FORMS OF BUSINESS

ORGANIZATION
for Business Ethics and Social Responsibility
Senior High School (ABM)
Quarter 1 / Week 1

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 FOREWORD

This Self Learning Kit for Business Ethics and Social Responsibility
is an innovative tool designed exclusively for ABM students in the
Senior High School. It assists in understanding various business
concepts by providing students with real-life business applications
through a variety of realistic examples. It serves as a guide in
differentiating the forms of business organizations.
It is aligned with the BEC of the Department of Education
following the prescribed MELCs (Most Essential Learning
Competencies.
This Self-Learning Kit is divided into three parts.
What happened
This section contains pre-activities that serve as springboards
and a pretest to determine if students are sufficiently prepared to
begin a new course of study.
What I Need to Know (Discussion)
This section also contains the different forms of business
organizations. Examples are given that will help them appreciate the
importance of business organizations.
What I have Learned (Evaluation/Post Test)
The exercises contained in this section measures student’s
understanding of key concepts of the forms of business organizations
are guaranteed to build skills and competence. These serve as a
diagnostic tool to identify the learners’ areas of strengths and
difficulties.

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 OBJECTIVES
At the end of the lesson, the learners are expected to:
K: identify the forms of business organizations;
S: differentiate the forms of business organizations; and
A:appreciate the importance of the forms of business
organizations.

LEARNING COMPETENCY:
Differentiate the forms of business organizations
(ABM_ESR12IIIa-d-1.1)

I. What Happened

PRE-ACTIVITY: PICTOWORD

Instruction: Form a word that describes the picture below.

Photo credits: Clipart

A N T C P R X O

A N I G B I Z O

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PRE-TEST:

Multiple Choice. Choose the letter that corresponds the correct answer. Write
your answer in your activity notebook.

1. Which of the following is a business owned by only one person and is the

simplest form of business organization?

A. sole proprietorship B. partnership

C. corporation D. cooperative
2. It is a business owned by two or more persons who contribute resources into
the entity.
A. sole proprietorship B. partnership
C. corporation D. general partnership
3. A business owned by two or more people, with a maximum of 20 owners, who
have agreed to share all assets, liabilities, profits, and losses of a company.
Which of the following best describe the statement?
A. sole proprietorship B. partnership
C. limited partnership D. general partnership
4. It requires two or more individuals agreeing to start a business where one or
more of the partners are liable only for the amount they have invested.
A. sole proprietorship B. partnership
C. limited partnership D. general partnership
5. Which among the form of business organization that has a separate legal

personality from its owners?

A. sole proprietorship B. partnership

C. corporation D. cooperative

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II. What You Need To Know

A business is an activity that is part and parcel of human society: it is

an entity in which economic resources or inputs, such as materials and
labor, are put together and processed to provide goods or services or
outputs to customers.
Businesses are usually complex enterprises involving major activities
like purchasing, manufacturing, marketing, advertising, selling, and
accounting. The objective of most businesses is to earn profit.
A business organization has different forms. It may take the form of
a proprietorship, partnership, corporation, or cooperative.

DISCUSSION
Forms of Business Organization

These are the basic forms of business ownership:

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is the

simplest form of business organization. It is easy to set-up and is the least costly
among all forms of ownership.

The sole proprietorship form is usually adopted by small business entities.

It’s a business that has no separate existence from the owner, as all income and
losses are taxed against their personal income tax return.

Compared to the other business organization methods, this option requires

the fewest number of documents to complete and file. Since everything funnels

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back to the owner, there is no profit-sharing to sort through, making the whole
process very simple.

Advantages
 Easy setup
 Full control

 You receive all of the profits

 Direct access to feedback

Disadvantages

 Unlimited liability

 Full responsibility

 High working capital demands

2. Partnership

A partnership is a business owned by two or more persons who contribute

resources into the entity. The partners divide the profits of the business among
themselves. Its chief characteristics are: (a) association of individuals; (b) mutual
agency; (c) limited life; (d) unlimited liability; and (e) co-ownership of property.

The association of individuals in a partnership may be based on as simple

an act as a handshake; however, it is preferable to state the agreement in
writing.

 A partnership is a legal entity for certain purposes.

 A partnership is an accounting entity for financial reporting

purposes.

 Net income of a partnership is not taxed as a separate entity.

Mutual agency means that an act of any partner is binding on all other
partners, so long as the act appears to be appropriate for the partnership. This is
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true even when partners act beyond the scope of their authority. Partnerships
have a limited life. Partnership dissolution occurs whenever a partner withdraws
or a new partner is admitted.

