ROMBLON STATE UNIVERSITY

San Fernando Campus

San Fernando, Romblon

BUSINESS ADMINISTRATION AND MANAGEMENT DEPARTMENT

Mgt. 1a (Organization and Management)
1ST SEMESTER SY: 2020-2021
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Subject Teacher: Lect. Gittelle Rafol

Cellphone#: 0955-341-9520
Email Address: grafol1021@yahoo.com
Textbook: Business Organization and Management by Roberto G. Medina
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FORMS OF BUSINESS OWNERSHIP
OBJECTIVES:
At the end of this chapter, the students are expected to:
1. name the various forms of business organizations;
2. describe the nature and characteristics of sole proprietorship;
3. describe the nature and characteristics of partnership;
4. describe the nature and characteristics of corporation;
5. assess modifications of the corporate forms; and
6. examine other forms of business organization.

Form of Business Ownership

MAJOR FORMS MINOR FORMS

SOLE Joint Stock

CORPORATION
PRORIETORSHIP Company

PARTNERSHIP
Joint Venture

General Limited
Partnership Partnership

Business Trust
Figure 10
Forms of Business Ownership

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SOLE PROPRIETORSHIP
The sole proprietorship is a type of business entity owned and operated by a single person.
The bid percentage of businesses owned by sole proprietorships indicates the popularity of this
partnership type. This is so because of certain advantages unique to sole proprietorships.
Advantages of Sole Proprietorship
Sole proprietorship are afforded with advantages pertaining to the following:
1. Ease and Cost of Formation. Among the three ownership forms, the sole proprietorship is the
easiest and least costly to organize. The only requisites for its legal existence are the following:
a. the sole owner’s resolve to start operating; and
b. getting the required permits and licenses.

There are many activities that a sole proprietor can do which are extra difficult to do under
the partnership or corporate forms. An example is the setting of the date for the actual start of
operations. The dole owner may change this date arbitrarily without consulting anybody.
The cost involved in forming the sole proprietorship is less than either the partnership or
corporation. This is because only one person makes decisions in the actual formation of the
business. Also, documentary requirements are not as extensive as those of the other two forms of
ownership.
2. Secrecy. One way of effectively competing with other firms is to know the moves, as well as
the strengths and weaknesses of competitors. The sole proprietor has the advantage of keeping his
intentions secret. As he does not have, and is not required by law, to share information with anyone,
he can proceed with his activities in secrecy. His competitors can only guess what his intended
moves are.
3. Distribution and Use of Profits. If because of his efforts, the business made some profits, the
sole proprietor is the sole beneficiary. He does not have to share these with anyone.
If he decides to use the profits for expansion, he is not required to consult anybody. He is
free to use it anyway he pleases.
4. Control of the Business. The owner is also vested with the power to solely control solely the
business and sole authority is very important especially under critical competitive situations. For
instance, a consumer is confronted with a situation where he or she must choose to buy from a sole
proprietorship, a partnership, or a corporation. If all of the prices quoted by the three firms are
identical and the prospective buyer is asking for a lower one, the sole proprietor has the advantage
of making an immediate decision while the partners will still have to consult with each other.
Meanwhile, the corporation may be ready with a lower quotation only after undergoing a long
process. If the prospective buyer is in a hurry, he or she may have to decide in favor of the sole
proprietor.
5. Government Regulation. The sole proprietorship is spared from various government rules, which
apply to partnerships and corporations. Moreover, sole proprietorships are required by the
government to submit fewer reports.
Sole proprietorships are also spared from charter restrictions on operations. An insurance
corporation, for example, cannot engage in the retailing of groceries. On the other hand, sole
proprietorship manufacturing furniture can switch to selling agricultural products in a few days
without worrying about violating any restrictions.
6. Taxation. The net income of the sole proprietorship is treated as the personal income of the sole
owner and is taxed accordingly. This is not true with partnership and corporations where their
respective net income is taxed and will be subject to taxation again when the owners individually
receive their shares of the profits.
7. Closing the Business. Sole proprietorships can be dissolved by the owners at will. Although this
is not always exercised, it remains an option of the owners. If the business conditions had become
unprofitable, the sole proprietor has the advantage of immediate cessation of operations. This

