Financial Accounting for Decision Makers

WHAT KINDS OF BUSINESS OWNERSHIP EXIST?
The particular form of business ownership has certain implications for financial accounting 
and so it is useful to be clear about the main forms of ownership that can arise. There are 
basically three arrangements for private-sector businesses:
■ 
sole proprietorship;
■ 
partnership; and
■ 
limited company.
We shall now consider these.
Sole proprietorship
Sole proprietorship
, as the name suggests, is where an individual is the sole owner of a 
business. This type of business is often quite small in terms of size (as measured, for exam-
ple, by sales revenue generated or number of staff employed); however, the number of such 
businesses is very large indeed. Examples of sole-proprietor businesses can be found in 
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CHAPTER 1
INTRODUCTION TO ACCOUNTING
most industrial sectors but particularly within the service sector. Hence, services such as 
electrical repairs, picture framing, photography, driving instruction, retail shops and hotels 
have a large proportion of sole-proprietor businesses.
The sole-proprietor business is easy to set up. No formal procedures are required and 
operations can often commence immediately (unless special permission is required because 
of the nature of the trade or service, such as running licensed premises (a pub)). The owner 
can decide the way in which the business is to be conducted and has the flexibility to restruc-
ture or dissolve the business whenever it suits. The law does not recognise the sole-proprietor 
business as being separate from the owner, so the business will cease on the death of
the owner.
Although the owner must produce accounting information about the business to satisfy the 
taxation authorities, there is no legal requirement to provide it to other user groups. Some 
user groups, however, may demand accounting information about the business and may be 
in a position to enforce their demands (for example, a bank requiring accounting information 
on a regular basis as a condition of a loan). A sole proprietor has unlimited liability which 
means that no distinction is made between the proprietor’s personal wealth and that of the 
business if there are business debts to be paid.