Each partner has unlimited liability. Each partner is personally and

individually liable for all partnership liabilities. Creditors’ claims attach first to
partnership assets and then to the personal resources of any partner,
irrespective of that partner’s capital in the company.

There are three forms of partnerships:

 General partnerships
 Limited partnership
 Joint ventures

In general partnerships, all partners have unlimited liability. In limited

partnerships, creditors cannot go after the personal assets of the limited
partners.

Each partnership shares similar features, though each has different

ownership and liability structures. In any partnership, each partner is required to
commit resources like capital, property, or tangible experiences such as skilled
work or labor in order to share in the business’s profits and losses.

As we’ll break down for each partnership, at least one partner is tasked
with making decisions the business’s day-to-day operations. While it is not
required legally, each partnership requires that a formal partnership agreement
is drafted. This document will lay out each partner’s ownership stake, liability
limitations, as well as their voting structures and how business decisions for the
company are to be made.

Now that we have a better understanding of partnerships, let’s learn more

about their specific forms.

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General Partnership
A business owned by two or more people, with a maximum of 20 owners,
who have agreed to share all assets, liabilities, profits, and losses of a company.
These partners carry unlimited liability, meaning their personal assets are on the
line and can be sued for the whole of the partnership’s business debts. Taxes,
however, do not flow through the partnership, meaning the partners are
responsible for their own tax liabilities, including any earnings made from the
partnership, on their personal income taxes.

Advantages
 More partners, more capital
 Added talent
 Divided responsibility

 Greater business networks

 Tax advantages
Disadvantages
 Unlimited liability
 Partners can disagree
 Profit is shared

To form a general partnership, there are 3 specific standards that need to be

met. Let’s take a look at them.

 The partnership needs to include two or more owners

 Each partner must be comfortable with unlimited liability

 Proof that the partnership exists via a formal partnership agreement

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 Compared to a corporation or an LLC, the costs of establishing a general
partnership are minimal and do not require as much paperwork. A general
partnership features many benefits including the flexibility to form the business as
partners see fit. This flexibility can include the opportunity to closely oversee its
operations.

In a general partnership, each partner possesses agency powers,

enabling them to participate directly in the management of the business.
Agency powers allow partners to establish binding agreements, deals, and
contracts with other organizations and individuals that each partner is bound to
adhere by. It’s recommended that agreements like these be cleared before
being agreed upon, however.

Arriving at these decisions typically occur through majority vote amongst

all of the partners. Each partner’s vote holds the same weight though voting
privileges can be awarded to specific voters in the absence of a specific
partner. It’s crucial for each member of the organization to have their vote be
recognized, as every partner is held responsible in the event of inappropriate or
illegal activities.

When a partner passes away, the general partnership is typically

dissolved. The same occurs when one partner becomes unable to meet their
obligations or leaves the organization. Specifics can be written into the
partnership agreement that would allow the general partnership to continue
through the transfer or succession of ownership.

Limited Partnership

Establishing a limited partnership requires two or more individuals agreeing

to start a business where one or more of the partners are liable only for the
amount they have invested.

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 Clearly, what separates limited partnerships from other partnerships is that
partners can limit their liability. Limited partners, also known as silent partners,
have a stake in the company but do not have the ability to make management
decisions. The remaining partners, known still as general partners, are responsible
for day-to-day operations and any financial obligations beyond their initial
investment.

Limited partners receive dividends based on the amount they’ve invested

in the business. Another difference between limited and general partners is that
they are not considered self-employed. As long as they remain outside of the
business’s operations, limited partners will not be subjected to self-employment
tax.

Advantages

 Share in profits and losses without needing to be involved in the business

 Limited personal financial risks for limited partners

 Taxed via your own income tax returns

 Easier to attract new investors

Disadvantages

 General partner(s) fully liable

 Limited partner(s) can assume general partner liability if they become

active in the business

 State taxes and fees

Joint Venture

A joint venture is an arrangement between two or more parties (often

established businesses) who have agreed to combine their resources in order to

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accomplish a specific project. This arrangement remains valid until the
completion of a project or a certain period elapse.