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allows him to cut his losses to the minimum. Once the owner decides to close shop, he does not
need to seek the approval of co-owners or partners for he does not have any.
Disadvantages of Sole Proprietorship
The smooth operation of sole proprietorships is hindered by the following disadvantages:
1. Owner’s Lack of Ability and Experience. The success of the sole proprietorship will depend
largely on the management skills of the owner. The firm will need a “generalist” with sufficient
grasp of the various specialized functions like marketing, production, finance, accounting,
personnel, and research.
Unfortunately, it is difficult to find qualified generalists to manage sole proprietorships. If the sole
proprietor lacks the skills of a generalist, then it will be very hard for the firm to succeed.
2. Difficulty in Attracting Good Employees. Sole proprietorships are not known for surviving
Long periods. The existence of a sole proprietorship is co-terminus with the life of its owner. As a
consequence, good employees tent to get employment in a more stable enterprise, which is most
often a corporation.
3. Difficulty of Raising Capital. In sole proprietorships, raising capital will depend on the financial
resources of the sole owner. Even if he can obtain credit, the amount will depend on his sole
capacity to pay. This problem is especially felt when business expansion is required and becomes
more difficult when credit is getting tight and interest rates become prohibitive. The difficulty in
raising additional capital often aggravates the problem of meeting competition.
4. Limited Life of the Firm. The existence of the sole proprietorship depends on the physical well-
being of the owner. When he is ill, business operations may be affected. Prolonged illness may
make the firm go bankrupt. His death will mean liquidation of the firm.
5. Unlimited Liability of the Proprietor. Any liability incurred by the sole proprietorship extends
to the owner’s personal assets. In theory, the sole proprietor could lose “even his shirt” if all his
other assets are not enough to cover all claims against his business.
Unlimited liability is the greatest disadvantage of the sole proprietorship. The lives of quite
a number of former sole proprietors became miserable because of this disadvantage.
PARTNERSHIP
A partnership is a legal association of two or more persons as co-workers of an unincorporated
business.
Advantages of Partnerships
1. Ease of Formation. Like sole proprietorships, partnerships are easy to form. The only
requirement before the partnership commences operations is for the partners to agree on basic
aspects of the business like the nature of the business, location, capitalization, and so on. A written
agreement called the contract of partnership is drawn to formalize what has been agreed upon.
2. Pooling of Knowledge and skills. The combined knowledge and skills of the partners provide
the partnership with a distinct advantage. One partner, for instance, may possess the required skills
in manufacturing, while another has the skills in accounting, and another in marketing. These skills
may be used to the advantage of the partnership. This condition also paves the way for
specialization, which is a very important competitive tool in business.
The partnership form also has the advantage of inviting a person who possesses a much
needed skills as a partner if for some reason, he could not be hired as an employee.
3. More Funds Available. The combined resources of the partners provide a bigger source of funds.
The condition leads to a higher credit rating for the partnership. The resource potentials of the
partners combined with a high credit rating result in a formidable financing capability for the
partnership.
4. Ability to Attract and Retain Employees. Attracting and retaining employees is a difficulty
inherent to sole proprietorships. Partnerships have the ability to overcome this difficulty by
offering partner status to valuable employees. This advantage also minimizes the potential harm
that may be done by a key employee moving over to a competitor.

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5. Tax Advantage. The income of the partnership is not taxed separately from the partners’
incomes. Any profits derived by the partners are treated and taxed as their individual incomes.
Disadvantages of Partnerships
The operation of partnerships are hindered by the following disadvantages:
1. Unlimited Liability. Partnerships, like sole proprietorships, are saddled with the disadvantage
of unlimited liability. Although one or two partners may opt to have limited liability, the remaining
partner or partners carry the burden of unlimited liability.
2. Limited Life. When a partner dies or withdraws from the business, the partnership is terminated.
The life of the partnership, in essence, is more limited than the sole proprietorship. Whereas, the
sole proprietorship depends on the state of health and willingness of the sole owner to continue,
the life of the partnership depends on the health and willingness of all the partners. If there are five
partners, the risk of discontinuance of the partnership business is five times greater than with the
sole proprietorship.
3. Potential Conflict Between Partners. There are occasions when partners disagree on certain
ways of operating the business; and there are many potential areas for disagreement. Among these
are adding new product lines, hiring new employees, decisions on credit extensions, and granting
employee welfare benefits.
When conflict between partners persists, operations are affected. This may even lead to
bankruptcy. An employee, for instance, may receive conflicting orders from the partners. The
employee may get confused, which in turn, may affect his or her performances.
4. Difficulty in Dissolving the Business. Partnerships are not as easy to dissolve as sole
proprietorships. After dissolving the sole proprietorship, whatever assets or liabilities left are the
concern of the sole owner alone. In partnership dissolution, it may not be easy to divide whatever
assets are left for distribution to the partners. This is because the assets may be fixed or immovable.
More difficult dissolution happens when liabilities are to be shared by the partners.

