Third Year Accounting Major
Chapter One: Business entity and accounting practices
Lecture one: What is a business entity?
1. Definition:
A business entity is the legal structure of an organization formed to conduct business,
determining its taxation, liability, and operational rights and responsibilities. Common
types include sole proprietorships, partnerships, limited liability companies (LLCs),
and corporations, each with varying degrees of legal separation, tax treatment, and
owner responsibility for the business's debts.
2. Types of Business Entities/Structures
What is a sole proprietorship?
• A sole proprietorship is the simplest and most common structure chosen to start
a business.
• It is an unincorporated business owned and operated by one individual with no
distinction between the business and the owner.
• Sole proprietorships, when not operating under the owner’s legal name,
must register a fictitious name with the Division of Corporations.
What is a partnership?
• A partnership exists when two or more persons co-own a business and share in
the profits and losses of the business.
• Each of the co-owners or partners contributes something, usually money or real
property, to the business endeavor.
What is a limited liability company?
• A limited liability company (LLC) is similar to a corporation, but with slight
differences.
• Like a corporation, it offers limited personal liability.
• An LLC is not required to hold regular stockholder or management meetings,
and there are no requirements to comply with other corporate formalities.
What is a corporation?
• A corporation is an independent legal entity that exists separately from the
people who own, control, and manage it.
• It does not dissolve when its owners (or shareholders) die because it is
considered a separate “person.”
• A corporation can enter into contracts, pay taxes, transact business, etc.
• The owners have limited liability.
3. Business Sizes
a. Small Businesses
Small owner-operated companies are called small businesses. Commonly managed by
one person or a small group of people with less than 100 employees, these companies
include family restaurants, home-based companies, clothing, books, and publishing
companies, and small manufacturers.
Businesses that meet the standards of the SBA can qualify for loans, grants, and "small
business set-asides," contracts where the federal government limits competition to
help small businesses compete for and win federal contracts.
b. Mid-Sized Enterprises
There is no definitive specification for a mid-sized or medium-sized company.
Third Year Accounting Major
In Algeria, a mid-sized enterprise is a company that employs 50 to 250 people, with
an annual turnover between 400 million and 4 billion Algerian Dinars (DZD).
However, when large U.S. cities such as Philadelphia, Baltimore, and Boston evaluate
the landscape of operating businesses, a medium-sized company is defined as one with
100 to 249 employees or $10 million to less than $1 billion in annual gross sales.
c. Large Businesses
Large businesses commonly have 250 or more employees and garner more than $1
billion in gross receipts. They may issue corporate stock to finance operations as
a publicly traded company.
Large enterprises may be based in one country and have international operations.
They are often organized by departments, such as human resources, finance,
marketing, sales, and research and development.
Unlike small and mid-sized enterprises, which can be owned by a person or group of
people, large organizations often separate their tax burden from their owners. An
elected board of directors enacts most business decisions.
4. Types of business departments
There are a variety of different, specialized departments that a business typically has.
Here are overviews of a few of the most common departments within a business:
Human resources
The human resources department is responsible for handling all aspects of a
business's employee life cycle, including recruiting, hiring, and offering assistance for
any issues they may experience during employment. This department focuses on
assisting all business personnel with training, development, compensation, relations,
benefits and legal compliance.
Operations management department
The operations management department of a business handles the oversight of
planning, organization, production and manufacturing within a business. This
department primarily focuses on the delivery of programs, products or services and
emphasizes the end-goal as its most important task.
Information technology department
The information technology department, commonly referred to as the IT department,
functions to ensure that a business's network of computers and other technology
operates correctly. The IT department focuses on maintaining the computer
infrastructure, holding governance over the entire business's use of technology and
ensuring the functionality of all systems in use
Marketing department
The marketing department of a business functions to promote said business and all
that it has to offer the public and prospective customers. It's common for businesses
to combine their sales and marketing departments into one larger department due to
their similar goals. The exact responsibilities of a marketing department, therefore,
can vary from business to business.
Sales
The sales department of a business functions to facilitate and secures a business' sales
to generate and maximize revenue. This department determines sales prices and
changes them as needed in an effort to sell the most of any product, program or
service.
Accounting and finance departments
The accounting and finance department of a business functions to handle all aspects
of a business's finances. Typically, the accounting department and the finance
department within a business have the same tasks and goals. It's common for
businesses to pair their finance and accounting departments together to create a
combined department so they can share resources and create efficiencies.
Production, research and development department
Third Year Accounting Major
The production, research and development department of a business functions to
conduct research on programs, products or services a business may offer, create that
product and develop it until it's ready for sale. Usually, only larger businesses have
this type of department.