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Economic Entities

 

Introduction

In generally accepted accounting principles (GAAP) of accounting, an economic entity is an assumption that an organization or a unit is operating a business. As such, an economic entity can be:

  • An individual who has a one-person tutoring business that provides evening classes to high school students
  • A group of family members who inherit money from a patriarch and decide to create a bank
  • A government agency that sells or provides services such as stamps
  • A big corporation that manufactures and sells automobiles.
 

Classification

For the purpose of ownership and responsibilities, economic entities are classified in three main categories.
Proprietorship

Proprietorship: A proprietorship is a business owned and operated by one person. It can just be a type of business with one person such as a hair braiding salon or a small convenience store. A proprietorship is usually the starting place for a company. For example, a person may decide to open a company that sells auto parts, based on his previous experience from working in a car repair shop.

A proprietorship usually starts from nothing or (very) low budget, in the hundreds of dollars.

For taxes and responsibilities purposes, in a proprietorship, the owner of the business is personally accountable for everything, including expenses, benefits, losses, and government regulations, etc.

Partnership: A partnership is a business owned by two or more people who work as an association.

Usually, in the beginning, two or more friends, two or more family members, or two or more acquaintances get an idea, their own money, and decide to start the business. They usually also define, orally or in writing, how they would proceed, how the responsibilities would be shared, and how they would eventually address those issues they can already foresee (of course, other issues would come up as things change).

Partnership

Although not a legal requirement, the business partners should put in writing as many issues as possible. These would include:

  • Each person's original financial contribution
  • Each person's role
  • Each person's benefits (earnings)
  • Issues resolution:
    • What to do if this or that bad thing happens
    • What to do when a member does not live up to his or her responsibilities
    • What to do if a member withdrawals, retires, or dies

Corporation: A corporation is a small, medium, or large company that is registered with the local, state, and federal government with many legal ramifications. The budget is usually considered in terms of stocks held by internal and external entities (people) with the ability to exchange (buy or sell) what they own in the company. The entities that own these stocks (they are called stockholders) do not have personal responsibilities with the company, or they are said to have (to enjoy) limited liability towards the company. For example, if the company is successful, the stockholders make money. If the company is failing, the stockholders may lose money but their person assets (such as houses or cars) would not be seized.

 

 

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