Three Main Types Of Business Organisations

Published Date: 02 Nov 2017

A Sole trader is a business started and run by one individual who provides the capital. It is easy to set up and operate. There are no formal procedures in establishing a sole trader business. The main legal obligation is that you must register as a self-employed person with the Revenue Commissioners. If you wish to use a business name instead of your surname, you must register your business name with the Companies Registration Office in accordance with the Registration of Business Names Act of 1963.

As sole traders and businesses are not recognised as separate legal entities sole traders have unlimited liability for its debts but profits go entirely to the owner. A sole trader is not required to register accounts apart from the usual PRSI and income tax requirements, and therefore confidentiality is maintained.

A Partnership is an association of two or more persons engaged in a business enterprise in which the profits and losses are shared equally.

Like sole traders they are easy to establish as they are subject to fewer regulations relative to other types of businesses. While not a legal requirement partnerships can have written contracts to deal with certain issues such as financing and how profit and losses are divided. Where a partnership does not have a partnership agreement in place the Partnership Act 1890 as amended by the Limited Partnership Act 1907 applies. Laws are similar to Sole Traders as partners in a partnership have unlimited liability. However, Limited Partnerships is where one or more partners limit their liability to the amount they have invested in the partnership. Limited partners cannot take part in the management of the business. Like sole traders, partnerships are not required to provide accounting information.

A Limited Company is classified in law as a separate legal entity from its owners or shareholders. This means shareholders of a limited company have limited liability from all the debts of the company, unless a bank requests a personal guarantee.

Limited companies can take two forms,

A Public Limited Company has "Public Limited Company" or "Plc." in its name. It sells shares to the public on a stock exchange. The Company must have a minimum of 7 shareholders and have authorised share capital in excess of €30,000 in Ireland. Examples of public limited companies include Glanbia plc. and Kerry Group plc.

A Private Limited Company has "Limited" or "Ltd." in its name. It does not sell its shares to the public. The maximum number of shareholders it can have is 50. Examples of private limited companies include Tara Mines Ltd. and BWG Ltd.

To establish a limited company, two documents, the Memorandum and Articles of Association must be filed with the Registrar of Companies. The Memorandum must be signed by the directors and state the company name, registered office, share capital and company objectives. A Certificate of Incorporation is necessary before trading can commence.

In preparing accounts, financial statements of limited companies must be prepared in accordance with the regulatory framework. Limited companies are required to subject their financial statements to an independent audit. This accounting firm examines the books and financial statements of a company on an annual basis to ensure that the accounts present a true and fair view of the financial well being of the company. It also ensures that all the relevant accounting regulations have been complied with.

3. Management Accounting

According to the Institute of Management Accountants (IMA): "Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy".[1]

Management accounting produces accounting data to management for basing its decisions. This helps improving efficiency, maximising profits and minimising loss to achieve the organisational goal.

Management accounting can be used to assist in ensuring that the business is run in an efficient manner by the following subheadings.

Planning by deciding in advance what needs to be done and how it is to be done. Information is provided relating to the past that helps forecast the future, giving guidance for budgets as he is also involved in the budgeting process itself.

Controlling where techniques like standard costing and budgetary control are helpful in controlling performance. Performance reports identify actual performance with planned performance. Any adverse variances which are not conforming to plan can be set right.

Organising by coordinating people to a desired goal or objective. Establishes responsibility centres, preparation of budgets and fixing responsibilities on various persons which help create an efficient organisational framework.

Motivating can be done through budgets to motivate managers and subordinates to attempt to achieve the organisation's objectives.

Formalised targets are more likely to motivate than vague and uncertain comments this can be done using the S.M.A.R.T (specific, measurable, attainable, relevant and timely) acronym. Achieving fixed targets employees can be rewarded through incentives.

Producing performance reports can also motivate individuals by communicating performance information in relation to the targets which have been set.

Decision making by collecting and analyzing data relating to cost, price, profit and savings for each of the available alternatives provides a base for making an informed decision about the best alternative and right course of action.

He provides internal focus information about the various products costing and benefits associated with each option so that management can choose whether to buy-in the component or manufacture it in-house.

4. Profit and Loss (P/L) and Balance Sheet.

A Profit & Loss account can be updated regularly and measures the performance of the business over a specific period. It tells you how much profit or loss your business is making by taking away expenses accumulated during that period from revenues made, giving a gross and net profit and loss. A formula used is sales, minus sales returns and cost of sales give the gross profit. Then by subtracting expenses give the net profit (See Appendix A). All income and expenses are entered in the P/L account.

A Balance sheet is like a snapshot taken at a particular moment in time summarising the company’s assets, liabilities and shareholder’s equity at that specific point in time. It measures the wealth of that business at that moment showing what it owns and what is owed. Assets, liabilities and capital are entered into the balance sheet. (See example Appendix B)

Depreciation is a non cash expense. Using the matching principle the expected life cycle of an asset is calculated and reduced on the balance sheet accordingly to the calculations. Only fixed assets can be depreciated.

An easy way to determine whether you should debit or credit is to use the acronym ALICE (Assets, Liability, Income, Capital and Expense). Please see diagram 1.1 below to understand which carries a debit and credit balance.

Diagram 1.1

Debit and credit and how accounts are affected

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5. Differences between management accounting and financial accounting

Financial accounting is mandatory and reports to external stakeholders such as owners, lenders, and companies registration office (CRO). It gives an historic summary of past activities to see how the company has performed. Reports must be filed annually and are publicly available.

Management accounting is tailored for management, presented internally and is confidential. Management accounting is not based on past performance but on current and future trends. It reports as required to those inside the organization which is necessary for managers to make daily and future financial decisions.

6. Main users of information produced by financial and management accounting.

Financial accounting is mainly used by,

Owners/Investors for analyzing how the business is running. The viability and profitability of their investment and determining any future course of action such as increasing or decreasing their shares.

Employees for assessing company's profitability and ability to remain in business, providing information on their future job security.

Government for determining the credibility of the tax returns, also to regulate the activities of the company.

Customers need to know the availability of the product or service.

Suppliers and other creditors are interested in information that enables them to determine the short-term liquidity of a business and whether amounts owing to them will be paid when due. This sets the amount and period of credit to be allowed.

Management accounting is mainly used by,

Senior management and directors by using information to find if profits are up or down taking the appropriate action to improve the company results.

Sales and production use information to help forecast demand and availability of product.

7. Conclusion. In the above report we explained the three main types of business organisations, sole trader, partnerships and limited companies.

Management accounting was outlined and how it can assist with efficient running of a business. Profit and loss and balance sheets were outlined and what they tell us about a business such as how profitable the business is. The main differences of management and financial accounting were identified outlining the main users of the information they provide.

Appendix A

Profit and loss account example.

Sales

100000

Less Sales Returns

1000

Purchases

30000

Less Purchases returns

1000

Cost of goods sold

Gross profit

Wages

40000

Rates

5000

General expenses

1000

Total expenses

Net Profit

Appendix B

Balance sheet example.

http://balancesheetexample.com/wp-content/uploads/2012/09/Balance-Sheet-Example.png

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