Introduction

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Fundamental differences

There are some fundamental differences between the accounts of sole traders and partnerships and limited liability companies. 

The following are perhaps the most significant.

  1. Legislation governing the activities of limited liability companies tends to be very extensive. 

    It may specify that the annual accounts of a company must be filed with a government bureau and so available for public inspection; and they often contain detailed requirements on the minimum information which must be disclosed in a company's accounts. 

    Also, the financial statements of companies must be audited annually.

  2. The owners of a company (its shareholders) may be very numerous. 

    Their capital is shown differently from that of a sole trader; and similarly the 'appropriation account' of a company is different.

  3. The liability for the debts of the business in a sole trader or partnership is unlimited, which means that if the business runs up debts that it is unable to pay, the proprietors will become personally liable for the unpaid debts, and would be required, if necessary, to sell their private possessions in order to repay them. 

    On the other hand, limited liability companies offer limited liability to their owners. 

    Limited liability means that the maximum amount that an owner stands to lose in the event that the company becomes insolvent and cannot pay off its debts, is his share of the capital in the business.

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