Advantages

 Increased capacity and access to resources

 Shared liability with parties
 Access to new markets

Disadvantages

 Different visions for the joint venture

 Imbalanced inputs and outputs between parties

 Lack of communication could derail project

An example of a joint venture is the collaboration between Alphabet

(Google’s parent company) and Fiat Chrysler Automobiles. In May of 2016, the
two companies announced that they would be collaborating in an effort to
develop self-driving cars. While each could have certainly done this
independently, both partners decided they had a greater opportunity to
achieve their goals by working collaboratively.
Technically, a joint venture is not a partnership. Since the term partnership
is used to describe a single body of business formed by one or more individuals,
a joint venture may not formally fall into the same category.

With a joint venture, each party is responsible for the costs of the project
and will be associated with any profits or losses. It should be noted that while
each partner is responsible for the joint venture’s expenses, these costs remain
separate from their and their partner’s other business interests.

A joint venture agreement will establish the rights, obligations, and

objectives for the partnership and its members. The agreement will indicate how

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much each partner contributed, where day-to-day responsibilities lie, and how
profits and losses will be handled.

Ideally, the partners should establish a new entity when forming a joint
venture. This will allow for the partners to have a clear sense of how taxes will be
paid. Through the joint venture agreement, the partners are able to declare
how the joint venture will pay its taxes.

Before forming a joint venture, it’s important to answer the following questions:

 How many parties will be involved? What specific, essential skill does each
provide?

 What and how much is each party contributing? Who owns what?

 What is the scope of the joint venture (Where will you operate? What will
you solve? How will you accomplish this?)

 How will the joint venture be structured? Who is controlling and

managing?

 How will we operate once we’ve accomplished our initial goals?

 Who will work for the joint venture?

(Types of Business Organizations n.d.)

3. Corporation

A corporation is a business organization that has a separate legal

personality from its owners. Ownership in a stock corporation is represented
by shares of stock.

The owners (stockholders) enjoy limited liability but have limited

involvement in the company's operations. The board of directors, an elected
group from the stockholders, controls the activities of the corporation.

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 Unlike an actual person, a corporation can live on in perpetuity, as long it
is profitable. Shareholders are able to either sell or transfer their shares enabling
the corporation to live in the event of a cash out or death.

The characteristics that distinguish a corporation from proprietorships and

partnerships are:

 The corporation has separate legal existence from its owners.

 The stockholders have limited liability.

 Transferable ownership rights (ownership is in shares of stock).

 Ability to obtain capital (relative ease).

 The corporation can have a continuous life.

 The corporation is subject to numerous government regulations.

 The corporation must pay an income tax on its earnings, and the
stockholders are required to pay taxes on the dividends they receive: the
result is double taxation of distributed earnings.

In addition to those basic forms of business ownership, these are some other
types of organizations that are common today:

Limited Liability Company

More commonly known and referred to as an LLC, a limited liability

company is a business organizational structure that protects the owner’s
personal assets in the event of a business fault or accident.

Having your business structured as an LLC won’t fully prevent you from
being personally liable if it is determined that the owner has taken action that is
illegal, reckless, or fraudulent. Owners can also be held responsible if they have
not properly distinguished the activities of their company from own personal
interests.

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Advantages
 Owner’s liability limited to their amount invested
 No minimum or maximum on the number of owners
 Owners can operate fully in the company
 Operating management flexibility
Disadvantages

 Increased organizational complexity

 Multiple tax classifications

The rules of an LLC are established by each state, meaning the rules for
each owner will differ depending on their location. You will need to file the
name of your LLC along with your articles of organization, with the state in which
you’ll operate.

It’s also possible that you will be asked to prepare an LLC operating
agreement stating each owner’s percentage of ownership in the company. This
operating agreement will also indicate each owner’s distribution of shares,
responsibilities, voting power, and the protocol in the event that the owner
wants to sell their stake in the business. (Types of Business Organizations n.d.)

Limited liability companies (LLCs) in the USA, are hybrid forms of business
that have characteristics of both a corporation and a partnership. An LLC is not
incorporated; hence, it is not considered a corporation. But, the owners enjoy
limited liability like in a corporation. An LLC may elect to be taxed as a sole
proprietorship, a partnership, or a corporation. (Types and Forms of Businesses, 2020)

Cooperative

A cooperative is a business organization owned by a group of individuals

and is operated for their mutual benefit. The persons making up the group are
called members. Cooperatives may be incorporated or unincorporated.

