| Course | MAT 200 Principles of Accounting I |
|---|---|
| Module | Module 8 |
| Paper type | Business entities paper |
| Length | About 1,003 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | Business Administration |
| Updated | October 2026 |
Free sample paper for MAT 200 Module 8
One Owner or Two? Choosing a Business Entity and Reshaping a Bike Shop's Financial Statements
Student Name
Business Administration Program, Aspen University
MAT 200: Principles of Accounting I
Instructor Name
Month Day, Year
One Owner or Two? Choosing a Business Entity and Reshaping a Bike Shop's Financial Statements
Prairie Spoke Cycles has completed its first summer. Revenue picked up after the slow start recorded in Module 5, and Sam Whitaker wants to open a second rental station at the other end of the trail network. Sam's aunt, Carol Whitaker, has offered $40,000 for a one-third share of the business. Until now, Prairie Spoke has been a sole proprietorship: Sam owns it, and the law does not separate Sam from the business. Taking on a co-owner raises a question every growing small business faces: what legal form should it take? This paper compares the options, shows how each would change the financial statements and recommends one, drawing on the statements and records built in earlier modules. It is an accounting analysis, not tax or legal advice.
Three Forms
A sole proprietorship belongs to one person, who answers for every debt of the business with personal assets and reports the shop's profit on a personal return. Bringing in Carol would make it a partnership unless another form is chosen. A limited liability company has members, whose liability for the company's debts is generally limited to their investment; unless it elects otherwise, an LLC with two or more members files as a partnership, and its profit flows to the members' own returns. A corporation is owned by stockholders, also with limited liability; a regular corporation pays its own income tax, while an S corporation election passes income through to owners, subject to rules on who may own shares.
How the Statements Change
For an LLC formed when Carol invests, the balance sheet would show Sam's capital of about $82,250 plus the summer's profit and Carol's capital of $40,000. Total assets would rise by the $40,000 in cash, and nothing else on the asset or liability side would change until the money is spent on the second rental station's bikes and equipment. Profits and losses would be divided as the operating agreement specifies, which need not match the capital balances.
| Sole proprietorship | Two-member LLC | Corporation | |
|---|---|---|---|
| Owners' contributions | Sam Whitaker, Capital | Sam Whitaker, Capital; Carol Whitaker, Capital | Common Stock; Paid-in Capital |
| Profits kept in the business | Added to Sam's capital | Divided between members' capital accounts per the agreement | Retained Earnings |
| Withdrawals by owners | Sam Whitaker, Drawing | Members' distributions | Dividends declared |
| Owner's pay | Not an expense | Generally not an expense for members | Salary to owner-employees is an expense |
| Equity statement | Statement of owner's equity | Statement of members' equity | Statement of stockholders' equity |
Who Incorporates
Levine and Rubinstein (2017) distinguished between incorporated and unincorporated self-employment, two groups often combined in studies of entrepreneurs. They found that the incorporated self-employed earned more, both compared with salaried workers and with the unincorporated, and had distinct characteristics, including higher learning aptitude, self-esteem and a disposition toward risk-taking and illicit activity in youth. The study suggests that the choice of form reflects the type of venture and the owner's ambitions, not only tax or liability calculations.
What Limited Liability Is Worth to a Borrower
Avery et al. (1998) studied the role of personal wealth in small business finance. They found that personal commitments, such as guarantees and collateral pledged by owners, were a large part of small business lending, and that owners' personal wealth mattered for their firms' access to credit. For Sam, the implication is that forming an LLC will not by itself shield personal assets from the bank loan: the bank already holds Sam's personal guarantee, and any new loan will likely require one from both owners.
Keeping the Bank Relationship
Petersen and Rajan (1994) used survey data on small businesses and found that close relationships with lenders, built over time and across multiple services, increased the availability of credit, while the effect on interest rates was smaller. Prairie Spoke's relationship with its bank, supported by the clear quarterly statements prepared in earlier modules, is an asset. A change of form should be explained to the bank in advance, with updated statements, so the relationship continues.
Recording Carol's Investment
If the LLC is formed, the entry for Carol's $40,000 would increase Cash and open a capital account in Carol's name for the same amount. Sam's existing equity would carry over as Sam's capital account. Each year, the closing process from Module 5 would divide net income between the two capital accounts according to the operating agreement, for example two-thirds to Sam and one-third to Carol, and each member's distributions would be closed to that member's capital account. The rest of the accounting system, from journals to adjusting entries to bank reconciliations, would continue unchanged.
Why Not Incorporate Now?
A corporation would also give Carol limited liability and a clear ownership share through stock. But a regular corporation's profits are taxed at the company level and again when paid as dividends, and the additional formalities, such as a board, minutes and separate payroll for owner-employees, add cost for a shop with five employees. If Prairie Spoke later grows to several locations and seeks outside investors beyond the family, incorporation can be revisited.
