Introduction to Financial Accounting: Business Structures

Flashcards based on lecture notes regarding the legal structures, advantages, and disadvantages of Sole Proprietorships, Partnerships, and Limited Liability Companies (LLCs).

What principle states that a business is a separate entity from its owners and must keep distinct financial records?

Business Entity Concept

When an owner takes $Rs.\,50,000$ from a company account for personal use, how is this transaction recorded?

It is recorded as 'drawings', which reduces the owner's investment (equity) in the business.

What is the primary legal liability risk for a Sole Proprietor?

Unlimited personal liability, meaning creditors can claim personal assets if business debts cannot be repaid.

What is the owner capacity for a partnership as stated in the documentation?

A minimum of $2$ partners and up to $20$, with an exception for professional partnerships.

In a partnership, if one partner cannot pay a shared debt of $LKR\,10\text{ million}$, what is the legal obligation of the other partners?

The other partners are legally obligated to cover the full amount due to joint and several liability.

Which specific law recognizes a Limited Liability Company (LLC) as a separate legal entity in Sri Lanka?

Companies Act No. 7 of 2007

To what extent is a shareholder's liability limited within an LLC?

Shareholders' liability is limited to the value of their unpaid shares.

What feature of an LLC ensures the business continues to exist despite changes in ownership?

Perpetual succession

How does the tax treatment of an LLC differ from a Sole Proprietorship under the Inland Revenue Act?

An LLC is subject to a separate corporate tax, while a Sole Proprietorship's profits are taxed as personal income.

Who is responsible for the strategic decision-making in a Limited Liability Company?

A Board of Directors elected by the shareholders.

Which regulatory ordinances mandate the registration of Sole Proprietorships and Partnerships?

The Business Names Ordinance and the Partnership Ordinance, respectively.

What are the primary compliance disadvantages of choosing an LLC structure?

Higher costs and obligations including annual returns, board meetings, audits, and the loss of privacy due to public disclosure of financial information.