a partnership is that it allows the partners to pool their resources, skills and expertise to run the business. The partners can also benefit from each other’s network and reputation. The main disadvantage is that the partners have joint and several liability for the business debts and obligations. This means that each partner is liable for the entire amount of the debt, even if he or she did not cause it or benefit from it.
Corporation
A corporation is a type of business in accounting that is a separate legal entity from its owners, who are called shareholders. A corporation can have one or more shareholders, who own shares of the corporation’s stock. The shareholders elect a board of directors, who appoint managers to run the day-to-day operations of the business. The corporation needs to register with the government and file separate tax returns for its income.
The main advantage of a corporation is that it has limited liability for its shareholders. This means that the shareholders are only liable for the amount they invested in the corporation, and their personal assets are protected from the creditors of the corporation. The main disadvantage is that a corporation is subject to double taxation, meaning that it pays taxes on its income at the corporate level, and then its shareholders pay taxes on their dividends at the individual level.
S corporation
An S corporation is a special type of corporation that elects to be taxed as a pass-through entity, meaning that it does not pay taxes at the corporate level. Instead, its income, losses, deductions and credits are passed through to its shareholders, who report them on their individual tax returns. An S corporation can have up to 100 shareholders, who must be U.S. citizens or residents.
The main advantage of an S corporation is that it combines the benefits of a corporation and a partnership. It has limited liability for its shareholders, but avoids double taxation by passing through its income to them. The main disadvantage is that an S corporation has strict eligibility requirements and limitations on its ownership structure, such as not being able to have foreign shareholders or more than one class of stock.
Limited liability company (LLC)
A limited liability company (LLC) is a type of business in accounting that is a hybrid between a partnership and a corporation. It has one or more owners, who are called members, who can be individuals, corporations, trusts or other entities. The members can manage the LLC themselves or appoint managers to do so. The LLC needs to register with the government and file a separate tax return for its income.
The main advantage of an LLC is that it offers flexibility in its taxation and management structure. It can choose to be taxed as a sole proprietorship, a partnership, an S corporation or a C corporation, depending on what suits its needs best. It also has limited liability for its members, meaning that their personal assets are protected from the creditors of the LLC. The main disadvantage is that an LLC may have higher administrative costs and fees than other types of business in accounting.
Cooperative
A cooperative is a type of business in accounting that is owned and operated by its members, who share a common goal or interest. The members can be consumers, producers, workers or other stakeholders of the cooperative. The members elect a board of directors, who appoint managers to run the day-to-day operations of the business. The cooperative needs to register with the government and file a separate tax return for its income.
The main advantage of a cooperative is that it is based on the principles of democracy, equality and solidarity. The members have equal voting rights and share the profits and losses of the cooperative. The main disadvantage is that a cooperative may have difficulty raising capital and attracting investors, as it does not issue shares or pay dividends.
Nonprofit organization
A nonprofit organization is a type of business in accounting that is formed for a charitable, educational, religious, scientific or other public benefit purpose. It does not have owners or shareholders, but may have members, donors, volunteers or employees. The nonprofit organization needs to register with the government and file a separate tax return for its income.
The main advantage of a nonprofit organization is that it is exempt from paying federal income taxes, and may also qualify for state and local tax exemptions. It can also receive grants and donations from individuals, foundations and corporations, who may deduct their contributions from their taxable income. The main disadvantage is that a nonprofit organization has to comply with strict rules and regulations regarding its finances, governance and activities, and has to report its income and expenses to the public.
Types of Business in Accounting
Accounting is the process of recording, organizing, reporting, and analyzing the financial data of a business or organization. There are different types of accounting that serve different purposes and stakeholders. In this blog post, we will discuss three main types of accounting: financial, managerial, and cost accounting.
Financial Accounting
Financial accounting is the type of accounting that prepares financial statements for external users, such as investors, creditors, regulators, and tax authorities. Financial accounting follows the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS), depending on the country or region. Financial accounting aims to provide a fair and accurate picture of the business’s financial performance and position. Financial statements include the income statement, the balance sheet, the statement of cash flows, and the statement of changes in equity.
Managerial Accounting
Managerial accounting is the type of accounting that provides financial information for internal users, such as managers, owners, and employees. Managerial accounting does not follow any specific rules or standards, but rather focuses on the needs and goals of the business. Managerial accounting helps with planning, decision making, controlling, and evaluating the business’s operations and performance. Managerial accounting reports include budgets, forecasts, variance analyses, profitability analyses, and performance dashboards.
Cost Accounting
Cost accounting is the type of accounting that analyzes the costs of producing or providing goods or services. Cost accounting helps with determining the optimal level of output, pricing, product mix, inventory management, and cost control. Cost accounting uses various methods and techniques to allocate direct and indirect costs to different products, services, departments, or activities. Cost accounting reports include cost-volume-profit analyses, break-even analyses, product costing reports, and activity-based costing reports.
References:
http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00110.pdf
http://logica.ugent.be/albrecht/thesis/FOTFS2008-Heeffer.pdf
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.investopedia.com/terms/b/business.asp
https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
