BUSINESS ETHICS AND

SOCIAL RESPONSIBILITY
2nd Edition

3G E-LEARNING
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
2nd Edition

3G E-LEARNING

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TABLE OF CONTENTS
Section 1 Role of Business in Social
And Economic Development
• Scope.......................................................................................1
• Learning
Objectives...............................................................................1
• Overview................................................................................2
Unit 1 Nature and Establishment of
Business Enterprises
• Introduction...........................................................................5
• Learning
Objectives...............................................................................5
• Business Organization: ——
Process and Nature...............................................................6
—— Process for Choose a Business Organization.........7
• Purposes of Establishing Business Enterprises ...............8
—— Manage the Business Enterprise..............................9
—— Business Enterprise Planning.................................10
• Basic Forms of Business
Organizations......................................................................11
—— Sole Proprietorships................................................12
—— Partnership................................................................14
—— Information Sheet....................................................16
—— Corporations.............................................................17
• Unit Summary.....................................................................19
• Multiple Choice Questions................................................20
• Points of Discussion............................................................21
—— Answers to Multiple Choice Questions................22
• References............................................................................22
Unit 2 Business Organizations for
Socio-economic Development • Philosophies of Business
• Introduction.........................................................................27
• Learning
Objectives.............................................................................27
• Socio-economic Development...........................................28
—— Principle of Socioeconomics in Business
Organization.............................................................30
—— Business Operation and Stewardship...................31
iii
—— Socioeconomics Affect Work Relationships.........33
• Share Observations on
Business Policies and
Practices . .............................................................................34
—— Socio-economic aspect of a Business Plan............35
—— Examples of Business Policies................................36
—— Create Company Policies........................................37
—— Interpret Business Policies for Customers............38
—— Core Business Practices...........................................38
—— Common Business Practices...................................39
—— Information Sheet....................................................41
Ethical Business Practices and Social
Responsibility...........................................................42
• Unit Summary.....................................................................42
• Multiple Choice Questions................................................43
• Points of Discussion............................................................44
—— Answers to Multiple Choice Questions................45
• References............................................................................45
Section 2 The Principles of
Business Ethics
• Scope.....................................................................................49
• Learning
Objectives.............................................................................49
• Overview..............................................................................50
Unit 3 Foundations of Business
Ethics
• Introduction.........................................................................53
• Learning
Objectives.............................................................................53
Ethics.....................................................................................54
—— Ancient Philosophy.................................................55
—— Virtue Ethics.............................................................56
—— Principles of Ethics..................................................57
• Technology Affect Business Ethics...................................60
—— Ethical Business Practices.......................................61
—— List of Ethical Issues in Business...........................61
 —— Effects of a Lack of Ethics on a Business —— Ways to Enhance Employer-Employee
Environment.............................................................62 Relationship............................................................100
—— Importance of Ethics in Business...........................63 —— Communicate Openly...........................................100
—— Information Sheet....................................................64 —— Business Ethics.......................................................101
• Unit Summary.....................................................................65 —— Employee Retention..............................................102
• Multiple Choice Questions................................................66 • Business Recruitment.......................................................103
—— Answers to Multiple Choice Questions................67 —— Step-1: Form a Business Recruitment Team.......104
• Points of Discussion............................................................67 —— Step 2: Create a Supportive Business
• References............................................................................68 Environment...........................................................105
—— Step 3: Assemble Recruitment and Marketing
Materials..................................................................106
Unit 4 The Filipino Value System
of Business Constituents —— Step-4: Maximize Your Success...........................108
• Introduction.........................................................................73 —— Business Environment Analysis..........................108
• Learning • Principles of Responsible Business.................................109
Objectives.............................................................................73
—— Human Rights Principles......................................109
• Filipino Value......................................................................74
—— Supplier Conduct Principles................................110
—— Filipino Business Norms, Etiquette and Style.....75
• Policies and Practices in all aspects of Business
—— Ethical Business Practices.......................................77 Operations..........................................................................110
• Understanding the Filipino Culture.................................78 —— Eco-efficiency..........................................................111
• Information Sheet................................................................81 —— Items Large and Small...........................................112
—— Philippines. Experts in Filipino culture................81
—— Accountability for the Environment...................112
—— Business Meetings....................................................81
• Unit Summary...................................................................112
—— Introduction..............................................................82 • Multiple Choice Questions..............................................113
—— Conversations...........................................................82 • Points of Discussion..........................................................115
—— Eating.........................................................................82 —— Answers to Multiple Choice Questions..............115
—— Gifts............................................................................82 • References..........................................................................115
• Unit Summary.....................................................................83
• Multiple Choice Questions................................................84 Unit 6 Frameworks of Social
• Points of Discussion............................................................85 Responsibility of
—— Answers to Multiple Choice Questions................85 Entrepreneurs
• References............................................................................85 • Introduction.......................................................................121
• Learning
Objectives...........................................................................121
Section 3 Social Responsibility of
• Different Models of Social Responsibility of
Entrepreneurs Entrepreneurs....................................................................122
• Scope.....................................................................................91 • Corporate Social
• Learning Responsibility....................................................................123
Objectives.............................................................................91 —— Employee Retention..............................................124
• Overview..............................................................................92
—— Community-based Development........................125
—— Philanthropy...........................................................125
Unit 5 Responsibilities and
—— Creating Shared Value..........................................125
Accountabilities of
—— Laws and Regulations...........................................126
Entrepreneurs
• Introduction.........................................................................95 • Business Ethics and
Corporate Social
• Learning Objectives............................................................95 Responsibility....................................................................126
• Identify Responsibilities to the Business —— The Importance of Business Ethics to a
Organization........................................................................97 Company:................................................................126
—— Arguments for and Against Corporate Social
—— The Importance of Business Ethics to the
Responsibility...........................................................98
Wider World...........................................................127
—— Stakeholder Concept...............................................98
—— Personal Ethics.......................................................128
—— Contemporary Social Issues...................................99

