Reasons behind the Existence of Sole Trader, Company and Partnership Firms and Difference between Forms of Share Capital and Long Term Debt

This report discusses the reasons behind the existence of sole trader, company and partnership firms and the difference between forms of share capital and long term debt. It also sheds light on the importance of accounting practice in businesses.

Accounting Business

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Reason behind existing of three various types of business..........................................................3
Difference between forms of share capital and forms of long term debt.....................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................1

INTRODUCTION
Accounting practice is very important in very business in order to know its profitability. This
report will discuss that why sole trader, company and partnership firms exists. Further it will
also shed light on the difference within long term debt and share capital.
MAIN BODY
Reason behind existing of three various types of business
Sole traders are the business which is owned by single individual only. He or she is solely
responsible for carrying his or her business. all the important decision in this business is taken by
sole traders himself or herself only (Ratnasari and Muniarty, 2020). They are the self employed
people who run their business on their own rules and regulations. In order to pay the creditors,
personal assets of sole trader is also at risk. This is one of the simple business structure.
Although an individual who is running the business is solely responsible for all the business
decisions. Example freelancers, gig economy workers etc.
Partnerships are the business between two or more than two business partners. Under
partnership firms all the partners share profits in the agreed profit sharing ratio. Investment is
done by partners as per already decided. There are two types of partners one partner only invests
in the business and in other partnership, partner do not invest by acts as the working partner.
There is partnership agreement between all the partners. In the partnership firm all partners are
responsible for the profit and loss of the business. Partnerships are easy to set up and are also tax
friendly when compared with companies (Falato, Kadyrzhanova, Sim and Steri, 2020).
Example of partnership firms- airbnb and flip kart, uber and spotify etc.
Companies are the artificial person which is form by group of people Which have limited
liability. They are the structured corporation, company may be either public or can be private.
They are also registered on stock exchange so that general public can purchase share in the
company. Profit is given to the shareholders of the company in the form of dividend. Company
have some legal responsibilities and they are entitled legally while carrying their business
operations. Funds in the company is obtained from the public or pooled from investors. Example
Tesco, Sainsbury etc.

The existence of sole trader, company and partnerships are required because they provide
employment to the general public and they also contribute in the economic development of the
country (Acikgöz, Hagedorn, Holter and Wang, 2018). They solve the biggest problem of the
government which is unemployment. Company leaves legacy behind them. People who are not
self employed approach companies for getting employment.
Difference between forms of share capital and forms of long term debt
Long term debt is the outstanding debt which is hold by the company which is having maturity
of more than 12 months. It is also present as the non current liability on the liability side of the
balance sheet (Difference Between Debt and Equity., 2018). The form of long term debt are
mortgage loans, tern loans etc. bank debt which is also the type of long term debt, it is the loan
which is given by the bank on the basis of security. Mortgages are the type of loans which
backed by the real estate like building.
Share capital is the funds which is raised by the company via stock exchange. Company can
raise funds from the public time to time from additional public offerings (Nuthall and Old,
2017). In simple words company raises money by selling shares to the public. Share capital
comes under the shareholder's equity part of the balance sheet.
Long term debt are the funds which is obtained by the company from other party while equity is
the funds raised by public by giving them shares (Moyle and et.al., 2018). Share capital is the
own fund of the company and debt are the loan funds of the company. In long term debt
company have the obligation to pay back to their borrowers from which it is obtained. Debt is for
short term and share capital is for the long term. Long term debt is less risky and and share
capital is high risky and also share capital is costly to issue. In long term debt, interest is charged
by the borrower and in share capital company has to pay dividend to their shareholders.
Dividend is given by the company as per the profit earned by them. In the case of long term debt
company has to pay fixed rate of interest to the banks or financial institution (Weetman, 2019).
While in share capital it is not entitled with fixed payment as it is irregular. If company will incur
losses then they will not pay dividend to their shareholders. Collateral is required in the vase of
debt but in the case of share capital no collateral is needed. Listed public limited companies often
takes long term debt from the financial institution so that their funds related needs can be
fulfilled.

CONCLUSION
Through this report it can be concluded that there are mainly types of business which are sole
proprietorship or trader, companies and partnerships. Existence of business enterprise is there
because these enterprises provide employment o the general public of the company. Government
of the country regulates these enterprise to ensure that they carry their businesses properly.
Report has also discussed share capital and long term debt in detail along with its difference.

REFERENCES
Books and journals
Acikgöz, Ö., Hagedorn, M., Holter, H. and Wang, Y., 2018. The optimum quantity of capital and
debt.
Falato, A., Kadyrzhanova, D., Sim, J. and Steri, R., 2020. Rising intangible capital, shrinking
debt capacity, and the US corporate savings glut. Shrinking Debt Capacity, and the US
Corporate Savings Glut (March 18, 2020).
Moyle, C.L. and et.al., 2018. Business sustainability: How does tourism
compare?. Sustainability,.10(4), p.968.
Nuthall, P.L. and Old, K.M., 2017. Will future land based food and fibre production be in family
or corporate hands? An analysis of farm land ownership and governance considering
farmer characteristics as choice drivers. The New Zealand case. Land Use Policy. 63.
pp.98-110.
Ratnasari, D. and Muniarty, P., 2020. Debt to Equity Ratio (DER), Earning Per Share (EPS)
Analysis of Company Value at PT Indosat, Tbk. Ilomata International Journal of
Management. 1(3). pp.83-87.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Online
Difference Between Debt and Equity., 2018. [Online]. Available through
<https://keydifferences.com/difference-between-debt-and-equity.html>
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