Module 4

Lesson 3: Forms and Economic Roles of Business Organization

Phases of Economic Development and its impact to
Business Environment

After going through this module, you are expected to:

 What are the forms and economic roles of business organization.
 Analyze the importance of these forms and economic roles in business
organization
 What is the impact of the Phases of economic development in business
environment.
 Understand the importance of these forms, roles and phases of business
organization in the economic development.

What I Know
Directions:
Enumerations:

A. What are the three (3) forms of Business Organization

1._________________________________
2. ________________________________
3. ________________________________

B. Give the three (3) types of Corporations

1. ____________________________
2. ____________________________
3. ____________________________
C. Give the five (5) impact of economic environment on business.
1. ______________________________
2. _________________________________
3. _________________________________
4. ______________________________
5. ______________________________

Lesson Forms and Economic Roles of Business Organization

Phases of Economic Development and its impact to

1 Business Environment

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ACTIVITY 1
Fill in the blanks:
Strength resources and capabilities describe as ______(1)_______, ____(2)_______,
and ______(3)__________
Weaknesses could be a _____(4)______ of patent protection and ____(5)_________
reputation among customers.

To assess the opportunities, the company should look for the elements of the
environment that could be _____(6)_______ to its own ______(7)___________.
The threats on the other hand are the _____(8)_______ factor that could cause
____(9)_______ for the company in the _______(10)________

ACTIVITY 2
What factors do you think will affect one business? Write factors using the picture
below.

BUSINESS

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 The Four (4) Forms of Business Organization

SOLE PROPRIETORSHIP - The simplest and most common form of business

ownership, sole proprietorship is a business owned and run by someone for their own
benefit. The business’ existence is entirely dependent on the owner’s decisions, so when
the owner dies, so does the business.

Advantages Of Sole Proprietorship

1. The owner receives all profits.

2. Profits are taxed only once.
3. The owner makes all decisions and is in complete control of the company (but
this could also be a disadvantage).
4. It is the easiest and least expensive form of ownership to organize.

Disadvantages Of Sole Proprietorship

There is unlimited liability if anything happens in the business. Your personal

assets are at risk.

1. It is limited in raising funds and the owner might have to acquire

consumer loans.
2. There is no separate legal status.

Tip: When looking at setting up a sole proprietorship, assess what type of liability you
have. If you’re selling advice or services, you may need an errors and omissions
insurance policy to cover yourself against claims for negligence. Determine what you
have to lose. Do you own a home or savings account? Your personal assets could be at
risk in the case of a lawsuit.

PARTNERSHIPS - In a partnership, two or more people share ownership of a single

business. Like proprietorships, the law does not distinguish between the business and
its owners. The partners should have a legal agreement that establishes how decisions
will be made, how profits will be shared, how disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out or what
steps will be taken to dissolve the partnership when needed.

Disclaimer: If you’re establishing a partnership, it is extremely important to make sure

everything is outlined in case things go sour, especially when starting a business with
a loved one or friend. Seek legal advice to create a partnership operating agreement to
hash out all business decision possibilities, including succession or exit plans.

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Partnership Advantages

1. It is easy to establish (with the exception of developing a partnership

agreement).
2. Separate legal status gives liability protection.
3. Profits are taxed only once.
4. Partners may have complementary skills.

Partnership Disadvantages

1. Partners are jointly and individually liable for other partners’ actions.
2. Profits must be shared with the partners.
3. Decision making is divided.
4. Business can suffer if the detailed partnership agreement is not in place.

CORPORATIONS - A corporation is considered by law to be a unique entity, separate from

those who own it. A corporation can be taxed, sued and enter into contractual agreements. The
corporation has a life of its own and does not dissolve when ownership changes.

There are three types of corporations: C-corporation, S-corporation and Limited Liability
Company.

C-Corporation

A C-corporation is a corporation that is taxed separately from its owners. It gives the
owners limited liability, which can encourage more risk-taking and potential investment.

C-Corporation Advantages

1. It is limited liability.
2. In regards to transfer of ownership, shareholders can sell their shares.
3. Capital is easier to raise through the sale of stock.
4. The company pays fringe benefits.
5. There are tax benefits.