iv
• Ethics Make Good Business Sense..................................129 —— Action Plans Important in Business....................172
• Unit Summary...................................................................131 —— Implement a Plan of Action to Strengthen
• Multiple Choice Questions..............................................132 Teamwork...............................................................173
• Points of Discussion..........................................................134 • Social Responsible
—— Answers to Multiple Choice Questions..............134 Enterprise-level Practices.................................................173
—— A business Profit earning......................................174
• References..........................................................................134
—— Nature of the Responsible Business
Enterprise................................................................175
Section 4 Business Beyond
—— Importance of Social Responsibility....................177
Profit Motivation
—— Ways to Improve Teamwork in the
• Scope...................................................................................139
Workplace...............................................................179
• Learning
Objectives...........................................................................139 • Unit Summary...................................................................180
• Overview............................................................................140 • Multiple Choice Questions..............................................181
• Points of Discussion..........................................................183

Unit 7 Establishing Business —— Answers to Multiple Choice Questions..............183

Enterprise Profit • References..........................................................................183

• Introduction.......................................................................143
• Learning Unit 9 Strategic Management for
Objectives...........................................................................143 Social Enterprise
• Establishing and sustaining Business Enterprise.........144 • Introduction.......................................................................187
—— Key Reasons to Establishing a Business.............145 • Learning
—— Primary Business Functions.................................146 Objectives...........................................................................187
• The Nature of the Strategy Development Process.......188
—— Open New business...............................................147
—— The Implementation Process of Strategic
—— Success Resources for a Business.........................148 Plans.........................................................................189
• Opportunities and Financial Freedom...........................149 • Developing a Vision and
—— Financial Objectives of a Business.......................151 Mission...............................................................................191
—— Information Sheet..................................................152 —— Cultural Dimensions in Social Enterprises........191

—— Manage Business and Personal Finance.............154 —— Vision Statement....................................................192

—— Active Roles as Decision Makers.........................154 —— Mission Statement..................................................193

• Unit Summary...................................................................156 —— Why should you Create Vision and Mission

Statements?.............................................................194
• Multiple Choice Questions..............................................157
—— Answers to Multiple Choice Questions..............158 —— Characteristics of Good Mission Statements.....194

• Points of Discussion..........................................................158 • Determining the Current Strategic Position of the

Organization......................................................................195
• References..........................................................................158
—— Developing Objectives, Strategies and Plans.....199
• Develop Business Goals and Objectives........................200
Unit 8 Prepare and implement an
—— Examples of Social Responsibility Strategies.....201
action for Business Enterprise
• Information Sheet..............................................................202
• Introduction.......................................................................163
—— Strategic Corporate Social Responsibility..........202
• Learning
Objectives...........................................................................163 —— The Role of Goals and Objectives........................203
• Prepare a Business Plan...................................................164 —— Types of Goals and Objectives.............................204
—— Steps in the Planning Process...............................165
• Implementing the Strategy..............................................205
—— Different Types of Business Plans.......................169 —— Meaning and Steps in Implementing a
—— Purposes of a Business Plan.................................170 Strategy....................................................................205

• Action Plan for Small —— Six Strategic Business Objectives.........................207

Business..............................................................................171 • Measuring Performance...................................................208
—— Setting Action Goals..............................................171 —— Reasons to Implement Performance
—— Create a Budget......................................................171 Measurement..........................................................210

—— Construct a Plan.....................................................171 —— Why choose the demonstrating value

approach?................................................................211
—— Update and Maintain............................................172
v
 —— Measure the Entire Process..................................211 • Multiple Choice Questions..............................................214
—— How to Measure Performance?...........................212 • Points of Discussion..........................................................216

—— Importance of Measuring and Managing —— Answers to Multiple Choice Questions..............216

Employee Performance.........................................213 • References..........................................................................216
• Unit Summary...................................................................213
Index 221
PREFACE

Introduction
The social responsibility of business is concerned with numerous responsibilities or tasks or
obligations that a business-organization has in the welfare of the society within which it survives
and works from. The same money and influence that enable large companies to inflict damage on
people and the environment allows them to effect positive change. At its simplest, a corporation
can give money to charity. Companies can also use their influence to pressure governments and
other companies to treat people and resources more ethically. Today, a shift has occurred in the
way people conceptualize corporate social responsibility. For decades, corporate business models
have been assumed to be necessarily harmful to certain communities and resources.

About the Book

This Second Edition covers nine units under four sections. This book is an exploratory and
introductory course which leads you to Business Ethics and Social Responsibility Certificate Level
I. The units have been revised and restructured with updated content to make each subject matter
more interesting and easier to understand by the students. It aims to inspire learners in striving
harder by developing a sense of responsibility and commitment as they go along with the course.

Unit 1 focuses on business organization process and nature with the purposes of establishing
business enterprises. It also highlights on basic forms of business organizations.
Unit 2 covers business policies and practices and Socio-economic development process that
seeks to identify both the social and the economic needs within a community, and seek to create
strategies that will address those needs in ways that are practical and in the best interests of the
community over the long run.

