Accounting and Its Relationship to Business - Essay Example

? Literature Review Forms of Business of Literature Review: Forms of Business Accounting and its Relationship to Business Accounting is the study of numbers and financial matters that have to do with business. Accounting deals with the financial information flow and how it moves in and out of a business (Peavler, 2013). Every business needs an accountant to make sure that they are operating in a specific way, so that many issues that may come up with their finances are seen before the issue can happen. There are many different forms of accounting and they all take care of business in some way. Because of this, an accountant must understand the different forms of business so they are able to provide the best information for the particular business. There are many different types of business structures. These include sole proprietorships, partnerships, and limited liability companies. In order for an accountant to do well with business, he or she needs to understand how each of these business structures work. Relationship of the Topic to Future Career Goals I have chosen this topic because accountants are needed all over the world. Many organizations provide many services for profit. Of course, accountants are also needed in the non-profit sector so the prospects for careers are endless. Many companies have gone bankrupt because they did not do well with their money. For example, companies like Enron, Qwest, and others had problems because they did not handle their financial affairs well. Because of this, an accountant can specialize in many different areas. An individual could decide to become a financial accountant, a managerial accountant or a cost accountant (Peavler, 2013). The field of accounting seems very open and it seems more dependent on an individual’s decision as to which aspect of the field they choose as a career. I wanted to investigate the different business structures and focus on the advantages and disadvantages of each one. Accounting is a basic principle of economics and can be viewed on different levels. For example, a company will use accounting, but an individual may also use an accountant to take care of everyday needs. Many people use accounting for calculating their taxes, making decisions, and understanding their stocks and bonds. This literature review will continue to develop the differences between the business structures and provide an understanding of the main characteristics and the advantages and disadvantages of each of these structures. Sole Proprietorship A sole proprietorship is generally the organizational structure that someone takes who is just beginning a start-up company. This allows the individual to have a business name and use their own social security number or register with a business number. A sole proprietorship allows an individual to operate as a business and to take all the profits. One person runs the business and therefore is responsible for any losses or debts that the business incurs. Advantages of a Sole Proprietorship The literature review provides a variety of ways that a sole proprietorship has its advantages and relates to accounting. Amato (2013) states that sole proprietorships need to do succession planning although they are the only ones running the business. Amato states that sole proprietors must understand that there is a need for them to name someone who will take over the business when they want to leave it, if they are not selling it. Hendrix (2012) states that a sole proprietorship is the easiest form of business to start because the owner and the business are the same entity. LaMance (2012) states several advantages of a sole proprietorship. The owner does not have to do separate business tax forms, sole proprietors can hire employees and they can receive tax breaks for hiring people. Also, the owner of the business is the only one responsible for making decisions in the business. Disadvantages of Sole Proprietorship LaMance (2012) states that there several disadvantages of sole proprietorships. One issue is that the individual is responsible for the business on a personal level, which means they are liable personally if someone wants to sue the business and is therefore liable for any problems. The owner must also pay self-employment taxes and there are some that are not deductible, like health insurance. The owner can also find it difficult to raise more capital as a sole proprietor because they were the ones who initially put money into the business. A sole proprietor does not have stock to sell or other ways of enticing investors. Murray (2012) adds that personal liability also means that the business owner cannot file business bankruptcy without filing personal bankruptcy. The business owner can also be personally sued by someone who believes the business did not perform to their standards. Limited Liability Company (LLC) Many people who want to remain the owners of their business will form an LLC. By doing so, they are able to separate their business from their personal assets but maintain control of their company. Advantages of an LLC Hazard (2011) states that an LLC provides more tax breaks than a sole proprietorship, but it does not have as many as a corporation structure. The LCC also will still pay unemployment tax but someone could sue the business without the individual losing their personal assets. Another advantage is that the business owner does not have to file a quarterly tax return like they would if they had a corporation (Hazard, 2011). LLCs also are simple to start and one person can still be the owner. This makes the business less costly to start than a corporation and the red tape involved is much easier to move through (Dahl, 2011). LLCs do not need a board of directors (Magloff and Medi, 2013). The owner of an LLC can also transfer their business to another person easier than they could if they had a corporation. Disadvantages of an LLC The biggest cons of the LLC according to Dahl (2011) are that the owner must make sure they keep separate books for the business so they can show that the business and the personal life are vastly different entities. Also, the LLC may have to pay unemployment taxes on a quarterly basis to show they are separating their business from their personal assets. Magloff and Medi (2013) add that if there is only one business owner in an LLC, they are taxed as a sole proprietor. Partnerships Many people think that collaborating with someone else for their business is the best way to do business because they have shared liability with a partner. Often, people team with their families or friends to start their business. In some ways, this is a great way to structure a business, but one must be sure that they have the right partner in order to proceed. The right partner may be the person who is most likely to help the business rather than hinder it. Advantages of Partnerships If the right partner is chosen, partners will complement each other’s strengths and weaknesses, and each partner will bring a different set of skills and experience to the business. Decisions will be made by more than one person and both partners have a say in how the business moves forward. (Business Financial Services, 2010). When there is a partnership, it can also attract other partners to a business if the partners are working well together. Also, it