Professor Adams' Lecture Materials

Learning Objective 2-08: Explain common forms of business ownership - sole proprietorship, partnership, and corporation - and demonstrate how they differ in terms of their statements of financial position.

Common Forms of Business Ownership

This section discusses the three main types of business ownership—sole proprietorship, partnership, and corporation—and explains how they differ in terms of their statements of financial position (balance sheets).

Sole Proprietorships

- Ownership: Owned by a single individual.
- Financial Position: The owner’s equity is represented by a single capital account on the balance sheet.
- Liability: The owner is personally liable for all business debts. This means the owner’s personal assets can be used to satisfy business liabilities.

Partnerships

- Ownership: Owned by two or more individuals who share ownership and profits.
- Financial Position: The balance sheet includes a separate capital account for each partner, reflecting their individual equity in the partnership.
- Liability: Similar to a sole proprietorship, partners are personally liable for the debts of the business.

Corporations

- Ownership: Owned by shareholders who invest capital in exchange for stock.
- Financial Position: The balance sheet distinguishes between capital stock (the amount invested by shareholders) and retained earnings (profits that are reinvested in the business). These elements together constitute the owners’ equity or stockholders’ equity.
- Liability: Shareholders have limited liability, meaning they can lose only the amount they invested in the corporation. Their personal assets are not at risk for the corporation’s debts.