Business Organization and Trends

(Financial Management 1)
3rd Trimester, AY 2020-2021
 Business Organization and Trends
Learning Outcomes:
1. Explain the basic legal forms of business organizations such as
sole proprietorship, partnership and corporation
2. Know the advantages and disadvantages of adopting the
a. Sole Proprietorship
b. Partnership
c. Corporation form of business organization
3. Determine the form of business organization most adaptable to an
enterprise
4. Understand the important business trends such as
– Increased globalization of business
– Improving information technology
– Outsourcing
And how they impact a business firm’s business operations
The Organization of the Business Firm
• The business firm is an entity designed to organize raw
materials, labor and machines with the goal of producing
goods and/or services.
1. Purchase productive resources from households and
other firms,
2. Transform them into a different commodity, and
3. Sell the transformed product or service to consumers.
• For business firms engaged in retail or trading activities , no
transformation of goods into a different commodity takes
place, as they just buy and sell the product as is.
In market economies, most firm choose their own price, output
level and methods of production. They get benefits of sales
revenues but also pay the costs of resources they use.
Legal Forms of Business Organization
PROPRIETORSHIP
• A sole proprietorship is a business owned by a single person who
has complete control over business decisions. This individual owns
all the firms assets and is responsible for all its liabilities.
• From a legal point of view, the owner is not separable from the
business and is personally liable for all debts of the business.
• From an accounting perspective, the business is an entity
separate from the owner therefore all financial statements of the
business present only those assets and liabilities pertaining to the
business.
• The owner cannot be paid salary from the business, instead he can
withdraw funds or other property from the business, and as such
treated as capital reduction.
• The business does not pay any income tax, but the owner reports
in his personal income tax return any profit or loss of the business.
 Legal Forms of Business Organization
PROPRIETORSHIP
ADVANTAGES DISADVANTAGES

1. Ease of entry and exit 1. Unlimited liability

2. Full ownership and control 2. Limitations in raising capital
3. Tax savings 3. Lack of continuity
4. Few government regulations

A proprietorship may be an ideal form of business organization when

The following conditions exist:
• The anticipated risk is minimum and adequately covered by insurance.
• The owner is either unable or unwilling to maintain the necessary
organizational documents and tax returns of more complicated business
entities.
• The business does not require extensive borrowing.
Legal Forms of Business Organization
PARTNERSHIP
• A partnership is a legal arrangement in which two or more persons
agree to contribute capital or services to the business and divide
the profits or losses derived therefrom.
2 Types of Partnership
1. General Partnership – is one in which each partner has unlimited
liability for the debts incurred by the business. General partners
usually manage the firm and may enter into contractual
obligations on the firm’s behalf.
2. Limited partnership – is one where there are one or more
general partners and one or more limited partners. The personal
liability of a general partner for the firm’s debt is unlimited, while
limited partners liability is limited to their investment. Limited
partners cannot be active in management.
Legal Forms of Business Organization
PARTNERSHIP
ADVANTAGES DISADVANTAGES

1. Ease of formation 1. Unlimited liability

2. Additional sources of capital 2. Lack of continuity
3. Management base 3. Difficulty of transferring ownership
4. Tax implication 4. Limitations in raising capital
Legal Forms of Business Organization
CORPORATION
• A corporation is an artificial being created by law and is a legal
entity separate and distinct from its owners.
• This entity may own assets, borrow money and engage in other
business entities without directly involving the owners.
• Owners of a corporation are called shareholders who do not
directly manage the company, but selects managers designated as
Board of Directors to run the firm for them.
• A corporation undergoes a process of incorporation initiated by
filing the articles of incorporation with SEC which includes the
following information:
– Incorporators - Capital Stock
– Name of the Corporation - Authorized shares
– Purpose of the Corporation
Legal Forms of Business Organization
CORPORATION
• After the corporation is legally formed, it will issue its capital stock.
Ownership of this stock is evidenced by a stock certificate.
• Corporate bylaws are rules that govern the internal management of
the company, established by the board of directors and approved
by the shareholders.
ADVANTAGES DISADVANTAGES

1. Limited liability 1. Time and cost of formation

2. Unlimited life 2. Regulation
3. Ease in transferring ownership 3. Taxes
4. Ability to raise capital
 Important Business Trends
4 Important Business Trends
1. Increased globalization of business
2. Ever improving information technology
3. Corporate Governance
4. Outsourcing
 Globalization of the Firm
• Investing overseas has proven to be highly profitable in most
cases. Decisions to build plants and produce goods abroad
are motivated by the low-cost labor and easy transfer of
highly efficient technology that gives competitive price
advantages to foreign operations.
• The trend to develop a presence abroad is also good to
hedge against risks, since economic activity differs from
country to country which tends to dampen the overall
fluctuations in sales and earnings.
• The arrival of new financial instruments and financial
derivatives like futures and swap agreements provides
managers with new tools for hedging and minimizing foreign
risks.
• Globalization of the firm will continue to provide highly
profitable opportunities to domestic firms through careful
decision making.
Ever-improving Information Technology (IT)

• Improvements in IT are spurring globalization and are

changing financial management as it is practiced in North
America, Europe Southeast Asia and elsewhere.
• Firms are collecting massive data and using them takes
much of the guesswork out of financial decisions.
• Example, Double Dragon Corporation, a Philippine real-
estate development company in the Philippines owned by Fil-
Chinese businessmen is considering a potential site for a
new mall.
• It can draw historical results from thousand of other stores to
predict results at the proposed site, thus lowers the risk in
investing in new stores.
 Corporate Governance
• This trend relates to the way top managers operate and
interface with the stakeholders.
• Years ago, the corporation’s chairman of the board of
directors was almost always also the chief executive officer
who decides who will sit in the board and would have
complete control of the firm’s operations thus it is impossible
for shareholder to replace a poor management team.
• However, with corporate governance, investors who controls
huge pools of capital in a certain corporation may now take
control and replace managers that causes underperforming
firms.
• Most firms today have strong written codes of ethical
behavior and also trains employees to understand proper
behavior in different situations.
 Outsourcing
• Outsourcing occurs when domestic firms invest and produce
goods in foreign countries or when these firms chose to rely
on imports rather than produce their own goods.
• Low labor-cost countries like China open up new investment
opportunities for corporations from the US, Europe and
Middle East.
• Competitive pressures are forcing domestic firms to invest
abroad or to import cheap foreign products.
• One major factor responsible for outsourcing is the ease with
which technology can be transferred abroad.
• Asian countries like the Philippines, China and India can
claim technological parity while enjoying low costs of
production, that is why outsourcing is an attractive
investment option.
 Outsourcing
• When evaluating the merits of outsourcing, a corporate
manager is forced to make central decisions:
1. Invest and produce domestically or move a plant
overseas
2. Import cheaper foreign goods to take advantage of low
labor and other costs or to shift to more capital-intensive
and technologically advanced operations
3. Invest abroad in order to gain access to new rapidly
growing foreign markets
• Outsourcing if carefully decided, can bring success to a
company and will continue to play an important role in
business decision making.
OPEN FORUM

•QUESTIONS????
•REACTIONS!!!!!
END OF PRESENTATION