Financial Accounting: An Integrated Statements Approach, 2nd Edition

The characteristics of sole proprietorships, partnerships, corporations, and limited

liability companies discussed in this section are summarized below.

Limitation Access

Organizational Ease of Legal on Life of to

Form Formation Liability Taxation Entity Capital

Proprietorship Simple No Nontaxable Yes Limited

limitation (pass-through)

entity

Partnership Simple No Nontaxable Yes Average

limitation (pass-through)

entity

Corporation Complex Limited Taxable entity No Extensive

liability

Limited Moderate Limited Nontaxable Yes Average

Liability liability (pass-through)

Company entity by

election

The three types of businesses we discussed earlier—manufacturing, merchandis-

ing, and service—may be either proprietorships, partnerships, corporations, or limited

liability companies. However, businesses that require a large amount of resources,

such as many manufacturing businesses, are corporations. Likewise, most large retail-

ers such as Wal-Mart,Sears, and JCPenneyare corporations. Because most large busi-

nesses are corporations, they tend to dominate the economic activity in the United

States. For this reason, we focus our attention in this text on the corporate form of or-

ganization. However, many of the concepts and principles that we discuss also apply

to proprietorships and partnerships.

How Do Businesses Make Money?

The goal of a business is to make money by providing goods or services to customers.

How does it decide which products or services to offer its customers? For example,

shouldBest Buyoffer warranty and repair services to its customers? Many factors in-

fluence this decision. Ultimately, however, the decision is based on how the business

plans to gain an advantage over its competitors, and in doing so, make money and

maximize its profits. Profitsare the excess of revenues from selling services or prod-

ucts over the cost of providing those services or products as illustrated below.

6 Chapter 1 The Role of Accounting in Business

REVENUES COSTS PROFITS



Businesses try to maximize their profits by generating high revenues, low costs,

and thus high profits. However, a business’s competitors are also trying to do the same

and, thus, a business can only maximize its profits by gaining an advantage over its

competitors. So, how can a business accomplish this?