Organizational Forms and the Business Goal

Financial accounting is important within all types of business organizations, the major forms of which are introduced here:

	A sole proprietorship is a business owned by an individual or family. The assets and liabilities of the business are the personal assets and liabilities of the proprietor.
	A partnership is a business owned by two or more individuals called partners. Unless otherwise specified, the assets and liabilities of the business are the personal assets and liabilities of the partners.
	A company is a legal entity independent of its owners – unlike a sole proprietor or partnership. It can sue and be sued. It can own assets, borrow, and contract on its own behalf. A company is owned by its shareholders. Shareholders elect a board of directors who employ managers to run the business.

In sole proprietorships and partnerships, the owners and managers of the business are generally the same people. In companies, the owners (that is, the shareholders) do not necessarily manage the business. This separation of ownership and control, while having many advantages such as knowledge and experience in particular areas, often creates a conflict of interest. Owners or shareholders pay managers to run the business in their best interests. The manager's prime responsibility is to make decisions in the best interests of maximizing shareholder wealth, but managers may sometimes neglect their obligations to the shareholders.