Financial Definitions

Many times when a person starts a business it is usually just a small company owned by a solitary person (sole proprietorship) or by two or more people (a partnership). With a corporation, however it is the one seen as an individual even though it may be made of hundreds, maybe even thousands of people. This means that the corporation has its own rights and responsibilities.

To start a corporation, a form is filed, this is done by the Secretary of State in the state where the corporation is started. Like a person, it is a whole seperate entity from those who owns it, it is also responsible for all the debts that it creates. In fact, if the corporation fails and goes bankrupt, none of its stock holders will have to worry about the bank coming for their assets.

The corporation will give a piece of its ownership to anyone who invests through stock certificates which usually tell them how much of the company shares that they own. The corporation will keep a list of all the people who own it. These people may be called either stockholders or shareholders.

In most cases, the stock will have different classes, the preferred stockholder's will make a certain amount of money (cash divident), paid every year. With what is called common stockholders will need to pay their liability first. After the debt is paid if there is money left, the prefered stockholders are the ones who are paid first, then if there is anything left then common stockholders are paid.

One of the most important things that businesses need is to make a profit, in order to make that profit, there are many different things that must be considered. Most of these companies will sell their products in hopes that they will make that profit. Their accountant will create the asset account "accounts recievables" to record the amount that a company stands to make should all the clients with balances were to pay them the amount owed. However in most cases the company does not recieve all of that money even at the end of thier fiscal year.

That being said the assets show the sales revenue when sales are made, and liablilities when expenses are incurred as well. Therefore the way it works is when ever a business takes money in for goods and services they increase the number of assets that they have. When they pay bills to run the business those are the liabilities.

When a person decides that his/her business will not be seperate from him (a seperate entity) he may want to become a sole proprietorship. This type of company means that everytime the owner makes a sale or provides a service, he is doing so for his own profit. This person who is making the profit will be required by the IRS to file a Scedule C which is a "Profit and Loss from a Business" statement, in addition to his or her regular income tax. This document explains your income and your expenses during your sole proprietor year in business.

Additionally, the person who is a sole proprietor also takes on all of the liabilities of the company, meaning if the money is not available within the company, the person will need to pay for it, and the creditors you owe may come after your income or your assets. In most cases people are unaware of this and they will find that if the company is losing money that they will need to pay back all of its debts.

The sole proprietor may not have other people that they need to make the tax statement for, but he must be aware of his own and how the business is doing. Additionally when he files for a business loan, he must show proof of capitol, credit and what ever paperwork they may require. He will also be responsible even if the business cannot meet its obligations which means that his home and other assets could be in jeapardy of being foreclosed for non payment.

Another thing that is important to remember is that the sole proprietor has no partners in which to share his income with, so all profits, whatever they may be will belong to him.