Unit 3 focuses on philosophies of business ethics and technology effect on business ethics
Unit 4 discusses on Filipino values and culture.
Unit 5 reveals on responsibilities to the business organization policies and practices in all aspects
of business operations.
Unit 6 examines the different models of social responsibility of entrepreneurs
Unit 7 presents an overview of establishing business enterprise profit for a business that desires
to expand its operations.
Unit 8 illustrates how to prepare and implement an action for business enterprise

Unit 9 focuses on the nature of the strategy development process and business goals and objec-
tives.
The following are the salient features of the book:
 Each section contains the scope, overview, and objectives.
 Topics are logically arranged according to the course outline of the subject.
 The use of simple language to facilitate a better understanding of each unit.
 Illustrative examples of varying difficulties are presented to enhance the interest of stu-
dents.
 The provision of progress check test for every unit is given at the end of unit to strengthen
the learning process of students.
UNIT 1
NATURE AND ESTABLISHMENT
OF BUSINESS ENTERPRISES

INTRODUCTION LEARNING
Business enterprise is a very general term that describes
OBJECTIVES
After reading and analyzing the
businesses that are attempting to enter industries or create unit, you should be able to:
new markets. The numbers and success of business enterprises 1. Explain business
in an economy are sometimes used to gauge economic activity. organization process and
Business enterprises must deal with specific taxes and can nature
sometimes struggle to find enough funding to succeed. A 2. Discuss purposes of
establishing business
business enterprise is simply a business started to make a profit. enterprises
This is distinguished from some other businesses, which owners 3. Describe basic forms of
create to supply themselves and others with jobs. A business business organizations
enterprise revolves around a single idea, a mission which the
owner intends to use to create a viable company for the purpose
of making a profit and succeeding in the business world.

Business enterprises are begun by entrepreneurs who have

the knowledge required to start a business, and a key idea
 about a product or service and how it can be used to create a
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

customer base and turn a profit. The entrepreneur creates a detailed

business plan outlining what the business needs to start, what its
marketing techniques will be, how it will deal with competition,
and what its first few years of growth will look like. With this
plan, the entrepreneur tries to find funding to start the enterprise.
The more enterprises that are being started in an economy, the
more individuals are having ideas and finding enough capital to
begin their own businesses. This is generally considered a good
economic sign. A low number of yearly enterprises may be a sign
that entrepreneurs cannot find financing, or that small businesses
are being choked out by large corporations.
Business enterprises fail very easily, most because of inexperience
and funding problems. To help these enterprises survive, many
organizations offer special funding for specific types of businesses.
Some organizations specialize in funding for enterprises run by
women or other minorities, while government agencies help small
businesses through loans and advice.

BUSINESS ORGANIZATION:
PROCESS AND NATURE
LEARNING OBJECTIVE A business organization is an individual or group of people
Explain business that collaborate to achieve certain commercial goals. Some
organization business organizations are formed to earn income for owners.
process and nature
Other business organizations, called nonprofits, are formed for
public purposes. These businesses often raise money and utilize
other resources to provide or support public programs.

Organization Meaning
The best way to derive the meaning of the term “business organization”
is to focus on each word separately. Organization is a broader term,
as it includes businesses and other groups of people not organized for
commercial purposes. Clubs and sports teams are examples of non-
business organizations. Organizations have a specific structure and
hierarchy. People and systems create a culture within the organization
and guide its operation. Different organizations have different policies,
KEY WORD work flows and objectives.

Local purchasing is
a preference to buy
Business Meaning
locally produced goods All businesses have commercial objectives. For-profit businesses
and services over those
produced farther away. sell products or services to generate revenue and earnings. Success
depends on the ability to gain more in revenue than is spent on fixed
and variable expenses. Nonprofit businesses must bring in enough
revenue to pay employees and cover the costs to administer or support
programs. Any money they have left over after expenses is put back
into the organization.

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System View
Definitions of organizations typically
emphasize the systematic approach used
to achieve goals. Businesses typically begin
with a hierarchy that establishes structure
and order in communication and workflow.
Business leaders work to establish a business
mission, vision, values, objectives and
strategies. These establish the direction for
the organizational system. People, processes
and policies are used to fulfill the mission
and strategies. The effectiveness of a business
organization often relates to the ability of
leaders to get all departments and employees
to work together toward company objectives.
Organizational Culture
An organizational culture reflects the shared
values within the organization that impact
employee morale, communication and,
ultimately, success. Companies use formal
processes and activities to influence culture,
such as social activities to promote teamwork.
However, much of an organization’s unique
culture evolves through informal channels. For
example, a company’s culture can be affected
by the way employees communicate during
lunch, breaks and other informal encounters.
Process for Choose a
Business Organization
Selecting the right business organization is
an essential part of starting a new small
business. When business owners register a
new business, they must also state the type
of organization, or structure, they will use
for their business. Each option has distinct
qualities, as well as pros and cons, that the
business owner needs to consider before
making a commitment. Choosing the right
type of organization for a new business comes
down to a little research and an understanding
of the responsibilities involved with each
structure.
►► Step 1: Research the different types
of business organizations. The most
important structures to consider
include the sole proprietorship,
the partnership, the corporation (in
3G E-LEARNING
addition to the S-corporation) and the
NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES
limited liability Company, or LLC.
The sole proprietorship is, as the name
suggests, owned by a single person,
and the partnership, corporation and
LLC allow for multiple owners. To
understand the specific differences
among each, consult Business.gov
or the IRS publication on business
structures.
►► Step 2: Determine the liability you want
for the business. A sole proprietor is
personally and financially responsible
for the business, and the business
income is filed on the business
owners personal tax statements. If the
business fails, the sole proprietor’s
personal assets can be tapped to pay
off business debts. Other business
structures, including the corporation
and the LLC, create distance between
the business owner or owners, and
their personal assets by making the
business a unique legal entity.
►► Step 3: Decide on the number of
owners. A sole proprietorship
allows for one official owner only,
and the other business structures
allow for multiple partners. The
sole proprietorship can limit the
difficulties that may arise when
multiple people own a single
business, but partners provides for
expanded initial contribution to the
business and shared liability for its
operation.
►► Step 4: Choose the tax structure that
is best for you and your business.
As noted, a sole proprietor files all
business information on his personal
taxes, because the business is not
registered as a separate legal entity.
At the same time, sole proprietors
are also taxed only once, rather
than twice once for personal, once
for the business. Similarly, business
owners in a partnership or an LLC
do not have to file separate business
taxes, although in these two cases
the business is recognized separately
from its owners--limited personal
liability in case of business failure.
7
 A corporation is an entirely separate entity, however, and
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

