Chapter 3 - Forms of Business Ownership-

A business is always owned by someone. This can just be one person, or thousands. Therefore, a
business can have different types of ownerships.
Major Types
1. SOLE PROPRIETORSHIP - owned by one person, operated for personal profit.
ADVANTAGES
a. Ease and cost of formation – starting a sole partnership is much less complicated than starting
a formal corporation, also much cheaper as it do require any kind of incorporation or registration
like Company.
b. Secrecy – one way of effectively competing with other firm is to know the moves, as well 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 the law, to share information with
anyone, he can proceed with his activities in secrecy. His competitors can only guess what his
intended moves are.
c. Distribution and use of profits - profits are distributed exclusively to the owner—they do not have
to share with stockholders. Moreover, Owner’s distributions are earnings that an owner
withdraws from a business based on the profit that the company has generated. Business
owners may withdraw profits via distributions for personal use, or they may leave profit income
in business accounts where it can be used as working capital. Protocols and conventions for
owner distributions vary based on business ownership structure.
d. Government regulation - adhere to a few regulatory requirements. It is also in charge of
maintaining the securities industry and stock and options exchanges. Unlike corporations, the
entities do not need to spend time and resources on various government requirements such as
financial information reporting.
e. Taxation – Income generated by the company is treated as the owner’s income, and hence
taxed as individual income.
f. Closing the business – besides paying off legal obligations such as taxes and debt, no other
legal obligations need to be met to stop doing business.

DISADVANTAGES
a. The owner’s possible lack of ability and experience – A sole proprietor may not be able to
manage the business efficiently as he is not likely to have necessary skills regarding all aspects
of the business. This poses difficulties in the growth of business.
b. The difficulty of attracting and keeping quality employees - Sole proprietorship form of
organizations have limited career opportunities, because of this they are unable to attract
trained and qualified persons.
c. Difficulty of raising capital - A sole proprietorship cannot raise capital by selling stock or using
other means to attract unrelated investors. The difficulty of attracting outside capital forces the
owner to rely on his own savings and loans from friends and family
d. The limited life of the firm - A sole proprietary organization suffers from lack of continuity. If the
proprietor is ill, this may cause temporary closure of business; and if he dies, the business may
be permanently closed.
e. Unlimited liability of the proprietor - the most serious disadvantage of a sole proprietorship is the
unlimited exposure to liabilities and lawsuits. Unlike a corporation, the personal assets of the
owner can be confiscated in the event of adverse legal actions. The finances of the business
and the owner are the same. The two are not legally separated. This means that the owner
could lose his house, cars, bank account and any other personal assets to settle any business
debts or bankruptcy.

2. PARTNERSHIP – usually owned by two or more partners, operated for joint profit.
ADVANTAGES
a. Ease of information - Formation of partnership is easy because all that is essentially needed in
a partnership is an agreement between the partners. The partnership agreement is usually
prepared in writing although an oral control is also acceptable.
b. Pooling of knowledge and skills - The skill and experience of all
the partners are pooled together for the functioning of a partnership firm. Combined judgement
of several persons helps to reduce the errors of judgement. Besides, the partners may be
assigned duties according to their talent. Therefore, benefits of specialization are also available.
c. Availability of more funds - With more than one owner, the ability to raise funds may be
increased, both because two or more partners may be able to contribute more funds and
because their borrowing capacity may be greater.
d. Ability to attract and retain employees – Prospective employees may be attracted to business if
given the incentive to become a partner.
e. Tax advantage – the profit from the business flow directly through to the partners’ personal tax
returns.
DISADVANTAGES
a. Unlimited liability- Similar to sole proprietorships, partnerships retain full, shared liability among
the owners. Partners are not only liable for their own actions but also for the business debts and
decisions made by other partners. In addition, the personal assets of all partners can be used to
satisfy the partnership’s debt.
b. Limited life - The partnership may have a limited life; it may end upon the withdrawal or death of
a partner.
c. Potential conflict between partners - With multiple partners, there are bound to be
disagreements. Partners should consult one another on all decisions, make compromises, and
resolve disputes as amicably as possible.
d. Difficulty in dissolving the business - transferability can be difficult to achieve, and a partnership
is unstable as it can automatically dissolve when just one partner no longer wants to participate
in the business or can no longer do so.

TYPES OF PARTNERSHIPS
a. General Partnerships - Assume that profits, liability, and management duties are divided equally
among partners. If you opt for an unequal distribution, the percentages assigned to each
partner must be documented in the partnership agreement.

b. Limited partnerships - also known as a partnership with limited liability) are more complex than
general partnerships. Limited partnerships allow partners to have limited liability as well as
limited input with management decisions. These limits depend on the extent of each partner’s
investment percentage. Limited partnerships are attractive to investors of short-term projects.