TYPES OF PARTNERSHIP
Partnership may be classified according to the liability of the partners. They are as follows:
1. General Partnership is an association of two or more persons, each with unlimited liability, who
are actively involved in the business.
2. Limited Partnership is an arrangement in which the liability of one or more partners is limited
to the amount of assets they have invested in the business.
CORPORATION
A corporation is an enterprise chartered by law, with most of the legal rights of a person,
including the right to conduct a business, to own and sell property, to borrow money, and to sue
or be sued.
The corporate form of business is the third ownership option open to businesspersons.
Owners of the corporations are called stockholders. They are issued certificates of ownership
called stocks. Some of these stocks are openly traded in the country’s stock exchange.
Advantages of Corporation
The advantages inherent to corporations are the following:
1. Limited Liability. The liability of stockholders is limited to the amount of their shareholdings.
A stockholder may lose the entire value of his stocks in the event of a bankruptcy. Beyond the said
value, he has no more liability.
2. Ease the Expansion. The Authority granted to corporations to sell its own shares of stocks
provides a means to pool large amounts of funds. The price per share of the stocks could be made
low enough to attract even the smallest investor. Because the ownership of the stocks can easily
transferred, this provides more reasons for the investors to buy stocks. The ability of the
corporations to accumulate large amounts of capital makes it easier for them to consider business
expansion.
3. Ease of Transferring Ownership. If a stockholder losses interest in the corporation he partly
owns, he may disassociate himself from it by selling or donating his shares to another person. In
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effect, the ownership of a corporation may change as often as it could without actually dissolving
it.
4. Relatively Long Life. Corporations may be established to have lives of up to 50 years and may
be extended indefinitely through renewals of documents. Since ownership is readily transferrable,
the death or withdrawal of any or all stockholders does not terminate the corporation. This
advantage makes the corporation the most stable among the three major forms or ownership.
5. Greater Ability to Hire Specialized Management. The expanded operation of the corporations
make it possible to divide the overall job into smaller specialized positions. As the various
positions will be quite dissimilar from each other, the demand for management expertise will be a
little more exacting than those required for sole proprietorships and partnerships. This said
requirement paves the way of hiring fully trained management experts. With specialized
management, the corporation is provided with the opportunity to grow and develop more
vigorously.
DISADVANTAGES OF CORPORATION
Corporations also have disadvantages. These are the following:
1. More expensive and Complicated to Organize. Among the three major forms of ownership,
more time and money are required to organize a corporation. It takes months or even years before
a corporation can begin serving its customers. It may start the operations only after receiving a
certificate of incorporation from the Securities of Exchange Commission (SEC). The SEC will
only issue the certificate of incorporation if it finds that the articles if the incorporation are fully
compliant with the requirements.
The articles of incorporation contains the following:
a. The name of the corporation;
b. Specific purpose or purposes;
c. Principal office of the corporation;
d. Term of existence of the corporation;
e. Names, nationalities, and residence of incorporators;
f. Number of directors or trustees;
g. Names, nationalities, and residence of directors;
h. Amount of authorized capital stock; and
i. Other matters.
The treasurer’s affidavit indicating payment of minimum subscribed capital stock is also a
requirement.
The articles of incorporation and treasurer’s affidavit must, point by point, conform with
the requirements of the Corporate Code. Complying with these requirements takes time.
However, and this makes it a distinct disadvantage of corporations.
2. The profits derived by stockholders are taxed twice by the government. First, when the
corporation realizes profits, and second, when individual stockholders declare the dividends they
receive from the corporation as part of their personal income. This advantage is not present in sole
proprietorships and partnerships.
3. More Extensive Government Restrictions and Reporting Requirements. Corporations are subject
to stringent government restrictions and are required to submit various reports on a periodic basis.
An example of a restriction id the prohibition of certain actions by the corporation without the
approval of the SEC.
The submission of financial statements is an example of annual report required by the SEC.
In complying with the requirement, the corporation is exposing itself to the scrutiny of its
competitors. This is because annual reports are made available to the public. Competitors do not
enjoy this privilege with competing with sole proprietorships and partnerships.
4. Employees Lack Personal Identification With and Commitment to Corporate Goals. Many
stockholders are detached from the daily operations of the corporation. Those who work for the
corporation mostly do not own the company’s stocks. The relationship between the corporation
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and employees is too impersonal. Employees do not feel deep attachment to the corporation,
resulting in less commitment to his work. Employees of sole proprietorships and partnerships most
often know the owners personally. This feeling of attachment pushes the employee to make the
company successful. Such concern is rarely present in a corporate work atmosphere.