C-Corporation Disadvantages

1. It is subject to double taxation. (Corporation and shareholder earnings are

taxed.)
2. It can be costly to form.
3. There are more administrative duties. This entity type is required by law to have
annual meetings, notify stockholders of the meeting and keep minutes of
meetings.
4. C-corps pay corporate taxes at a different time than other forms of business.

S-Corporation

An S-corporation, also known as subchapter S-corporation, offers the owners

limited liability. S-corporations do not pay income taxes; the earnings and profits are

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treated as distributions. The shareholders must report their income on individual income tax
returns.

S-Corporation Advantages

1. It enjoys limited liability.

2. It avoids double taxation.
3. Profits are taxed only once.
4. Capital is easier to raise through the sale of stock.
5. It offers transfer of ownership.

S-Corporation Disadvantages

1. It can be costly to form.

2. Stockholders are limited to individuals, estates or trustees.
3. It is subject to required administrative duties.
4. It cannot provide company paid fringe benefits.
5. Stockholders are limited to citizens or resident aliens of the United States.

Limited Liability Company

A limited liability company or LLC is a hybrid business structure that provides the limited
legal liability of a corporation and the operational flexibility of a partnership or sole
proprietorship. However, the formation is more complex and formal than that of a general
partnership.

Tip: Forming an LLC requires the business owner to file legal paperwork. You may want to
consult an attorney to help you with the process

Limited Liability Company Advantages

1. It is the most common business structure and is specifically created for small
businesses.
2. This entity type requires insurance in case of a suit.
3. It is a separate legal entity.
4. LLCs are usually taxed as a sole proprietorship.
5. LLCs can have an unlimited number of owners.

Limited Liability Company Disadvantages

1. It can be costly to form.

2. It requires yearly administrative costs.
3. LLCs have a personal tax liability.
4. Legal and accounting assistance is recommended.

ECONOMIC ROLES OF BUSINESS ORGANIZATION

The role of business in social and economic development cannot be overstated.

Business plays a vital role in the economic development and wealth of a country. Success in

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business translates to the economic well-being of a company and its residents through job
creation and offering improved quality of life for the country’s citizens.

The role of a business is to produce and distribute goods and services to satisfy a public
need or demand. According to Business News Daily corporate social responsibility (CSR) is "a
business practice that involves participating in initiatives that benefit a society." However,
corporate social responsibility is more than just a simple business practice. When you pursue a
Master of Business Administration (MBA), you will learn how to differentiate the blurred lines of
working for profit and working to help maintain the social order. Society does not exist without
some form of an economy, and businesses are what make up the economic system of the world.

Top 5 Stages of Economic Development

The Traditional Society:
In a traditional society, modern science and technology are either not available or are not
being systematically applied. However, there may be ad hoc application of innovations.
Production can also increase due to increase in acreage.

Domestic and foreign trade can change in composition. But the distinguishing feature of
the traditional society is that there exists a ceiling to the level of the attainable per capita output.
A large proportion of productive resources are devoted to agriculture.

The Pre-conditions to Take-off:

Covers a long period of a century or more during which the pre-conditions for take-off
are established.
These conditions mainly comprise fundamental changes in the social, political and
economic fields.

(A) change in society’s attitudes towards science, risk-taking and profit-earning;

(b) The adaptability of the labor force;
(c) Political sovereignty;
(d) Development of a centralized tax system and financial institutions; and
(e) The construction of certain economic and social overheads like rail-roads and
educational institutions.

The “Take off” Period:

This is the crucial stage which covers a relatively brief period of two or three decades in
which the economy transforms itself in such a way that economic growth subsequently takes
place more or less automatically. “The take-off” is defined as “the interval during which the rate
of investment increases in such a way that real output per capita rises and this initial increase
carries with its radical changes in the techniques of production and the disposition of income
flows which perpetuate the new scale of investment and perpetuate there by the rising trend in
per capita output.”

The term “take-off’ implies three things-, firstly the proportion of investment to national
income must rise from 12% to 15%, definitely outstripping the likely population increase;
secondly the period must be relatively short so that it should show the characteristics or an
economic revolution; and thirdly, it must culminate in self -sustaining and self-generating
economic growth.