is important to draw up a partnership agreement so that all parties understand how they will proceed (Business Financial Services, 2010). Disadvantages of Partnerships Family members and friends may have a different vision for the business than the business owner. Also, in the beginning of the business, both people may need to spend long hours at the business which can cause problems with family members (Bekiaris, 2010). Partners can have different work ethics, which means that there can be an unequal sharing of the labor. A business takes time to build and sometimes partners want to see the business move faster than it can. This can cause conflict within members (Lloyd, 2009). Also, partners must trust each other and sometimes this trust is not easy to find when two people are attempting to work differently in a partnership (Lloyd, 2009). Corporations Many small business owners incorporate their business as a corporation. There are two types of corporations: The C corporation and the S Corporation. Though listed as corporations, they have different requirements. S Corporation An S Corporation is distinguished from the C Corporation because it can have up to 100 shareholders and their net income or losses go are the responsibility of the shareholders (Lund, 2013). This corporation allows the company to have one class of stock and no more than 35 shareholders. Advantages of an S Corporation With an S Corporation, the business avoids having to pay a double tax as they would have to in a C Corporation. The income will pass to the stockholders, but the losses will also go to the stockholders (Hersch, 2010). This means that the stockholders have to report the income or loss on their personal income tax instead of reporting it on a business tax (Zahorsky, 2013). A business owner can also write off any start-up costs when they have this type of tax structure. Finally, there is some protection against liability but this liability can pass to the individual’s personal income (Zahorsky, 2013). Disadvantages of an S Corporation One disadvantage of this type of corporation is that the company is limited to only one class or stock. This can cause the business owner to have less control over the company and can create limited stock options. Because the S Corporation has a limit on shareholders and the liability can go to personal income, this type of corporation is less likely to gain funding from venture capitalists or others interested in investing (Zahorsky, 2013). The business must hold regular meetings and keep minutes so this may be more time consuming than other corporations. C Corporations This tax structure is known as the regular corporation. It has a board of directors and pays a corporate tax in addition to the personal tax for employees and the owner (Hazard, 2011). The C corporation provides the most protection from liability for individual stakeholders because the business structure allows the business to be sued and not the individual stakeholders. Advantages of the C Corporation The corporation is set up in such a way that it provides the necessary structure for a business to gain venture capital or other types of financing. A C Corporation is easier to grow if the business owner wants to publicly trade their business later. Also, there are many tax breaks with this type of corporation (Wasserman, 2010). This structure allows the company to create a medical reimbursement plan which is tax deductible. Disadvantages of the C Corporation The biggest disadvantage is the double tax that can happen. When there is a profit in the business, they are taxed at the business level. When shareholders receive dividends from the business, these are also taxed (Wasserman, 2010). This can cause many challenges but there are strategies to prevent the double tax (Wasserman, 2010). Stakeholders also have to have formal board and stakeholder meetings and they must keep detailed notes. There is also more paperwork that includes more tax forms that have to be filed and an accountant may need to be hired to help sort through all of the paperwork. Conclusion When starting a business, the business structure is very important to the implementation and growth of any business. If an accountant is going to move forward in starting their own business, he or she needs to understand which structure may be most beneficial, but he or she must also weigh the advantages against the disadvantages of each business structure. Business can be profitable if people are sensible about putting the business together. When setting up a business, the structure is very important and an accountant can help in learning the differences between the various structures. Each structure has its own merits and really depend on the needs of the business organization. Also, the type of business that is created may make a difference in the structure that is chosen. References Amato, N. (2013). Succession planning: The challenge of what's next. Journal Of Accountancy, 215(1), 44-47. Bekiaris, M. (2010). Start-up strategy. (cover story). Money (14446219), (123), 48-49. Retrieved from Business Source Premier. Business Financial Services. (2013). Business owners need to weigh pros and cons of partnerships. Business Financial Services. Retrieved from http://www.businessfinancialservices.com/blog/small-business-partnerships/ Dahl, D. (2011, March). Should your business be an LLC or an S Corp?. Inc Magazine. Retrieved from http://www.inc.com/guides/201103/s-corp-vs-llc.html Hazard, J. (2011). Starting your VAR business: The best tax structure. Channel Insider, 1-4. Retrieved from Business Source Premier. AN: 60446723 Hendrix, J. E. (2012). How to start a firm. Tax Adviser, 43(6), 408-411. Hersch, W. S. (2010). Starting a new practice? Don't forget about the tax type. National Underwriter / Life & Health Financial Services, 114(13), 21-23. LaMance, K. (2012). Advantages and disadvantages of sole proprietorships. LegalMatch. Retrieved from http://www.legalmatch.com/law-library/article/advantages-and-disadvantages-of-sole-proprietorships.html Lloyd, J. (2009). The Disadvantages of business partnerships. Yahoo! Contributor Network. Retrieved from http://voices.yahoo.com/the-disadvantages-business-partnerships-2368391.html Lund, M. (2008). The right fit. Hardwood Floors Magazine, 21(5), 26-31. Magloff, L., and Medi, D. (2013). Pros & Cons of an LLC. LegalZoom. Retreived from http://info.legalzoom.com/pros-cons-llc-3503.html Marchand, C. (2013). The pros & cons of s-corporation status. AllLaw.com. Retrieved from http://www.alllaw.com/articles/business_and_corporate/article5.asp Murray, J. (2012). The advantages and disadvantages of sole proprietorships. About.com. Retrieved from http://biztaxlaw.about.com/od/startingyourbusiness/f/solepropprocon.htm Peavler, R. (2013). Areas of accounting and their relationship to your business financial accounting, managerial accounting, and cost accounting. About.com, Business Finance. Retrieved from http://bizfinance.about.com/od/Finance-and-Accounting/a/areas-of-accounting.htm Wasserman, E. (2010, March). The pros and cons of setting up a C Corp. Inc. Magazine. Retrieved from http://www.inc.com/guides/starting-a-c-corp.html Zahorsky, D. (2013). Should your small business become an S Corporation? Pros and cons of an S Corporation. About.com. Retrieved from http://sbinformation.about.com/od/ownership1/a/SCorporation.htm Read More