Accounting for Business: Enterprise Types, Share Capital, and Debt

This report provides an overview of accounting for business, focusing on different types of business enterprises, including sole traders, partnerships, and public and private companies. It critically distinguishes between preferred and ordinary share capital, highlighting the preferential advantages of preferred shares and the voting rights associated with ordinary shares. Furthermore, the report explores various forms of long-term debt, such as treasuries, municipal bonds, corporate bonds, mortgages, debentures, income bonds, and equity-linked debt, outlining their characteristics and associated risks. The analysis concludes by summarizing the different ways of organizing finance through long-term debts and evaluating various types of business enterprises.

Accounting for Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
a. Describing three different types of business enterprise ..........................................................3
b. Critically distinguishing between two forms share capital and long-term debt.......................4
CONCLUSION ..............................................................................................................................6
REFERENCES ...............................................................................................................................7

INTRODUCTION
Accounting is a process by which business transactions are identified, recorded, analyzed,
interpreted and summarized. This report will highlight the three different types of businesses. It
will also highlight difference between the forms of share capital and long term debt.
a. Describing three different types of business enterprise
Sole traders
Sole proprietorship is a type of business that is not incorporated under law and fully
managed and controlled by an individual referred to as sole trader or sole proprietor. There is not
distinction between the owner and the business entity. Sole trader has unlimited liability that
means the sole trader has full legal responsibility to pay for all the debts of the business. All the
decisions are taken by the sole proprietor (Bennett and et.al., 2019). It is easiest to establish and
discontinue this type of business. There are very few laws to abide by sole proprietorship form of
business. Operating costs are lower because all the tasks related to the functioning of the
business are performed by the one person only. Only traders earning more than £1,000 have to
register themselves with HMRC. These businesses are highly popular among freelancers, sole
owners, self contractors and consultants.
Partnerships
This type of businesses involve two or more people having legal relationship established
by a written (most commonly) or oral agreement between them. Persons involved in this type of
businesses are called partners (Partnership, 2022). These partners agree to share all risks,
expenses, responsibilities and profits/losses. A partner can be both an individual or another
business. The registration of each partner for self assessment with HMRC is must. They must
also complete an annual tax return. Partners manage the business themselves although they can
delegate certain responsibilities to their subordinates or employees. Among all the partners a
partner is nominated who sends HMRC a partnership return. The partners only contributing
capital and not participating in managing the business are known as sleeping partners. There
exists three types of partnerships namely:

 Ordinary partnerships -have no legal existence distinct from its partners, requires
registering with HMRC.
 Limited partnerships -mixture of ordinary and limited partners, have to register with
companies house but not necessarily make an annual return, partners liability limited to
money invested by them in the business and personal guarantees given by them.
 Limited liability partnerships -must register with companies house, send an annual return
to and file accounts with it. This type of partnerships have at least two designated
members.
GoPro & Red Bull, Uber & Spotify, Apple & MasterCard are some examples of partnership
form of business.
Public and private companies
A public limited company must have a minimum share capital of £50,000. Minimum two
shareholders are required for a public limited company. Minimum of two directors need to be
registered. Within 6 months of the end of the financial year company accounts are required to be
submitted to HMRC. Appointment of fully qualified company secretary is needed. For raising
money a public limited company can sell shares on the stock market. Examples are -British
Petroleum Company Limited, Rolls-Royce Holdings, Royal Dutch Shell.
A private limited company does not require any minimum share capital for its
establishment. Minimum shareholders and directors requirement is only one each. It is allowed 9
months for submission of company accounts to HMRC. Company secretary of private limited
company does not need to hold qualifications. It is not permitted to trade on stock market and it
can only privately sell or transfer shares. Some examples are Virgin Atlantic, John Lewis, River
Island.
b. Critically distinguishing between two forms share capital and long-term debt
The two forms of share capital are Preferred Share Capital and Ordinary Share Capital.
Capital raised by issuing preference shares or preferred stock is called preferred share
capital. Shareholders purchasing this type of shares enjoy some preferential advantages over the
other type. Holders of preferred shares in a company get dividend payment in priority to holders

of ordinary shares. They are also prioritized at the time of liquidation of the company (Oreiro,
Paula and Heringer Machado, 2020). Preference share holders do not get voting rights for the
decisions taken in shareholders and general meetings. This form of shares are purchased by those
who want secure returns at low risk.
Ordinary share capital is raised by issuing ordinary shares also referred to as common
stock. Common stock holders have voting rights at general shareholder meetings. They have one
vote per share and influence company's decisions with their votes. Dividend is paid to ordinary
share holders after the payment of dividend to the preference shareholders (Gurung, 2020). Also,
at the time of liquidation of company common stock holders are repaid after payment of all the
debts and preferred stock holders.
Types of long term debts
1. Treasuries -these are issued by central bank and government. These have maturity
period of 2 years, 5years, 10 years, 15 years or 20 years.
2. Municipal Bonds -There instruments of debt are issued by the government in
order to fund the infrastructure projects it launches. These are classified as bonds
with the lowest risk. Risk is slightly higher than the risk in treasuries.
3. Corporate Bonds -risks associated to these are higher than treasuries and
municipal bonds (Nikolova, Wang and Wu, 2020). Rating agencies rate corporate
bonds depending upon solvency ratios in their analyses.
4. Mortgages -real estate, buildings or lands are put as collateral by the company to
get a loan (Briggs and Zuijderduijn, 2018). Loan amount is equal to up to 80%
value of the collateral.
5. Debentures -debentures are the unsecured bonds that are not secured by any
company. In case of liquidation of the company, debenture holder becomes the
creditor of the company. Debenture holders are paid before payment is made to
ordinary or preference share holders.
6. Income Bonds -interest on income bond is to be paid by company only when it
earns the interest. Interest gets accumulated if its not paid. In case of low profits
interest amount is paid on the basis of appropriation.

7. Equity Linked Debt -some debt issues are linked to common or preferred stock, it
means it allows the holder to get company's common stock in exchange for the
security. Interest costs of the debt issued with conversion option are less than the
similar debt without conversion options.
CONCLUSION
Based on this report different types of business enterprises have been evaluated.
Difference between ordinary and preferred form of share capital have been analyzed. This report
also highlighted the different ways of organizing finance through long term debts.

REFERENCES
Books and Journals
Bennett, R. J. and et.al., 2019. The age of entrepreneurship: Business proprietors, self-
employment and corporations since 1851. Routledge.
Briggs, C. and Zuijderduijn, J. eds., 2018. Land and Credit: Mortgages in the Medieval and
Early Modern European Countryside. Springer.
Gurung, J. B., 2020. Initial Public Offering Investment: The General Investors’
Perspective. Management Dynamics. 23(2). pp.173-184.
Nikolova, S., Wang, L. and Wu, J. J., 2020. Institutional allocations in the primary market for
corporate bonds. Journal of Financial Economics. 137(2). pp.470-490.
Oreiro, J. L., de Paula, L. F. and Heringer Machado, J.P., 2020. Liquidity preference, capital
accumulation and investment financing: Fernando Cardim de Carvalho’s contributions
to the Post-Keynesian paradigm. Review of Political Economy. 32(1). pp.121-139.
Online
Partnership. 2022. [Online]. Available through:
<https://www.entrepreneur.com/encyclopedia/partnership>