the owners must file separate corporation taxes. This means

that corporation owners are essentially taxed twice: once at
the personal level and once at the business level.
►► Step 5: Consider the amount of recordkeeping that you are
willing and able to do for the business. Recordkeeping is
an essential part of running any business, but the types of
records that you keep for the business will depend on its
structure. The more complex the business structure, the
more recordkeeping is required. In other words, expect to
keep more records for a corporation than you would for a
sole proprietorship.

PURPOSES OF ESTABLISHING
BUSINESS ENTERPRISES
LEARNING OBJECTIVE A responsible business is more than a profit machine. Though
Discuss purposes it is true that business cannot survive without profit, modern
of establishing businesses that focus solely on their income level will find that
business enterprises
communities are less likely to embrace them. Customers expect more
from a company than a good bottom line, and modern businesses
have several responsibilities beyond their main goal of staying
profitable and functional.

Community Involvement
A successful business should be invested in its community. Local
businesses can sponsor youth sports teams and facilities or efforts
to get litter off the streets. Large business can contribute money
toward new public parks and playground equipment. Businesses
that are respected by their communities will do better in the long
run, and most companies are expected to put some money back
into the community that helps make them a success.

Fairness to Employees
For every CEO or other important executive, there are a number
of low-level employees that perform the bulk of a business’ work.
KEY WORD These employees should be treated with respect, paid fair wages and
have access to benefits that improve upon their quality of life. Strong
Business failure refers businesses know that one of their most important responsibilities
to a company ceasing
is keeping their employees challenged and satisfied as these are
operations following
its inability to make two primary methods for encouraging innovation and productivity.
a profit or to bring
in enough revenue to Ethics
cover its expenses.
Companies are also expected to act ethically and honestly with the
community, their employees and shareholders. Corporate fraud,
shutting down local businesses, cheating on taxes and violating
federal and state laws can have serious repercussions for a company,
and not just in the sense of legal fees and prison time. Customers
want their companies to act like responsible and respectable members

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 NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES
WHAT DO YOU ALREADY KNOW? Understand how much you already know about using appropriate of management
in a business organization.

Manage the Business Enterprise

Effectively managing your business enterprise involves many aspects. From the
day-to-day to the large-scale annual events or maintenance, managerial duties are
often never-ending. Your solid leadership and understanding of the industry are
a great start, but these alone will not create solid management in your business.
1. Step 1: Lead with knowledge and confidence. To build your leadership skills,
find a more experienced manager willing to mentor you. Use networking
to connect with managerial staff from other companies that can give you
wisdom. In this ever-changing world, it is crucial that you stay current
and informed on any technology, products and practices that relate to
your company.
2. Step 2: Delegate effectively. No matter how skilled you are, you will not
be able to manage everything on your own. However, delegating can
create more work for you if you do not do it well. Make a list of things
that you know you must do yourself and things that could successfully
be accomplished by another. Your time should be spent in the areas in
which you excel, but be careful not to over-delegate. If you have given
too many tasks away, you will spend all of your time monitoring their
progress, leaving you unable to accomplish your own tasks.
3. Step 3: Hire the right employees and manage them with care. Interview
and screen every candidate, performing background checks and credit
checks, especially if they will be handling money. Be purposeful about job
descriptions so that the eventual employee will know of your expectations
and be clear about what is required of them. Set clear expectations
in employee manuals and be prepared to consistently enforce those
expectations. Consequences for unethical or inappropriate behavior should
be labeled in employee manuals.
4. Step 4: Motivate and train your employees. As business practices and
technology change, it is important educate your employees. Motivate them
with bonuses and rewards for specific achievements. Building employee
morale will benefit you and the business. Share the company’s success
with the employees to give them a sense of ownership and belonging.
6. Step 5: Meet the needs of your customers. Your employees should be well-
trained in customer service, but you should lead as their best example.
Make it a priority to truly listen to the needs of your customers. Ask
appropriate, open-ended questions about the customer’s needs and desires.
7. Step 6: Market your company effectively. Although the business owner may
have a paid marketing staff, you must still be willing to use your own skills
and those found in your own department to market your company. You may
be required to coordinate and create marketing activities, including print
media, target market research, advertising and customer communication.

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 of the community and often feel embarrassed or upset over a
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

business’ ethics violations. A company should always take the ethical

high ground to preserve its standing with consumers.

Environmental Impact
As environmental issues and green energy have become popular
topics in public debate, companies are feeling an increased pressure
to limit their environmental impact. Though this is a larger concern
for manufacturing businesses that deal with harsh chemicals and
harmful pollutants, even companies, from banks to video game
developers, should make an effort to host internal recycling services,
carpool and limit their energy consumption. A company should be
able to show what it is doing to proactively protect the environment
if it wants to live up to the expectations of consumers.

