Businesses may all look the same when you look at the building in which they operate, the employees they hire and the product they sell. However, they can be very different when it comes to their legal structure. The legal structure determines the type of entity they are which in turn determines the rules that will be applied to them. Here is a list of the types of entities and their relevance to accounting.
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Sole Proprietorship
Sole Proprietorship is when there is one owner of the business. The owner does not need to register his firm with the government. The proprietor has unlimited liability. The proprietor can withdraw funds from the organization at will. This is called drawings. The proprietor need not seek anybody’s permission before making such withdrawals.
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Partnership
Partnership is when there are multiple owners of a business. The partners may have a equal share of profit or loss or as decided amongst them. Partners in profits only are also legally allowed. The partners too have joint unlimited liability. Their withdrawals from the firm are however controlled. They can withdraw money only to the extent decided in the partnership agreement. If they require more than the above amount, they may be required to attain explicit consent of the other partners.
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HUF
Hindu Undivided Family (HUF) is a type of entity which exists in India only. It has a head of the business called the “karta” who has decision making powers and unlimited liability. In a HUF, the rules for the functioning of the organization are laid down by the “Karta”. These rules include rules on drawings.
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Joint Venture
Joint Venture is when two organizations come together for a specific purpose. It is like a partnership, except for the fact that it is meant to achieve a common purpose after which the parties to the joint venture proceed their own way.
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Corporations
The most common type of organizations today is corporations. This is because corporations have limited liability. This feature helps their owners separate the ownership and management of the business. There are two types of corporations:
- Private Limited Corporation: A private limited corporation may not be required to disclose its information to outside parties.
- Public Limited Corporation: A public limited company solicits money and other resources from the general public and hence results pertaining to its performance must be made public.
Apart from the following there are co-operative organizations, not for profit organizations etc. They too are different types of entities. The type of entity has a profound effect on the accounting system of the organization.
