Three Most Common Types of Small Businesses – Sole Proprietorships, Partnerships and Private Limited Companies

Sole Proprietorships

This is the type of business which legally the business entity is not separated from the owner. However, do not get yourself confused with the Separate Entity Concept in accounting. Usually the business is registered with government under a trade name (either with some association with the name of the owner or a different name altogether) and this trade name will represent the business entity in the conduct of its business activities.

Partnerships

This is the type of business with more than one owner. All the owners are called partners. In general all the partners contribute capital to the business and share common objectives of making the business successful and share the profits generated. Generally in law, the partners may have joint liability or joint and several liabilities. However, some countries may allow partnerships in which the liabilities of partners are limited. A partnership agreement could be used to set the terms and conditions among the partners.

Private Limited Companies

Some countries allow single member limited companies to be incorporated and some require minimum two members. The clear distinction of private limited companies from sole proprietorship and partnership is the liability of members is limited to the capital invested. Another distinct feature of limited private companies is that the governing body of the companies are the board of directors. The company incorporated carries its own identity under law and can sue and be sued by others. Of course when a company is found to have guilty legally, financial penalties are imposed because it is meaningless to impose jail terms on companies. In these circumstances, the relevant individuals behind the company (usually the directors) may be penalised financially, with jail terms or both. The relationship between the companies, the members/shareholders and the directors is unique and also can be a complex one whenever there are disputes between the company with third parties or disputes between members/shareholders or among the members of the board of directors. There are relevant sections in the Companies Act or Corporations Act of each country touching on this and of course there are common laws which have set down the legal principles since centuries ago.

You could find a lot of reading materials on the legal aspects of the above three types of business entities. Therefore, I only described them briefly in this post.

Example of Income Statement and Balance Sheet of a Sole Proprietor

Income Statement for the year ended 31 December 2006

$

Sales

159,270

Cost of Sales

– 90,875

Gross profit

68,395

Other income: –
Interest income

2,356

Operating expenses: –
Accountancy fee

– 800

Depreciation of property, plant and equipment

– 2,500

Donation

– 500

Electricity & water

– 3,340

Insurance premium

– 2,000

Printing & stationery

– 1,697

Rental of premises – 12,000
Salaries

– 35,579

Upkeep of office

– 3,547

Telephone charges

– 1,285

Travelling, petrol & toll charges

– 2,648

– 65,896

Net profit for the year

4,855

Retained profits B/F

27,654

Retained profits C/F

32,509

Balance Sheet as at 31 December 2006

$

Non-current assets
Property, plant and equipment

15,000

Current assets
Inventories

5,200

Trade receivables

6,000

Other receivables, deposits & prepayments

3,458

Cash and bank balances

10,639

25,297

Current liabilities
Trade payables

– 3,588

Other payables and accruals

– 2,575

– 6,163

Net current assets

19,134

34,134

Financed by: –
Capital

15,000

Retained profits

32,509

Net drawings

– 13,375

34,134

Example of Income Statement and Balance Sheet of a Partnership

Income Statement for the year ended 31 December 2006

$

Sales

159,270

Cost of Sales

– 90,875

Gross profit

68,395

Other income: –
Interest income

2,356

Operating expenses: –
Accountancy fee

– 800

Depreciation of property, plant and equipment

– 2,500

Donation

– 500

Electricity & water

– 3,340

Insurance premium

– 2,000

Printing & stationery

– 1,697

Rental of premises

– 12,000

Salaries

– 35,579

Upkeep of office

– 3,547

Telephone charges

– 1,285

Travelling, petrol & toll charges

– 2,648

– 65,896

Profit for the year

4,855

Add: –
Interest on partner’s drawings
Partner A 1,500
Partner B 2,000 3,500
Less: –
Partner’s salary
Partner A – 15,000
Partner B – 20,000 – 35,000
Partner’s commision
Partner A – 3,000
Partner B – 2,000 – 5,000
Interest charged on partner’s capital
Partner A – 2,500
Partner B – 3,500 – 6,000
Net loss for the year – 37,645
Shared as follows: –
Partner A – 60% – 22,587
Partner B – 40% – 15,058
– 37,645

Analysed as follows: –

Partner A

Partner B

Total

$

$

$

Shared net loss for the year

– 22,587

– 15,058

– 37,645

Less: –
Interest on partner’s drawings

– 1,500

– 2,000

– 3,500

Add: –
Partner’s salary

15,000

20,000

35,000

Partner’s commission

3,000

2,000

5,000

Interest charged on partner’s capital

2,500

3,500

6,000

Net profit for the year

– 3,587

8,442

4,855

Note 1

Note 1

Balance Sheet as at 31 December 2006

$

Non-current assets
Property, plant and equipment

15,000

Current assets
Inventories

5,200

Trade receivables

6,000

Other receivables, deposits & prepayments

3,458

Cash and bank balances

10,639

25,297

Current liabilities
Trade payables

– 3,588

Other payables and accruals

– 2,575

– 6,163

Net current assets

19,134

34,134

Financed by: –
Partner A Partner B

Total

$

$

$

Capital account

9,000

6,000

15,000

Current account
Balance B/F

45,874

24,280

70,154

Shared net loss for the year

– 22,587

– 15,058

– 37,645

Net drawings during the year

– 12,000

– 5,000

– 13,375

Balance C/F

11,287

4,222

19,134

20,287

10,222

34,134

Note 1: the net loss for the year for Partner A of $3,587 and net profit of Partner B of $8,422 were derived by calculating from the share of net loss for the year of $37,645, taken into account of the interest on capital, interest on drawings, salary and commission of each partner. You would not be able to know how much is each partner’s share of profit or loss directly from the net profit of $4,855.

Example of Income Statement and Balance Sheet of a Private Limited Company

Income Statement for the year ended 31 December 2006

$

Sales

159,270

Cost of Sales

– 90,875

Gross profit

68,395

Other income: –
Interest income

2,356

Operating expenses: –
Accountancy fee

– 800

Depreciation of property, plant and equipment

– 2,500

Donation

– 500

Electricity & water

– 3,340

Insurance premium

– 2,000

Printing & stationery

– 1,697

Rental of premises

– 12,000

Salaries

– 35,579

Upkeep of office

– 3,547

Telephone charges

– 1,285

Travelling, petrol & toll charges

– 2,648

– 65,896

Net profit for the year

4,855

Retained profits B/F

27,654

Retained profits C/F

32,509

Balance Sheet as at 31 December 2006

$

Non-current assets
Property, plant and equipment

15,000

Current assets
Inventories

5,200

Trade receivables

6,000

Other receivables, deposits & prepayments

3,458

Amount due by shareholders

13,375

Note 2
Cash and bank balances

10,639

38,672

Current liabilities
Trade payables

– 3,588

Other payables and accruals

– 2,575

– 6,163

Net current assets

32,509

47,509

Financed by: –
Share capital

15,000

Retained profits

32,509

47,509

Note 2: in this example, the net drawings of the owner in the example of a Sole Proprietor has been shown as amount due by shareholders for comparison purposes

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