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Drive to Maturity:
This is, of course, a long period of self-generating and self-propelling economic growth.
‘The rates of savings and investment are of such a magnitude that economic development
becomes automatic. Overall capital per head increases as the economy matures. The structure
of the economy changes increasingly.

The- initial key industries which sparked the take-off” decelerate as diminishing returns
set in. But the average rate of growth is maintained by a succession of new rapidly-growing
sectors with a new set of pioneering leaders; the proportion of the population engaged in rural
pursuit’s declines, and the structure of the country’s foreign trade undergoes a radical change.

The Age of High Mass Consumption:

During this stage, the per capita real income increases to the level at which a large
number of people can afford consumption transcending the basic food, shelter and clothing
requirements. There is tendency for the leading sectors to shift towards durable consumer goods
and services.

IMPACT OF ECONOMIC ENVIRONMENT ON BUSINESS

The economic environment can have a major impact on businesses by affecting patterns
of demand and supply! Companies need to keep a track of relevant economic indicators and
monitor them over time.

Income:
One of the most important factors in the economic environment is the income of
customers. This indicates their ability to spend on the products sold by the marketer. The
marketer not only needs to estimate the income of customers, but he also has to decipher the
products on which the customer would be willing to spend his money.

Inflation:
Inflation is an important economic indicator of an economy. Inflation refers to an increase
in prices without a corresponding increase in wages, resulting in lower purchasing power of
consumers. An economy should try to achieve low rate of inflation. The best way to achieve a low
rate of inflation is to ensure that products and services are produced efficiently.
When cost of production of products and services are low, they will be sold at lower prices
and hence inflation will be low. An artificial way to reduce inflation is by restricting supply of
money in the economy by raising the interest rates at which consumers and businesses can
borrow money.
There will be less demand and supply will be higher, forcing suppliers to reduce their
prices. But this can only be a short-term approach because restricting the supply of money will
reduce the output of businesses, and lower the level of economic activities. This will be dangerous
to the economy. The effort should be to increase productivity and efficiency of all economic
activities.

Recession:
Recession is a period of economic activity when income, production and employment tend
to fall. Demand for products and services are reduced. Specific activities cause recession.

Companies should improve existing products and introduce new ones. The idea is to
reduce production hours, waste and the cost of materials so that companies can offer products
at lower prices. Recession increases the demand for products and services that offer good value
at lower prices. Business buyers buy products that are economical and efficient, offer value, help

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them to streamline practices and procedures, and improve their services to their customers. The
idea should be to prompt consumers and business customers to buy more. The most potent way
to end a recession cycle is to make it attractive for customers to buy more.

Interest Rate:
If interest rate in an economy is high, businesses will borrow capital at a higher rate and
they will set up new businesses only when they are convinced that they can earn at a rate higher
than the interest rate they are paying on the capital.
Therefore if the interest rates are high, new businesses will not come. Even among existing
businesses, operating costs would go up as their working capital requirements will attract higher
interest rates. Therefore, companies will be able to produce products and services at higher costs
and will perforce sell them at higher prices.
Therefore, there will be inflationary tendencies if interest rates are higher for long periods.
Further, consumers will have strong tendencies to save because of the prospect of earning higher
interest rates from their deposits. High interest rates have detrimental effects on the economy.

Exchange Rate:
Exchange rate becomes a very important driver of performance when a company exports
its products, and when it imports materials and components for making its products. It is more
profitable to export when the currency of the exporting country is weaker than the currency of
the importing country. But this advantage is nullified if materials and components are imported
from a country whose currency is stronger. A company will run its most profitable operations
when it exports its product to a country whose currency is stronger, and imports material and
components from a country whose currency is weaker.

ACTIVITY 3

DIRECTIONS:

Give at least three ( 3) advantages of engaging in a different form of business.

A SOLE PROPRIETORSHIP
______________________________
_______________________________
________________________________
B PARTNERSHIP
______________________________
_______________________________
________________________________
C CORPORATION
______________________________
_______________________________
________________________________

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