The Role of Accounting in Business Organizations

There are three legal forms of a business entity a proprietorship, partnership, and corporation.

Owned by one person, a proprietorship has no legal requirements that need to be met to start up. Unlike a corporation a proprietorship has unlimited liability there for making the owner completely responsible for the proprietorship's debt. The owner can be ordered by the court to sell his personal belongings to pay of its debt this is know as unlimited liability which is a major downfall in being a proprietorship. On the upside a proprietorship's income is not subject to business income tax it is reported on the owner's personal income tax. (Wild-Larson-Chippetta, 2007 pg. 10)

A partnership is owned by two or more people. A partnership is very similar to a proprietorship there is no legal requirement to start up a partnership instead they only thing required is that an oral or written agreement is made between all of its partners to run the business together. Also unlimited liability applies to all it's partners making them responsible for the partnerships debts and it's income is reported on each partners income tax.

However there are three types of partnerships that limit liability: a limited partnership, a limited liability partnership, and a limited liability company. A limited partnership's has partners whose liability is limited to how much they invest in the partnership, and is also made up of general partner's who have unlimited liability. (Wild-Larson-Chippetta, 2007 pg. 10) A limited liability partnership limits the liabilities to each partner by their actions and the actions of those under their watch.

This type of partner ship protects a partner from the negligent acts of another partner. Most partnerships and proprietorships are now limited liability companies which offer the benefits of a corporation because of limited liability and the tax benefits of both partnerships and proprietorships. (Wild-Larson-Chippetta, 2007 pg. 11)