KEY WORD Business Enterprise Planning

Pollutant is a substance
Planning is an essential business function that requires a dedicated
or energy introduced effort from the company’s management team in order to fully
into the environment realize the benefits. Companies often have an annual planning
that has undesired process whereby the strategies and budget for the upcoming year
effects, or adversely are determined, but, ideally, planning should be a part of everyday
affects the usefulness
of a resource.
management thinking. It is a mindset of continually looking for
ways to make the enterprise more competitive.

Benefits
During the planning process, goals are set for both the short and
long term. These may be financial goals, such as increasing revenues
25% in the upcoming year, or they may less intangible but just as
significant goals, such as improving company-wide morale. Having
goals provides direction for all members of an organization. Once
goals are set, strategies are determined to reach the goals. These
are actions that must be taken to achieve the stated goals, including
who is responsible for completing them. Planning provides a sharply
focused blueprint by which the management team can guide the
company.

Research Needed
Information is the raw material that fuels the planning process.
Management must gather detailed information about the strengths
and weaknesses of competitors in order to come up with strategies
that create a competitive advantage for the company. To plan a
business enterprise, you also have to have a thorough understanding
of the current state of your industry so you can identify emerging
opportunities. Market research is also key; understanding your
customers will allow you to better attract and serve them. Consumers’
needs change, their tastes change, and what they are willing to
pay for products or services changes depending on the economic
environment.

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Thinking Process

NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES

Planning requires vision, or the ability to see success for your
company before it occurs. Knowing where you want the company
to be in three to five years and what you want to achieve during
that time is an essential ingredient of successful planning. All of
the decisions the company makes should contribute to making this
vision a reality.

Opportunity Analysis
The core concept of enterprise planning is resource allocation, or
making the tough decisions about where to spend money and devote
staff members’ time in order to reach the organization’s stated goals
and succeed versus the competition. Companies must allocate their
resources to what they determine are their best opportunities, and
should be constantly seeking out new opportunities. A company’s
best opportunities result from a combination of its capabilities, or
what it does particularly well in comparison to its competitors,
and what the most critical customer needs are. The products and
services the company offers should match up extremely well with
customer needs.

Planning the Team

The quality of the management team is an important determinant
of the company’s ultimate success. A business owner, as part of the
planning process, must constantly assess the skills and capabilities of
his current team versus the changing requirements of the business.
Growth brings increasing complexity to the operation of a business
and can expose weaknesses in management. The business owner
must anticipate this and bring in additional talent as well as build
the skills of the existing team members through additional training
and education.

BASIC FORMS OF BUSINESS

ORGANIZATIONS
Before you start a business, you need to decide what kind of LEARNING OBJECTIVE
structure your business will follow. The type of businesses Describe basic
organization you choose will determine the amount of taxes forms of business
organizations
levied on it and the nature of legal issues it may face. The most
common type of business organizations include sole proprietorship,
partnership, corporation, S corporation and limited liability company
(LLC). Each type of business organization has its own advantages
and disadvantages, so it is best to get some advice from a lawyer
and an accountant to determine which business organization suits
your business goals.
The three primary forms of business organization in the
United States are the sole proprietorship, the partnership, and
the corporation. The principal differences among them lie in the

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 ownership structure, the legal status of the
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
business and how the company’s profits are
taxed.
Sole Proprietorships
A sole proprietorship is a business owned by
one person. Legally, there is no distinction
between the business and the owner the
owner is the company, and the company is
the owner. The owner is personally liable
for all of the company’s debts. All profit
is considered to be the owner’s personal
income and must be reported on the owner’s
individual income tax return. The advantage
of this form of business organization is
simplicity: no partnership agreements to be
signed, no corporate formalities to perform.
Most people who start a small business
on their own, choose the sole proprietorship
model because its the simplest type of
business organization, in terms of legal issues
and taxation. There is only one owner in a
sole proprietorship. All the business assets
and profits belong to the sole proprietor.
However, there is limited financial safety,
because the owner is personally responsible
for all financial liabilities. The income and
expenses related to the business are filed
under the owner’s personal tax return.
A sole proprietorship is one method
of business ownership. Other possibilities
include a partnership, a corporation and a
limited liability company. When deciding
the type of business ownership that is right
for you, consider your personal liability,
tax consequences and the legal formalities.
The easiest method is not always the best
for your business; seek qualified legal and
financial advice when making this decision.
In a sole proprietorship, you own the business
personally. There are no stockholders or
partners to consult. You are completely
in control of the business, and you are
completely responsible for it. Starting a sole
proprietorship is straightforward and can
often be done quickly, without legal help,
which makes it an inexpensive business start-
up method.
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Advantages of a Sole Proprietorship
Many small business owners starting new
businesses choose to operate their companies
as sole proprietorships. Sole proprietorships
are the most common business structure and
are owned by one person. Business owners
choose to operate as a sole proprietorship
because of the many advantages available.
Choosing the appropriate business structure is
a major decision, so knowing the advantages
of operating a sole proprietorship can help
you decide if it is the best structure for your
business.
Formation
One advantage of starting a sole proprietorship
is the simplicity of formation. Very little paper
work is required if you choose to file your
business name. In most cases, you can visit
your local courthouse and complete a “Doing
Business As” or a fictitious name form to
operate under your business name. A small
fee is required for completing the paperwork.
You are then given a certificate with the
name of your business. Use the certificate
to open bank accounts and apply for business
credit cards. Unlike other business structures,
individuals owning sole proprietorships are
not required to file annual reports or legal
documents required by some other business
structures.
Ownership
The sole owner of a sole proprietorship
possesses all of the authority to make decisions
on behalf of the company. Full ownership and
management control is another advantage of
owning a sole proprietorship. Owners are not
required to attend formal meetings required
of owners and members of other business
structures. With a sole proprietorship, the
owner can decide to sale or transfer the
company to another individual and make
important business decisions at his discretion.
Taxation
Another advantage of forming a sole
proprietorship is the taxation rules established
by the Internal Revenue Service. Sole
proprietors are not required to file separate Bookkeeping

NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES

tax returns for their business. Income made
from the business is counted as personal A bookkeeping business caters to the financial
income and owners pay taxes according to needs of other businesses. A bookkeeper posts
their individual tax rates. Sole proprietors a company’s revenue, expenses and other
must pay Social Security and Medicare financial data to an accounting system. This
taxes as well. The tax rules regarding sole gives businesses owner’s accurate financial
proprietorships allow owners to avoid the information concerning their business.
double taxation of corporations. The IRS The financial information maintained by a
allows sole proprietors to take deductions bookkeeper is used to prepare a company’s
on business expenses, which lowers owners’ tax returns.
taxable income amount.
Home Healthcare
Changing Business Structures The healthcare industry usually flourishes
If your business grows to a place that the in both good and bad economic conditions.
business structure of a sole proprietorship Many sole proprietors seek to benefit from
no longer works to your advantage, you can this stability by starting home healthcare
easily change your business structure to a businesses. Many of these cater to senior
more complex model. The only requirement citizens. Services may include cooking meals,
for going from a sole proprietorship to another cleaning homes and assisting with hygiene
business structure is filling out the paperwork needs.
for your new business structure. You are
not required to fill out paperwork with a Financial Planners
regulatory body because sole proprietorships
Sole proprietors work as financial planners,
are not governed by regulatory bodies.
offering their services to individuals and
small businesses. They help families plan
Distribution of Profits for retirement, save for college expenses
Sole proprietors are the sole owners of their and invest in securities. Financial planners
businesses and do not split profits with other catering to businesses may help a company
owners. One hundred percent profit retention set up its employee retirement packages and
allows sole proprietors to use the money at other employee benefits.
their discretion. You can choose to reinvest
the money back into the business to expand Landscaper
the company, start another business or use
A landscaper may work alone or hire a small
it for personal reasons.
team of employees. Landscapers maintain
lawns, plants and trees of homeowners and
Examples of Sole Proprietors businesses. Most landscaping companies
A sole proprietorship is a business with working with commercial customers hire
a single owner and not registered as a employees to work on projects.
corporation, partnership or limited liability
company. A sole proprietor can work as an Computer Repair Services
independent contractor or operate a small
Computer repair companies are often operated
business. Sole proprietors own businesses
as sole proprietorships. Some business owners
in many industries. Many home-based
operate commercial shops, while others work
businesses are operated by sole proprietors.
from home. Small computer repair businesses
Understanding common businesses operated
typically cater to individuals.
by sole proprietors can help you decide if it
is the right structure for you.

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 Catering Company
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Catering companies offer their services for parties, weddings, church

functions and business events. In most cases, a sole proprietor
operating a catering company needs to hire employees.

Housecleaning Service
The startup costs for a housecleaning business are generally low.
Business owners can offer a variety of additional services, such as
laundry, window washing and carpet cleaning.

Freelance Writer
Some freelance writers operate as independent contractors, while
others start small publishing companies. A freelance writer provides
content to businesses owners or writes content to sell to consumers.
Press releases, sales copy, website content and blog posts are
commonly provided by freelance writers.

KEY WORD Tutoring

Entrepreneurship is the Tutoring businesses provide learning assistance to students in a
process of starting variety of subjects. Tutors may work with students in person or
a business, typically through online video chats. Many tutors have teaching experience
a startup company or extensive knowledge in the subject they are teaching.
offering an innovative
product, process or
service. Virtual Assistant
Virtual assistants help entrepreneurs with administrative functions
through the Internet. The tasks completed by virtual assistants
depend upon the needs of clients. Common tasks may include
checking emails, creating excel spreadsheets and typing documents.

Partnership
A partnership is a business with two or more owners. There are
two basic types of partnerships: general and limited. In a general
partnership, each partner is personally liable for all of the debts of
the business. In a limited partnership, some partners have limited
liability -- they can lose what they’ve put into the business, but no
more while others have full liability. Partnerships don’t pay income
taxes; instead, the owners report the company’s profits as personal
income according to their share of ownership in the company. A
partnership involves more paperwork than a sole proprietorship,
including a formal partnership agreement.
When two or more people own a business together, it is
called a partnership. The partners sign an agreement that defines
their responsibilities, contributions, profit share and the terms of
dissolution of partnership. The partners are equally responsible for
any debts that the business might incur. Partnerships need to file
annual tax returns but do not pay income tax. The partners share
the profits and report them in their personal tax return.