Recommendation
Prairie Spoke should form a two-member LLC. It accommodates Carol as a co-owner, keeps pass-through taxation, limits liability for debts not personally guaranteed and requires only modest changes to the accounting system: separate capital and distribution accounts for each member and a statement of members' equity. An operating agreement should set how profits are divided and what happens if a member wants to leave. Sam should consult an accountant and attorney on the details, including Nebraska's filing requirements and how the change affects the shop's sales tax permit and loan documents.
Conclusion
The course has followed Prairie Spoke from its first transactions through journals, adjustments, statements, inventory and cash controls. The choice of form changes only the equity section of the statements, but it changes who owns the business. Levine and Rubinstein, Avery, Bostic and Samolyk and Petersen and Rajan show that the decision is about owners and lenders as much as accounting.
References
Avery, R. B., Bostic, R. W., & Samolyk, K. A. (1998). The role of personal wealth in small business finance. Journal of Banking & Finance, 22(6-8), 1019-1061. https://doi.org/10.1016/S0378-4266(98)00016-8
Levine, R., & Rubinstein, Y. (2017). Smart and illicit: Who becomes an entrepreneur and do they earn more? The Quarterly Journal of Economics, 132(2), 963-1018. https://doi.org/10.1093/qje/qjw044
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3-37. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x
MAT 200 Module 8 instructions, in plain terms
MAT 200 closes with business entities and financial statements in Module 8, and students commonly compare forms of business organization and explain how each affects the accounting. Your course's Module 8 directions govern; the shop and figures are invented, and the paper is not tax or legal advice. Describe the decision. Compare the forms on ownership, liability, taxation and accounting. Show how each form changes the financial statements, especially equity. Consider how lenders view each form. Recommend a form, explain why and show how the investment would be recorded. Cite sources in APA 7 form.
How the MAT 200 Module 8 example is put together
Sam Whitaker's aunt offers $40,000 for a one-third share, which would let the shop open a second rental location on the trail network. Levine and Rubinstein's Quarterly Journal of Economics article distinguished incorporated from unincorporated self-employment and found that the incorporated earned more and had distinct traits. Avery, Bostic and Samolyk's Journal of Banking and Finance article found that personal wealth, commitments and guarantees play a large role in small business credit. Petersen and Rajan's Journal of Finance article used small business survey data to show that lending relationships increase the availability of credit. The equity table compares owner's capital and drawing accounts for a proprietorship, members' capital accounts for an LLC and common stock and retained earnings for a corporation. The paper recommends a two-member LLC, with an operating agreement, separate capital accounts and the bank relationship kept intact.
Where the marks sit in the MAT 200 Module 8 rubric
Entity papers earn credit when they compare forms on more than liability, show the accounting consequences and connect the choice to the business's situation. This example compares ownership, liability, taxation and accounting, shows how the equity section changes under each form and uses Levine and Rubinstein, Avery, Bostic and Samolyk and Petersen and Rajan to add evidence about owners and lenders. The table makes the accounting differences concrete, and the recommendation follows from the investor's arrival. Noting that personal guarantees limit the value of limited liability shows realistic understanding. Showing the journal entry for the new investment and how closing changes under the new form ties the decision back to the accounting cycle.
MAT 200 Module 8 help: mistakes that cost marks
Entity papers often treat limited liability as complete protection. Explain that lenders commonly require personal guarantees from small business owners. Another weakness is ignoring the accounting effects; show how equity accounts change under each form. Compare taxation in general terms and recommend professional advice for specifics. Connect the choice to the business's needs, such as bringing in an investor. Consider how lenders and investors will view the change, and whether existing loans need the lender's consent. Finally, draw on the earlier modules so the paper closes the course. Show the entry that records the new owner's investment.
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MAT 200 Module 8 questions, answered
What does MAT 200 Module 8 usually ask for?
Aspen's MAT 200 closes with business entities and financial statements in this module, so comparing forms of business and their accounting is typical. Look at your classroom prompt.
How does the equity section differ between business forms?
A proprietorship shows owner's capital and drawings; an LLC shows each member's capital; a corporation shows contributed capital such as common stock and retained earnings.
Does limited liability fully protect small business owners?
Not always. Avery, Bostic and Samolyk found that personal wealth and guarantees play a large role in small business borrowing.
Where can I find a free MAT 200 Module 8 sample paper?
The example above compares entity forms for a bike shop taking on an investor and shows how its statements would change.
Do lending relationships matter for small firms?
Petersen and Rajan found that closer relationships with lenders increased small firms' access to credit.