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Some examples of cooperatives are: water and electricity (utility) cooperatives,
cooperative banking, credit unions, and housing cooperatives. (Types and Forms of
Businesses, 2020)

Types of Cooperatives

Most simply, cooperatives can be categorized by their purpose; their

members procure from and/or provide goods and services to the cooperative.
For example, members of grocery cooperatives procure grocery items from their
cooperatives while members of worker cooperatives provide their labor to their
cooperative. Sometimes, members provide goods and/or services to the
cooperative, as well as procuring goods and/or services; for example, members
of an arts and crafts cooperative can purchase supplies from the cooperative
and provide their artwork and labor to market their crafts through a cooperative
store.

Cooperatives operate in a broad variety of industries, including the following:

 Agricultural cooperatives help producers assure markets and supplies,

achieve economies of scale, and gain market power through jointly
marketing, bargaining, processing, and purchasing supplies and services.

 Arts and Crafts cooperatives help artists and crafts persons maximize their
earning potential and working conditions.

 Business cooperatives are formed by businesses to purchase supplies or

obtain services at a lower cost.

 Child Care and Preschool cooperatives provide high-quality enrichment

and educational programs for children and their families.

 Credit Unions provide at-cost financial services to a wide cross-section of

the population.
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 Custodial and cleaning services cooperatives create employment
opportunities and provide the benefits of ownership for their worker-
members.

 Food cooperatives and buying clubs gain access to grocery products

using a consumer-directed approach.

 Hardware wholesaling cooperatives, like other business cooperatives,

allow independent businesses to be competitive by cutting expenses and
adding member services through joint purchasing and marketing.

 Housing cooperatives offer ownership options for the countrymen from all
income groups.

 Insurance cooperatives operate much like retail cooperatives except that

they provide insurance services instead of consumer goods.

 Student cooperatives are set up and run by students to meet specific

needs.

 Utility cooperatives provide utilities such as communication services,

electricity, and water to their members.

 Worker cooperatives create employment opportunities and provide the

benefits of ownership to members. (What is Cooperatives? n. d.)

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II. What Have I Learned

SUM IT UP!
Forms of Business Organization
These are the basic forms of business ownership:

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is the

simplest form of business organization. It is easy to set-up and is the least
costly among all forms of ownership.

2. Partnership

A partnership is a business owned by two or more persons who

contribute resources into the entity. The partners divide the profits of the
business among themselves. Its chief characteristics are: (a) association of
individuals; (b) mutual

Specific forms of partnership.

General Partnership
A business owned by two or more people, with a maximum of 20
owners, who have agreed to share all assets, liabilities, profits, and losses of
a company. These partners carry unlimited liability, meaning their personal
assets are on the line and can be sued for the whole of the partnership’s
business debts.

Limited Partnership

Establishing a limited partnership requires two or more individuals

agreeing to start a business where one or more of the partners are liable
only for the amount they have invested.

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3. Partitive Proportion
Joint Venture

A joint venture is an arrangement between two or more parties

(often established businesses) who have agreed to combine their
resources in order to accomplish a specific project. This arrangement
remains valid until the completion of a project or a certain period elapses.

3. Corporation

A corporation is a business organization that has a separate legal

personality from its owners. Ownership in a stock corporation is
represented by shares of stock.

In addition to those basic forms of business ownership, these are some

other types of organizations that are common today:

Limited Liability Company

More commonly known and referred to as an LLC, a limited liability

company is a business organizational structure that protects the owner’s
personal assets in the event of a business fault or accident.

Cooperative

A cooperative is a business organization owned by a group of

individuals and is operated for their mutual benefit. The persons making up
the group are called members.

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POST TEST:
Multiple Choice. Choose the letter that corresponds the correct answer. Write it
in your activity notebook.

1.The proprietorship form of business organization __________________.

A. must have at least three owners

B. represents the largest number of businesses in the country

C. combines the records of the business with personal records of the

owner

D. is characterized by a legal distinction between the business as an

economic unit and the owner

2. The partnership form of business organization ________________________.

A. is a separate legal entity

B. is a common form of organization for service type of business

C. enjoys an unlimited life

D. has limited liability

3. A business organized as a corporation ___________________________.

A. is not a separate legal entity

B. requires that stockholders be personally liable for the debts of the

business

C. is owned by its stockholders

D. terminates when one of its original stockholders dies

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4. Which of the following is not an advantage of the corporate form of business
organization?

A. limited liability stockholders

B. transferability of ownership

C. unlimited personal liability for the stockholders

D. unlimited life

5. Abcede and Xyck met at the law school and decide to start a small law
practice after graduation. They agree to split revenues and expenses evenly.
Which among the common form of business organization for a business such
this?

A. joint venture B. partnership C. corporation D. proprietorship

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