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Types of Partnerships

NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES

There are two basic types of partnerships: general partnerships and
limited partnerships.
General Partnership: A general partnership is the usual type
where each partner is fully active in the firm with a voice in its
management. Each is an agent of the other partner (or partners) with
full authority to act for the firm within the scope of its business
activities. Each is fully liable for the debts of the business, and each
shares in the profits.
Limited Partnership: Every limited partnership has at least one
limited partner and one general partner. The limited partner is not
legally liable for all the financial obligations of the firm. Instead, this
partner’s liability is limited to the amount of his or her investment
in the venture. A limited partner has no voice in management, no
involvement in the day-to-day running of the business. In essence,
the limited partner is largely an investor in the firm. A general
partner is one who has unlimited liability and is active in managing
the partnership.
The Uniform Limited Partnership Act defines a limited
partnership as “a partnership formed by two or more persons
KEY WORD
having as members one or more general partners and one or more Enterprise planning
limited partners. The limited partners as such shall not be bound system covers the
by the [financial] obligations of the partnership beyond the extent methods of planning
of their investment.” for the internal and
external factors that
To grasp the concept of limited partnership, think of limited affect an enterprise.
partners as investors. This is, in fact, what they are namely, investment
vehicles, as opposed to regular business partnerships. They put their
money into the partnership as a financial investment, taking none
of the day-to-day responsibilities for managing the business. In
addition, their limited liability keeps them from losing more than
they invest.
Professional Partnerships: Another way of differentiating
partnerships is to divide them into commercial (business)
partnerships and professional (personal service) partnerships. Typical
professional or personal service partnerships are legal, medical,
engineering, architectural, accounting, dental, advertising, consulting
firms, realtors, and brokers. Though most of the characteristics of
professional partnerships and commercial partnerships are the same,
professional partnerships do have a few distinctive characteristics.
Partners often meet the challenge of work a little better and to make
more money in a partnership than working alone.
For example, a survey by the National Income Division of
the Office of Business Economics shows that lawyers operating in
partnerships earn more on average than lawyers operating alone.
Surveys among other professional groups would undoubtedly
indicate the same situation. Because this is true, an obligation is
created. The partners owe each other some measure of responsibility
for their enhanced positions. When one of the partners dies, the
survivors are keenly aware of this debt. Your opportunity is to help
partners realize this obligation before one of them dies, while there
is still time to use the best solution.
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3G E-LEARNING
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

WHAT DO YOU NEED TO KNOW?

Read Information Sheet very well then find out how much you can
remember and how much you learned by doing self-check.

Information Sheet

Partnership Profit Sharing Factors

When forming a partnership in Texas, the partnership has an option
of creating a partnership agreement. Absent a partnership agreement,
the partners will share profits equally. If the partnership does have
a partnership agreement, they can divide the profits in any way they
see fit. When coming up with this ratio, the partners can factor in
any reasoning for their profit-sharing ratio. The two main factors
are responsibility and capital contributions.

Responsibility
The partners can decide to divide profits by responsibility. The
amount of responsibility a partner has is usually known by the
partners while they are forming the partnership. For example, Partner
A and Partner B form a partnership. Partner A is responsible for
most of the day-to-day operations of the partnership. Due to Partner
A's added responsibility, they draft the partnership agreement
to state, “Partner A shall receive 70% of profits and Partner B shall
receive 30% of profits each year.”

Capital Contribution
When forming a partnership, partners can give as much or as little
capital to the partnership as they want. Often, one partner will
contribute more to the partnership than another partner. If this is
the case, the partner may want to share profits based on the amount
of contribution he makes. In this example, if Partner A contributes
$400,000 in capital and Partner B contributes $100,000, then the
partners could add a clause to their partnership agreement stating,
“Partners shall divide profits based on the proportion of capital in
the partner's capital accounts on the last day of the year.”
Here, Partner A would receive 80% of profits, and Partner B would
receive 20% of profits.

Mixture of Factors
The profit-sharing ratio can be an arbitrary number the partners
agree upon. This means the partners can look at the two main factors
and negotiate a profit-sharing ratio both find mutually beneficial.
As long as the terms are agreed upon and in the partnership
agreement, that is how the partners will split the profits. For example,
Partner A contributes $400,000 of capital and has a majority of the
responsibility in the partnership. Partner B contributes $100,000 of

