 King's College of the Philippines   Jay-Ar Ron Borgonio

Entrepreneurship in Tourism and Hospitality

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Lesson 8: Forms of Small Business Ownership

LESSON 8: FORMS OF SMALL BUSINESS OWNERSHIP

The forms of ownership applicable to small business are sole proprietorship, partnerships, and corporation.

A. Sole Proprietorship

A business owned and operated by single person.

Advantage of Sole Proprietorship

1. Ease and Cost of Formation. Among the three forms of ownership, the sole proprietorship is the easiest and least costly to establish. The only requisites for its legal existence to commence are the following the sole owner’s resolution to start
operating, and getting the required permit and license.

2. Secrecy. One way of effectively competing with others is for the businessperson to determine the plans as well as the strengths and weaknesses of his competitors. The sole proprietor is ahead in this regard because he has the advantage of keeping
his intentions secret. This is possible because he does not have, and he is not required by law, to share information with anyone. Thus, he can proceed with his activities in secrecy. His competition can only guess what his intended moves are.

3. Distribution and Use of Profits. If, because of his efforts, his business made large profits, the sole proprietorship is the sole beneficiary. He does not have to share the profits with anyone.

4. Control of the Business. The power to control the business is vested solely to the single proprietorship. This authority is very important especially under critical moments of competition.

5. Government Regulation. The sole proprietorship is spared from various government rules which cover partnerships and corporations. Also, sole proprietorships are required to submit fewer reports to the government.

6. Taxation. The net income of the sole proprietorship is regarded as the personal income of the sole owner and is taxed accordingly. This is not so in the case of partnerships and corporations wherein net incomes are taxed and will be subject to
taxation again when the owners individually receive their share of the profits.

7. Closing the Business. Sole proprietorships can be dissolved at will. Although this is done when necessary, it remains an option of the owner. Once the owner makes a decision to cease operations, he does not need to seek the approval of co-owners
or partners because he is the sole owner.

Disadvantages of Sole Proprietorships

1. Possibility that the Owner Lacks Ability and Experience. The success of the sole proprietorship will depend largely on the management and entrepreneurial skill of the owner. The firm will need a generalist with sufficient exposure to the various
specialized functions required, like marketing, production, finance, accounting, personnel, and research and development.

2. Difficulty in Attracting and Keeping Quality Employees. The assurance that the firm will survive for a long period is not a feature of sole proprietorships. As a consequence, good employees will tend to join a more stable enterprise which is most
often a corporation.

3. Difficulty in Raising Additional Capital. In a sole proprietorship, the amount of capital that could be raised 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 more difficult when credit is getting tight and interest rates are going up.

4. Limited Life of the Firm. The existence of the sole proprietorship depends on the physical well-being of the owner. The health on the part of the owner could cause bankruptcy. His death will mean liquidation of the business.

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 other assets have been exhausted in liquidating all claims
against his business. Unlimited liability is the greatest disadvantage of sole proprietorships.

B. Partnership

A legal association of two or more persons as co-owners of an unincorporated business.

Formed with the purpose of eliminating some of the disadvantages of sole proprietorships while retaining some of their advantages.

Advantages of Partnership

1. Ease of Formation. Like sole proprietorship, partnership is easy to form. The only requirement before the partnership start to operate is for the partner to agree on the basic aspect of the business like the nature of the business, location,
capitalization, and the like. 

**A written agreement called partnership agreement is drawn to formalize what has been agreed upon.

2. Pooling of Knowledge and Skills. The combined knowledge and the skills of the partners provide the partnership with the distinct advance. One partner, for instance, may be very good at marketing, while another may have the proven track record
in research and development. These skills may be used to t5hge advantage of the partnership. This condition lead to specialization which is a very important competitive tools in business.

3. More Sources of Capital. The combined resources of the partners provide a bigger source of funding. Also, the partnership can enjoy the benefits of a higher credit rating. A combination of the resource potentials of the partners and a high credit
rating is regarded as a formidable financing capability of the firm.

4. Ability to Attract and Retain Employees. Attracting and retaining good employees is a difficult inherent to sole proprietorship. Partnership are able to overcome this difficult by offering partner status to valuable employees. This advance also
minimizes the potential harm that may be done when a key employee moves over to another firm.

5. Tax Advantage. The income of the partnership is not taxed separately from the partners’ income. Any profit derived by the partners are taxed as their individual incomes.  

Disadvantages of Partnerships

1. Unlimited Liability. Partnership, like sole proprietorship, are saddled with the disadvantage of unlimited liability. Although one or more partners may opt to have limited liability, the remaining partner carries the burden of the unlimited liability.