3. CORPORATION – “legal entity”, owned by shareholders and operated for joint profit.
Corporations are a form of ownership that is a legal entity separate from its owners. This
creates a limited liability for all owners, but results in a double taxation on profits (first as a
corporate income tax, then as a personal income tax when the owners take their profits).
Corporations tend to have an easier time raising capital then sole proprietors or partners in
large part due to the greater sources of funding made available to them, such as selling stock.
However, this does result in greater government regulations for corporations, such as
requirements for more extensive record keeping. In addition, setting up a corporation is much
more difficult, requiring more resources and capital to cover expenses and create legal
documentation. This ownership form is best suited for fast growing or mature organizations that
have owners looking for limited liability.
 ADVANTAGES

a. Limited liability- Shareholders of a corporation are not personally liable for the contractual
obligations, debts, negligence or wrongful acts of the corporation. The most money that a
shareholder can lose is his investment in the corporation - the value of his stock.

b. Ease of expansion - Companies operating as an incorporated business may find it easier to

raise money. Incorporating allows a company to issue stock in an effort to raise money, allowing
a company to issue multiple classes of stock. This provides greater opportunity for a company
to grow and expand by taking on more investors.
c. Ease of transferring ownership - Another advantage of incorporation is continuity. Because the
corporation has a legal life separate from the lives of its owners, it can (at least in theory) exist
forever. Transferring ownership of a corporation is easy: shareholders simply sell their stock to
others. Some founders, however, want to restrict the transferability of their stock and so choose
to operate as a privately held corporation. Only a few individuals, who are not allowed to sell it
to the public, hold the stock in these corporations. Companies with no such restrictions on stock
sales are called public corporations; stock is available for sale to the public.
d. Relatively long life- A business organized in corporate form has unlimited life. This means the
corporation may be in existence well beyond the lifespan of its original owners. Corporation will
continue to exist, and will not be dissolved or cancelled when shareholders die or withdraw from
the company. In fact, a business organized in corporate form will continue to operate in that
manner, regardless of who owns it. As a corporations example to exemplify this, Apple
continued onward without its founder leader
e. Ability to hire specialized management - Because of their size and ability to pay high sales
commissions and benefits, corporations are generally able to attract more skilled and talented
employees than are proprietorships and partnerships.

DISADVANTAGES

a. More expensive and complicated to organize - Filing your articles of incorporation can be quick,
but the overall process of incorporating is often a long one. You will likely have to go through
extensive paperwork to properly determine and document the details of the organization and its
ownership. For example, you need to draft and maintain corporate bylaws, appoint a board of
directors, create a shareholders ownership change agreement, issue stock certificates, and take
minutes during meetings.
b. Double taxation - Corporate income is taxed twice. The CORPORATION PAYS TAX on income
before it can distribute any to stockholders. The STOCKHOLDERS PAY TAX on the income
 they receive from the corporation. States often tax corporations more harshly than other
enterprises.
c. More extensive government restrictions and reporting requirements - Alongside the lengthy
application process is the amount of time and energy necessary to properly maintain a
corporation and adhere to legal requirements. You have to follow many formalities and heavy
regulations to maintain your corporation status. For example, you need to follow your bylaws,
maintain a board of directors, hold annual meetings, keep board minutes and create annual
reports. There are also restrictions on certain corporation types.

MODIFICATIONS OF THE CORPORATE FORM OF OWNERSHIP

The corporate form of ownership was modified to suit special requirements. Two forms are:

1. COOPERATIVE – a firmed owned by a group of people who have a common objectives and
who collectively bear the risk of the enterprise and share its individual profits.
a. Credit Union – promotes thrift and savings among its members and creates funds in order to
grant loans for productivity.
b. Producers Cooperative – undertakes joint production whether agricultural or industrial.
c. Marketing Cooperative – is one, which engages in the supply of the production inputs to
members and market their products.
d. Consumers Cooperative - the primary purpose is to procure and distribute commodities to
member and non-members.
e. Service Cooperative – engages in medical, and dental care, hospitalization, transportation,
insurance, housing, electric light and other services.
2. MUTUAL COMPANIES - s a private firm that is owned by its customers or policyholders. The
company's customers are also its owners. As such, they are entitled to receive a share of the
profits generated by the mutual company. Types of mutual companies are:
a. Mutual saving banks - These firm are owned by depositors and which specialized in saving
and mortgage loan. The profits of these company are remitted to the depositors.
b. Mutual insurance company - Organized and owned by the policy holders. Voting control is in
the hands of insureds. Profits earned by the company can be used to pay policy dividends
to policyholders and to strengthen the company by building its surplus

OTHER FORMS OF BUSINESS ORGANIZATION

Minor Types
 Joint stock company – A joint-stock company is a business entity in which shares of the
company's stock can be bought and sold by shareholders. Each shareholder owns company
stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to
others without any effects to the continued existence of the company.

 The joint venture - A joint venture (JV) is a business arrangement in which two or more parties
agree to pool their resources for the purpose of accomplishing a specific task. This task can be
a new project or any other business activity. In a joint venture (JV), each of the participants is
responsible for profits, losses, and costs associated with it. However, the venture is its own
entity, separate from the participants' other business interests.

 The Business trust - Commercial organization managed by appointed trustees (who hold the
title to the business' property) for the benefit of one or more beneficiaries. A business trust is
treated as a legal entity by the tax authorities and must have (1) a business purpose, and (2)
must function as a business. In addition, Trust are real property, or assets, or both, which are
overseen by someone appointed to manage the interest for the beneficiary. The trustee is an
appointed individual and the person who owns the property in the trust is the settler. The role of
the trustee is to administer the trust for the beneficiaries' advantage, and the beneficiaries are
the ones that hold equitable title to the trust.