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Accountants should be familiar with the types of businesses and forms of ownership because of the differences in accounting practices.

A business is an organization or firm that uses economic resources such as materials, labor, and other inputs, to provide goods or services to customers in exchange for money or other goods and services. Business organizations come in different types and forms. In accounting, it is important to know them because there are differences in accounting for the transactions of each type of business and form of ownership.

3 Types of Businesses

There are three major types of businesses:

1. Service Business – A service type of business provides intangible products (products with no physical form). Service type firms offer professional skills, expertise, advice, and similar products. Examples of service businesses are: schools, repair shops, hair salons, banks, accounting firms, and law firms.
2. Merchandising Business – This type of business buys products at wholesale price and sells the same at retail price. They are known as "buy and sell" businesses. They make profit by selling the products at prices higher than their purchase costs. Merchandising businesses sell a product without changing its form.
3. Manufacturing Business – Unlike a merchandising business, a manufacturing business buys products with the intention of using them as raw materials in making a new product. Thus there is a transformation of the products purchased. The manufactured goods will then be sold to the customers. Manufacturing businesses combine raw materials, labor, and factory expenses in producing goods to be sold.

Hybrid businesses are companies that may be classified in more than one type of business. A restaurant, for example, combines ingredients in making a fine meal, sells a cold bottle of wine, and fills customer orders. Nonetheless, hybrid companies may be classified according to their major business interest. In that case, restaurants are more of the service type -- they provide dining services.

Forms of Business Organizations

These are the basic forms/types of business ownership:

1. Sole Proprietorship – A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner in case the business entity cannot pay them. The sole proprietorship form is usually adopted by small business entities.
2. Partnerships – A partnership is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among themselves. In general partnerships, all partners have unlimited liability. In limited partnerships, the limited partners are liable to third parties only to the extent of their investment.
3. Corporations - A corporation is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock. The owners (stockholders) enjoy limited liability but have limited involvement in the company's operations. The board of directors, an elected group from the stockholders, controls the activities of the corporation.

In addition to those basic forms of business ownership, these are some other types of organizations that are common today.

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is not considered a corporation. Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation.

A cooperative is a business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group are called members. Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative banking, credit unions, and housing cooperatives.

Accountants should be familiar with the different types of businesses and forms of ownership because of the differences in accounting and other practices.

For example, in a sole proprietorship type of business, capital is known as owner's equity. It is called partners' equity in partnerships, and stockholders' equity in corporations. Under the service type of business, the main income account is Service Revenue or Professional Fees; but for merchandising and manufacturing concerns the main income account is Sales. Plus, there are also clear differences in accounting for inventories (and other accounts).

These differences will be presented in depth as you go through this course. The early lessons of this site deal with the service type of business and sole proprietorship form of ownership. Accounting for the other types and forms are discussed in later tutorials. Nonetheless, all tutorials include topics that may be applicable to all types and forms of business so be sure to check them out.

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