2. Limited Life. When partner dies or withdraws from the business, the partnership is terminated. In essence, the life of the partnership is more limited than that of the sole proprietorship. This is so because the life of the sole proprietorship depends on
the state of health and the willingness of the sole owner to continue while a life of a partnership depends on the state of the health and willingness of the partners to continue. If there are partners, the risk of the termination of the life of the partner-
ship is five times greater than the sole proprietorship. 

3. Potential Life Between Partners. There are occasions when partners disagree on certain ways of operating the business, and there are many potential areas of disagreement. Among these are the following adding new products or services carried by
the business, hiring new employees, decisions on credit extensions, and the grant of additional benefits to employees.

4. Difficulty in Dissolving the Business. Partnerships are not as easy to dissolve as sole proprietorships. Whatever assets or liabilities are left after dissolving a sole proprietorship is the concern of the sole owner. In a partnership dissolution, it may not
be easy to divide whatever assets are left for distribution to the partners as some of the assets may be fixed or immovable.

Types of Partnerships

1. General Partnership is an association of two or more persons, each with unlimited liability, and 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 invested in the business.

Partnership Agreement

A document designed to prevent or at least minimize disagreements between partners.

It usually covers the following:

a. purpose of the business;

b. terms of the partnership;

c. goals of the partners and the partnership;

d. financial contribution made by each partner at the beginning and during the lifetime of the business;

e. distribution profits and losses;

f. withdrawal of contributed assets or capital by a partner;

g. management powers and work responsibilities of each partner;

h. provisions for expelling a partner;

i. provisions for admitting new partners;

j. provisions for continuing the business in the events of a partner’s death, illness, disability, or withdrawal;

k. provision for determining the value of a departing partner’s interest and method of payment of that interest;

l. methods of setting disputes through mediation or arbitration; and

m. duration of the agreement and the terms of dissolution of the business.

C. Corporation

A legally chartered enterprise 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 and be sued. 

Advantages of Corporation

1. Limited Liability. The liability of a stockholder is limited to his shareholding. He 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 of Expansion. The authority granted to a corporation to sell its own share of stock provides a means to pool large amounts of funds. The price per share of the stocks can be made low enough to attract even the smallest investor. As the
ownership of the shares of stock can be easily transferred, this feature motivates further the prospective investor to buy shares.

3. Ease of Transferring Ownership. If a stockholder loses interest in maintaining part ownership of the corporation, he may disassociate himself from it by selling or donating his shares to another person. This feature allows the corporation to change
ownership as often as required without actually dissolving it.

4. Relatively Long Life. Corporations are established to have a life of up to 50 years and is extendible for longer periods. Because ownership is readily transferrable, the death or withdrawal of any or all stockholders do not terminate the corporation.
This advantage makes the corporation the most stable among the three forms of ownership.

5. Greater Ability to Hire Specialized Management. He expanded operations of corporations make it

possible to subdivide the overall task into smaller specialized positions. As the created positions will be a little

more exacting than those for sole proprietorships and partnerships. The said requirements pave the way for

hiring fully trained management experts. With specialized management, the corporation is provided with an

opportunity to grow and develop more vigorously.

Disadvantages of Corporation

1. More Expensive and Complicated to Organize. Among the three forms of ownership, the corporation requires more time and money to organize. A corporation may start operations only after receiving from the Securities and Exchange
Commission (SEC) a certificate of incorporation. The SEC will only issue the certificate of incorporation after reviewing the articles of incorporation previously submitted by the initial set of corporate officers.

The articles of incorporation contain the following:

Name of the corporation;

Specific purpose or purposes;
Principal office of the corporation;
Term of existence of the corporation;
Names, nationalities and residences of incorporators;
Number of directors;
Amount of authorized capital stock; and
Others matters.

The treasurer’s affidavit indicating payment of minimum subscribed capital stock is also a requirement.

The articles of incorporation and the treasurer’s affidavit must, point by point, conform with the requirements of the Corporation Code.

2. Double Taxation. The profits derived by stockholders are taxed twice by the government:

1. First, when the corporation realizes profits; and

2. Second, when individual stockholders declare as part of their personal income the dividends they receive from the corporation.

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.

4. Employees Lack Personal Identification and Commitment. Many stockholders are detached from the daily operations of the corporation. Those who are employed by the corporation mostly do not own even a share of the company’s stocks. The
relationship between the corporation and the employees are too impersonal. Employees do not feel identified with the corporation and therefore, lack commitment to their work. The extra concern provided by employees of sole proprietorships and
partnerships sometimes spell the difference between success and failure. Such concern is rarely present in a corporate work atmosphere.

Last modified: Friday, 1 October 2021, 2:45 PM

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