Partnerships & Corporations, Research Paper Example

Introduction

There are many forms of the organization of the enterprise in the modern business world. Some of them have been present for a long period of time; others have emerged in the relatively recent times. At the same time, the very basic organizational forms are well known: sole proprietorship, partnership and corporation. It is hard to figure out which format is best suitable for this or that specific type of business just away. Concerning management and accounting, all the ownership variants have their peculiarities. Firstly, we need to revise the very general facts of the two formats that will be studied later: partnership and corporation.

Partnership is business owned by two or more persons, who start a business activity for the sake of receiving profit. Partnerships are very common for relatively small service firms – in the sphere if medicine, law and accounting. Usually, the partners are fully responsible for any debt of the enterprise. Partnerships as a firm are not required to pay any taxes, while partners are supposed to declare their profits from the business operations in their personal tax accounts.

Almost all large companies and multiple small enterprises are organized in a form of a corporation. The main distinctive feature of the corporation is that these are complete legal entities and are not directly attached to their investors in any form. That means that the owner of the enterprise (shareholders) are risking only the costs that they have spent to purchase the share of the company, other than that they bear no personal responsibility. Corporation is much harder to establish, as greater funds and time is needed. Shareholders are not expected to take part in the governance of the corporation and are supposed to elect the Body of Directors (BOD), which will be responsible for the activities of the enterprise.

Accounting Specifics for Partnerships

Concerning accounting, partnerships have certain specifics, related to the partnership agreement. It should include: (Pyke, C.J. 2003)

1. Nature and name of the business
2. Amounts of capital that are to be invested
3. Proportion in which the profits or losses are to be shared
4. Interest rates that will be applied to the capital invested
5. Salaries to be paid to the partners
6. Arrangements for the admission of new members
7. Procedures in case one of the partners dies or retires

Partnership accounts are in many ways similar to the sole proprietorship accounts – assets are enumerated in the balance sheet and the profit is calculated as usual. The main and basically the only major difference from the personally owned firm is that in the end of the balance sheets equity has to be properly distributed among the partners. Partnership accounts need to include the appropriation of how the profit will be divided base upon such data as the amount invested, time contributed to the business and personal and professional qualities of the partner and experience. Other important information that has to be considered while studying the accounting of the partnership is the salary level, rate of interest on the capital and share of balance.

Salary level is estimated base on how much each partner contributes to the success of the business. Share of the balance directly depends on the initial sums, invested by the partners (profits are usually proportional to the sums invested at the very beginning). Interest on the capital is the sort of “loyalties” paid to the partners no matter whether the company has received any profits. Interest rate does not depend on the fluctuations on the market and is usually around 5% (Pyke, C.J. 2003).

Accounting Specifics for Corporations

Choosing corporation as a form of legal entity for the business has its pros and cons. Main advantages include:

1. Limited legal responsibility of stockholders: they are neither liable for corporate actions nor the company’s debt
2. Convenient and flexible ownership rights: the changes of the owner usually has little or no effect on the corporation
3. Simplicity of capital growth: purchasing shares is attractive to investors because, as they bear no responsibility for the company’s actions and debts.
4. Continuous life – corporations usually remain for a longer period of time

Some problems actually arise as well:

• Extra government regulations – any corporations has to follow all of the state and federal laws, which often makes operations rather inefficient
• Corporate taxation – large companies are forced to pay property and payroll taxes and are often subjects for double taxation.

Concerning the accounting and organizational specifics, partnerships and corporations may be compared this way:

It is clear that from the point of view of accounting, there is no obvious answer to which form is more convenient. Corporations allow accumulating greater funds, use professionals for the complicated tasks. At the same time, partnerships are more profitable as the taxes for this form is enterprise is much lower.

Financial Reporting in a Partnership

Financial reports are usually prepared by the partners themselves, as the number of operations and the sums are not very big. The calculations presented in the financial statement are easy to calculate, as only the basic economic indicators are usually used. Main input data is the volume of sales, revenues, expenses and, of course, profit. Basic parts of the financial statement for the partnership are:

• Income statement (reports financial information over some period of time, reports financial dynamics, cost of goods sold, its pricing, total and variable costs)
• Balance sheet (presents the financial health of the enterprise, in other words – the volume of assets, financial resources and debt. While looking at the balance sheet, the professional accountant can easily see the real stability of the business)
• Distribution of net income and net losses (describes how much profit or losses each partner received)
• Owner’s equity statement  (describes the changes in each partners’ equity)

It is important to note that the annual report of a partnership is created for the inner usage only; it is not usually demonstrated tot eh public and is aimed to inform the owners of the enterprise of the current business state.

Financial Reporting in a Corporation

Basic principles on which the financial reporting lies are: timeliness (the report is due on the exact date), integrity (no fraudulent information), completeness (full representation of all the assets and debts), and publicity (anyone ca review the financial statement). The purpose of the financial reporting in a corporation is slightly different than that of a partnership. It is supposed that professionals in the company are already well aware over the state of the business, the annual report is supposed to demonstrate the shareholders the amount of work that has been done, and to report on the funds used.

Large corporations tend to have massive annual report, due to great operational volumes. Rather often, side agents such as auditors and consulting firms control the annual report and check its accuracy. Corporate financial statement consists of slightly different parts, balance and income statements are similar by their nature to the partnership while some differences exist:

1. Statement of retained earnings – explains the changes in the earnings and the ways the funds have been used (retained or paid as dividends)
2. Statement of cash flows – justifies all the financial activities, such as investing.

Corporate reporting is far more complicated than in the partnerships, as the dividends per share, dividends paid, yields of return, etc have to be estimated. At the same time, corporate reports are much more accurate and detailed.

Conclusion

I can not say which business form is better for accounting and financial reporting; it depends on the specifics of the market, size of the company and may other factors. Accounting in a partnership is certainly easier, while corporate reports are much more informative.

References

Pyke, C.J. (2003).  Accounting for partnerships Accountancy retrieved March 23, 2009 from:  http://www.accountancy.com.pk/articles_students.asp?id=53

Schallenkamp, K. “Simplicity Versus Protection: a comparison of Partnerships and Corporations”. Retrieved March 23, 2009 at: http://www.emporia.edu/sbdc/docs/Chamber-Article-3-Partnerships-Corp.pdf

Financial Statements for Corporations. AllBusiness retrieved March 23, 2009 from: http://www.allbusiness.com/accounting/126561-1.html