Understanding Economic Units and Business Structures

Posted on Oct 15, 2024 in Economy

Economic Units

Businesses and Consumers

Businesses and consumers are generally known as economic units. These units combine human and physical components to obtain goods and services to meet present and future needs.

Companies

A company is defined as the set of material, human, and capital resources that interact to accomplish a goal, whether or not for profit. Companies are the most prevalent economic units in the commercial sector.

Types of Companies

There are two main types of companies:

  • Societies of People: Formed by two or more persons who voluntarily associate to create a common heritage with the aim of obtaining a benefit for members. These include:
    • Simple Collective Society
    • Limited Liability Society
    • Limited Society
  • Capital Companies: Incorporated by capital injection through share purchases. These include:
    • Cooperative
    • Anonymous Society
    • Limited by Shares Society

Cooperatives

Cooperatives are associations that aim to improve the living conditions of their members. Key characteristics include:

  • All partners have equal rights and obligations.
  • One vote per person.
  • Voluntary income and retirement.
  • Operating surpluses are distributed among partners.

Characteristics of a Society

According to Civil Code Article 2053, a society or company is a contract in which two or more persons provide something in common with a view to distributing the resulting benefits among themselves.

General Partnership

The name of these societies must include the names of members, followed by “and Company” or “Cia.” (e.g., Moreno y Cia Giacaman). The capital is formed by the contributions each partner makes, as outlined in the charter. Any increase in capital requires member agreement and charter modifications.

Limited Liability Company

The name includes the names of partners and “Co. Limited” (Ltd.) to indicate limited liability (e.g., Moreno and Henriquez y Cia Ltda). The capital consists of member contributions. Members’ liability is limited to the amount of their capital contributions.

Individual Limited Liability Company (EIRL)

Its constitution is formal and must be documented. An extract is filed in the Trade Register and published in the Official Gazette within 60 days. The holder of the firm or their authorized representative manages the EIRL.

Features:

  • The EIRL is a legal entity with assets separate from the owner’s.
  • The EIRL is subject to the Commercial Code and can conduct civil and commercial operations, except those legally reserved for corporations.
  • The name must contain the owner’s name, an optional fancy name, and “Individual Limited Liability Company” or “EIRL.”

Limited Liability

The company is solely responsible for its obligations with all its assets. The owner is liable only for the actual payment of their committed contribution, as per the act and its amendments (subject to exceptions).

Limited Partnership

Formed by two types of partners: capitalists (limited partners) and those who manage (managing partners). There are two kinds: limited partnership and in-stock. The name includes the managing partners’ names and “and Company.” Capital comes from limited partners, but managing partners are also liable for obligations and losses. Limited partners are liable only up to their capital contributions.

Corporations

Key features include:

  • A corporation is a legal person, capable of assuming rights and civil obligations, and being represented in and out of court.
  • It is independent of individual partners, existing as a separate legal entity from its shareholders.

Economic Duality

Businesses require resources. There’s a constant flow of goods and rights, each with a source. Every resource used must be financed by a source, and every source funds a resource’s use. This is economic duality.

Accounting for Economic Duality

Basic financial statement concepts express economic duality. These are divided into two groups:

  1. Resources and their sources: assets, liabilities, and equity.
  2. Results of operations: expenses, revenues, profits, and losses.

Assets are resources owned by the company, regardless of source (e.g., money, property, rights). A resource is an asset if previously acquired, whether owned or controlled by the company. Examples include:

  • Cash or bank deposits
  • Goods for sale
  • Materials and products in process
  • Receivables from customers

Assets: Resources controlled by the company due to past events, with expected future economic benefits.

Liabilities are external funding sources, representing contractual commitments to future economic benefits (e.g., loans, supplier credits). These are financing sources used by the company for its activities. Examples include:

  • Bank loans
  • Payables
  • Tax obligations
  • Commitments to provisional institutions
  • Obligations to staff

Liabilities: Present obligations from past events, whose payment will likely result in an outflow of resources.

Equity represents funds contributed by owners, partners, or shareholders. Unlike liabilities, these are the company’s own funds, not claimable by third parties. Equity includes capital contributions, retained profits, and revaluation reserves (updates due to inflation).

Equity: The residual interest in assets after deducting liabilities.

Earnings are increases in equity from unusual events (e.g., property sale, trial compensation).

Losses are decreases in equity from unusual, non-operational events (e.g., selling a car below cost, fire, theft).

The difference between earnings and losses is the extraordinary result.

Double-Entry Bookkeeping

Double-entry bookkeeping records economic events, enabling classification, registration, calculation, and storage of data on economic variations.

Economic Duality: The principle explaining an economic phenomenon.

Accounting Equality: The mathematical demonstration of economic duality.

Double Entry: The recording technique based on economic duality.

Accounts are named according to their use and should represent the assets or commitments involved. They are divided into:

  • Equity Accounts:
    • Asset Accounts
    • Liability Accounts
    • Heritage Accounts
  • Income Statement:
    • Income Accounts
    • Expense Accounts
    • Earnings Accounts
    • Loss Accounts