Area of Concern Sole Proprietorship Partnership Corporation

1. liability of owners unlimited limited/unlimited limited
2. ease of expansion not easy not easy easy
3. life of the firm dependent on the dependent on the independent of the
owner partners owners
4. decision making can be made quickly tends to be slower tends to be the slowest
5. taxation of income once once twice
6. ease of formation easiest easy not easy

Figure 11
A Summary of the Positive and Negative Features
of the Forms of the Business Ownership

MODIFICATION OF THE CORPORATE FORM OF OWNERSHIP

The corporate form of ownership has been modified to cater the special needs. Those that
have become popular are cooperatives and mutual companies.
Cooperatives
A cooperative is defined as “an organization composed of individuals or small businesses
that have banded together to reap the benefits of larger organization.” A cooperative is an
organization composed of individuals or businesses that have banded together to reap the benefits
of belonging to a large organization. Cooperatives are not organized for profit, but to make its
members individually profitable or to save money.
Cooperatives are of various types. They are classified according to the special interest of
its members. They are as follows:
1. Credit Union-accepts deposits from members and lends money to its members at a very
reasonable interest rate.
2. Producer Cooperative- assists one another in the procurement of raw materials, machinery,
equipment, and other time-saving devices.
3. Marketing Cooperative- assist members in the marketing of their produce.
4. Consumers Cooperative- provides members with quality goods and services at reasonable
prices.
5. Service Cooperative- makes services readily available and at a lower price.

Mutual Companies
A mutual company is a financial-service firm (such as an insurance company or a savings and loan
association) owned by its policyholders or depositors. Mutual companies may be classified
according to products or services they carry. They are as follows:
1. Mutual Savings Banks- are owned by depositors and specialize in savings and mortgage loans.
The profit of the company are credited to the account of the depositors.
2. Mutual Insurance Company- is a cooperative corporation organized and owned by its
policyholders. Voting control is in the hands of the insured. Profits earned by the company can be
used to pay policy dividends to policyholders, and to strengthen the insurer by building its surplus.

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OTHER FORMS OF BUSINESS ORGANIZATION
Minor forms of business organization consist of the following:

1. The joint stock Company. Bannock and others define joint stock company as “a form of
business enterprise in which the capital is divided into small units permitting a number of
investors to contribute varying amounts to the total, profits being divided between
stockholders in proportion to the number of shares they own” it is largely similar in form
to the corporation, although it has certain additional features like fewer taxes, greater ease
of formation, mobility, and freedom from government regulation. The disadvantage of joint
stock companies, however, is they lack the legal personality to enter into contracts and hold
title to real property. In addition, the unlimited liability of the stockholder
2. The joint Venture. It is best regarded as a particular partnership established for a specific
undertaking. This type of organization is created for the purpose of bringing together
several partners to engage in a business activity, which is normally very specialized and
which exist for a limited, specific purpose. A joint venture is mostly formed for the purpose
of producing a movie or a concert, engaging in oil or mining exploration, constricting a
major project such as a dam or an airport, or perhaps the underwriting or selling of
securities.
3. The business trust. It is a legal form of organization in which a trustee is appointed to
manage the business and its operations through a trust relationship. Under the trust
agreement, the owners of property, securities, or other assets convey these to a trustee in
exchange for transferable trust certificates. The certificates entitle the owners to participate
in the profits of the operations. However, the liability is transferred to the trustee.

CHAPTER EXERCISES:
1. Compare the common forms of ownership based on the following criteria:
 Ease of raising capital
 Ease and cost of formation
 Quickness of decision making; and
 Provision for quick expansion
2. Briefly differentiate general partnership from limited partnership.
3. Contrast the following forms of ownership based on its respective purposes:
 Cooperative
 Mutual company
 Joint stock company
 Joint venture
 Business trust

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