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3G E-LEARNING
capital and does not help much in partnership
responsibility. The partners can agree that
Partner A receives 10% of profits and Partner
B receives 90% of profits, or vice versa. The
partners must agree but absent an agreement,
they will share profits evenly.
Corporations
A corporation is a “person,” legally speaking.
It is a distinct entity separate from its
owners -- the shareholders. The company
itself is responsible for all of its debts. The
shareholders can lose the money they’ve
invested in the company, but no more. A
corporation directly pays income taxes on its
profits, just like individuals do. Shareholders C h i e f
pay taxes on corporate profits only if those Corporations
profits are distributed to them as dividends.
The advantages of corporate organization
include limited liability for shareholders and
the ability to raise money by selling stock.
Drawbacks include greater state and federal
regulation and the fact that corporate profits
can be taxed twice: once as income to the
company and a second time when distributed
as dividends.
A corporation is a unique legal entity that
is separate from its owners. The owners of a
corporation may change, but the corporation
remains as a unique entity. The owners
(shareholders) of a corporation choose a
board of directors that is responsible for
making business decisions, paying taxes and
dealing with legal issues. The formation of
a corporation can be a time- and money-
consuming process due to all the paperwork
and legalese involved. A big disadvantage is
that a corporation may be taxed twice: once
on income generated and once on dividends
paid to shareholders.
A corporation has been defined by
Ames and Ames in their authoritative work
Private Corporations as “a body, created by
law, composed of individuals united under
a common name, the members of which
succeed each other, so that the body continues
the same notwithstanding the change of
individuals who compose it, and is, for certain
purposes, considered as a natural person.”
From this definition, we may derive the
3G E-LEARNING
following important facts about the corporate
NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES
form:
►► A corporation is created by law.
►► A corporation is invisible and
intangible. It cannot be seen, as can
the buildings and machinery owned
by the corporation.
►► A corporation is an intangible
artificial being an entity separate
and independent from the owners
of its capital stock. As an entity, it
is viewed as an artificial person and
is subject to many of the privileges
and restrictions of a natural person.
Characteristics of
Because a corporation is a separate legal entity,
certain characteristics distinguish it from the
sole proprietorship and the partnership.
►► Limited liability of stockholders: The
corporate form of business enables
persons to own part of a business and
yet limit their losses (in case of failure)
to the amount of their investment in
the capital stock. This is true even
if the assets of the corporation are
not sufficient to pay its own debts.
(Sometimes creditors will not extend
credit to the corporation; they will
insist that stockholders sign personal
notes. This calls for life insurance
to cover the debt, which will be
discussed later.)
►► The corporation itself is responsible
for its own actions and liabilities;
creditors have no claim to the
personal assets of a stockholder to
satisfy claims that are strictly against
the corporation.
►► Continuity of existence: Corporations
can go on indefinitely. An
owner’s death, withdrawal, mental
incompetence, or bankruptcy
does not in itself interrupt the
corporation’s continued existence.
The same is true in the event of a
stockholder’s retirement or change
in the corporation’s stockholders,
directors, or officers.
17
 ►► Ease of transferability of interest: A
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
stockholder is an owner of part of a
corporation. Ownership is evidenced
by a stock certificate issued by the
corporation. Unless restricted by
contractual agreement, such a share
of stock may be transferred from
person to person simply by an
endorsement on the certificate by the
owner, without necessarily affecting
the operations of the corporation.
►► Capital may be increased: It is a common
occurrence today for corporations
to increase their capital stock for
expansion purposes. Issuing new
shares of stock for this purpose can
affect the proportion of ownership
among stockholders. This, in turn,
can affect who controls the company.
As will be discussed later, life
insurance can play a key role in
providing money to the corporation
so that ownership and control need
not change at the death of an owner.
Advantages of Corporations
Following are some of the corporate form of
doing business. Included are contrasts with
proprietorships and partnerships.
Tax Status: The decision to incorporate
is often influenced by the fact that owner-
employees of C corporations can buy tax-
deductible fringe benefits for themselves.
Except for contributions to their own
retirement plans, and their own group health
insurance premiums, such deductions are not
generally available to sole proprietors, or
partners, or to most owners of S corporations.
For example, if two partners buy group life
insurance to cover themselves and their three
other employees, they can deduct only about
three-fifths of the premium for federal income
tax purposes. Specifically, sole proprietors,
partners and S corporation’s employees who
own more than 2% of the outstanding stock
or more than 2% of the voting power of the
corporation can deduct the portion of the
group life insurance premium that covers the
three other employees, but not the portion
that covers them. In general, only the cost of
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3G E-LEARNING
fringe benefits covering employees is income
tax deductible by the business.
If the two partners incorporated the
business, they could deduct the entire
premium, including the portion that covers
their own lives. The law’s rationale is
that corporate owners who work for their
own corporation are generally considered
employees of the corporation for federal
income tax purposes. Partners in a partnership,
sole proprietors and S corporation owners are
not considered to be employees.
Income Tax Levels: Many corporations
manage to pay little or no income tax. This
is possible if times are bad, and expenses
exceed income. It is especially likely to happen
if there are major items of depreciation,
deductible fringe benefits, tax credits, and
high salaries.
The corporate alternative minimum tax
helps assure that large corporations with real
economic income will pay at least a minimum
amount of income tax.
Continuity: With partnerships, even when
there is a written agreement to continue,
the technical fact of dissolution always
occurs when a partner dies. Death of a sole
proprietor has a similar result. This is not
true of corporations. Legally, even the deaths
of all the stockholders at once would cause
no dissolution of the corporation.
Obviously, legal considerations are not
the sole considerations. The death of a key
executive-and almost certainly the deaths
of all the key executives-would shake the
business to its foundations.
Limited Liability: Every cent owned by a
sole proprietor or partner is subject to the
debts of the business. But the owner of a
corporation is not liable for any corporate
debts (if incurred legitimately).
If the business folds, the stockholder might
lose every cent invested in the business, but
no more. The owner’s house and all personal
property, including shares of stock in other
businesses, are safe from the creditors of the
failing corporation. This is a key advantage
of the corporate form. Only the corporate
assets themselves are subject to the claims
of creditors.
Hybrid Forms

NATURE AND ESTABLISHMENT OF BUSINESS ENTERPRISES

States have created an additional form of ►
business organization the limited liability
Company, or LLC: that combines features
of a partnership and a corporation. The
company owners receive corporate-style
liability protection, but the company can opt
to be taxed like a partnership, with profits
reported on the owners’ personal income ►
taxes. Certain corporations, meanwhile, can
claim “Subchapter S” status with the Internal
Revenue Service. An “S crop” doesn’t pay
corporate income taxes; instead, its profits
pass to the owners’ income taxes like in a
partnership or LLC.
►
Profits vs. Cash
When choosing a form of organization for
a business, entrepreneurs commonly give
great weight to how profits will be taxed. ►
But it’s critical to understand just how those
taxes are applied. When company profits are
taxed as personal income -- as with a sole
proprietorship, partnership, LLC or S crop
-- the business owners pay taxes on their ►
share of the profits regardless of whether
they actually receive any money from the
company. If the company reinvests its profit
in, say, new equipment, the owners still have
to pay taxes on that profit.

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