INTERNATIONAL ISLAMIC

UNIVERSITY ISLAMABAD (Women Campus)

INTRODUCTION TO BUSINESS FINANCE

ASSIGNMENT-1
Submitted to:
MS SAMEEN

Submitted by:
SUMAIRA YOUSUF

Forms of Business Organizations

FEATURES SOLE PARTNERSHIP CORPORATION

 PROPRIETORSHIP (often referred as firm)

Legal Status Not a separate Legal Not a separate Legal Separate Legal Entity.
Entity. Entity.

Liability of owners for Personal Liability for General Partnership: No personal liability for
business debts business debts. Partners have unlimited corporate debts. However
liability. in closely held
corporations, one or more
Limited Partnership:
owners personally
Only general partners guarantee specific debts
have unlimited liability. of the business.

Limited liability
partnership:

Liability is extended only

to those partners directly
involved.

Cost in starting the Low cost Low cost High cost

business

Accounting Status Separate Entity Separate Entity Separate Entity

Persons with Owner Every Partner Hired professional

managerial Authority employees

(Stockholders are merely

investors rather than the
active participants in
business).

Continuity of the Entity ceases with the New partnership is Indefinite Existence;
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Business retirement or the death of formed with a change in ownership is transferred
the owner partners without effecting the
business.

Form of Organization Most common form of Least common form of A corporation is more
business; easy to start. business; too many bosses difficult to form than any
other type of organization

Belonging of the assets Business assets belong to Assets do not belong to The assets of corporations
the proprietor. business, they belong belong to the corporation
jointly to all partners. and not to the
stockholders.

Payment of Income The business pays no The partnership itself Corporations may enter
Tax income tax (Tax laws do pays no income taxes, but into contracts and pays
not view Sole proprietor partners include their income taxes on its
separate from other respective shares for the earning. They end up
financial activities from firm’s net income in their being taxed twice;
its owner. The owner personal income tax charged up to 60% to
includes the income of the returns. 70% of the corporate total
business in his/her income.
personal income tax
In S corporations, owners
return)
do not pay corporate
income taxes, nor do they
pay personal income tax
on the dividends they
receive. Instead they pay
tax on his or her share in
the corporation.

Withdrawal of assets When the owner with Money or assets taken by Owners of corporations
or money from the draws money or asset, it the partners from the can not make “with
business is not considered as business is shown by drawl” of corporate
salary, the ‘drawing debiting the partner’s money or assets
account’ is debited personal drawing account.

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Application of Federal Federal Securities law are Federal Securities law are Federal Security Laws are
Securities Law not applied on Sole not applied on Partnership applied on Corporations.
Proprietorship

Meaningfulness of The Balance Sheet is less The Balance Sheet is Creditors base lending
Balance sheet to useful to creditors. more meaningful than decisions on the Balance
Creditors Sole proprietorship Sheet.
because there are legal
distinctions between
partnership assets which
are jointly owned and
personal individual
partners.

Personal responsibility
for debts may not extend
to all partners.

Authorization before No authorization is Every partnership A Corporation must

the start of Business required from any requires a carefully obtain a charter from the
government agency. written “Partnership state in which it is
Contract”. formed, and also must
receive authorization
from the state to issue
shares of capital stock.

Evaluation of Financial Statements are Financial Statements are Financial Statement are
Financial Statements hard to evaluate: hard to evaluate: easy to evaluate then
those of a unincorporated
1. Personal services 1. Personal services business (Sole
given to business. given to business. proprietorships and
2. Capital 2. Capital Partnerships).
Investment. Investment.
3. The degree of 3. The degree of
financial risk the financial risk the
owner is taking. owner is taking.

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Accounting activities If the owner provides If owners provide service, It owners provide service,
on services provided service, salary is not salary is not given. they are given salary and
by the owner given. it is recognized as
expense.

Financial Risk Financial risk is not Financial risk is not Financial risk is limited
limited limited up to investment

Basis of the issuance Creditors see the solvency Creditors see the solvency Creditors see the solvency
of loans of the individual owner, of the individual owners, only of the business
rather than that of rather than that of entity.
business. business.

Authority Managerial Authority. Managerial Authority. No Managerial Authority.

Distribution of Profit Owner gets all the profit It is stated on the Board of Directors
“Partnership Contract” decides how much profit
that how much will be of the business is
allocated to each partner. distributed among
Stockholders (in the form
of dividends).

Claim of Creditors on Creditors have claim on Creditors have claim on Creditors only have
the personal assets of the personal assets of claims on the assets of the
the assets
individuals General Partners and in corporation and not on the
case of limited liability assets of the corporations’
partners; if they are owners.
directly involved.

Use of Control NO YES YES

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Systems

Auditing by NO YES/NO YES

Independent
Accountants

Presentation of Statement of Owner's Statement of Partner's Statement of Retained

Equity Equity Earnings and
“Statement of owners Stockholders' Equity
Equity”

REFERENCE: MEIGS & MEIGS