Accounting for a Sole proprietorship vs Corporation
by Reginald Brown
(Sumter, South Carolina)
South Carolina Drayton Plantation
Q: I am a business student at South University. I'm taking an accounting class right now. This is one of the questions I had for my first assignment in my class. I don't think my answer is right. I need help with the question.
You are planning to start a small business that you want to run as a sole proprietor. A friend of yours, who has been an employee of a business-consulting corporation for three years, suggests that the corporate form of ownership is more efficient from an accounting perspective. Do you agree? Explain your answer with appropriate examples.
Owners of corporations and sole proprietors can both invest and reinvest in their companies. I think a corporation can grow faster than a business run by a sole proprietor. Corporations have more owners (stockholders) that can invest large amounts of money and reinvest into the business. A sole proprietor can put money back into their business or get loans; but their business will still grow slower than a corporation.
A: Hi Reginald, and thank you for your question.
Yes, it is generally easier to attract and raise capital with a corporation, and that is the main advantage of choosing this.
Remember, a corporation is either a private or public company with numerous owners. These owners are know
. Each of these shareholders invest a certain amount in the business and thus own a part of it.
But because corporations are generally larger, with more money involved and more owners, the government always requires them to comply with more regulations
(because more people would be affected if things go wrong). These increased regulations includes accounting regulations
Accounting regulations for a corporation include the requirement to publish annual financial reports
for their various stakeholders.Sole proprietorships definitely have less regulations
Other people may think differently, but in my opinion, this point about regulations makes corporations less efficient from an accounting perspective than sole proprietors
. Or at least means that there is much more work to do.
For corporations, there simply is a lot more accounting work to do, more records to keep, more financial reports to put together, etc.
Do a bit of research about the regulations (especially accounting regulations) that have to be followed by a corporation and you'll see what I'm talking about.
When answering a question like this, remember to add some examples (the assignment specifically asks for this). You can use a well-known public company like Facebook, Amazon, Netflix, or any other. You can even Google them and see their latest financial reports and use this as part of your answer.
Hope that helps.
Founder of Accounting-Basics-for-Students