Module 2

Business Organization

M. MANAYAO, CPA
Learning Objectives
➢ Explain the basic legal forms ofbusiness organization.
➢ Know the advantages and disadvantages of adopting
the sole proprietorship, partnership and corporation
forms of business organization.
➢ Understand the importance of business trend.
Introduction
The business firm is an entity designed to organize raw
materials, labor, and machines with the goal of producing
goods/services. Firms
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.
 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 firm’s assets and
is responsible for all its liabilities. More businesses are
sole proprietorship than any form of business
organization.
Proprietorship
From a legal point of view, the owner of a
proprietorship is not separable from the business
and is personally liable for all debts of the
business. From an accounting prospective,
however, the business is an entity separate from
the owner (proprietor). Therefore, the financial
statements of the business present only those
assets and liabilities pertaining to the business.
Advantages and Disadvantages

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
Proprietorship
Therefore, the proprietorship may be an ideal form of business
organization when the following conditions exist:
➢ Theanticipated 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.
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 that may be derived therefrom. Partnership
may operate under varying degrees of formality.
General Partnership
A 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. Profits and asset
ownership may be divided in any way agreed upon
by the partners.
Limited Partnership
A limited partnership is one containing 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 the
personal liability of limited partners is limited to
their investment. Limited partners cannot be
active in management.
Advantages and Disadvantages

Advantages Disadvantages
1.Ease of formation 1.Unlimited liability
2.Additional sources of 2.Lack of continuity
capital 3.Difficulty of transferring
3.Management base ownership
4.Tax implication 4.Limitations in raising
capital
Corporation
A corporation is an artificial being created by law and is
a legal entity separate and distinct from its owners. This
legal entity may own assets, borrow money and engage
in other business entities without directly involving the
owners. In many corporations, owners who are also
called shareholders do not directly manage the firm.
Instead, they select managers designated as the Board
of Directors to run the firm for them. The Board of
Directors is authorized to act in the corporation’s behalf.
Corporation
The incorporation process is initiated by filing the Articles of
Incorporation and other requirements with the Securities and
Exchange Commission (SEC). The Articles of Incorporation
includes among others the following:
▪ Incorporators
▪ Name of the corporation
▪ Purpose of the corporation
▪ Capital stock
▪ Authorized shares
Advantages and Disadvantages

Advantages Disadvantages
1. Limited liability 1. Time and cost of formation
2.Unlimited life 2.Regulation
3.Ease in transferring 3.Taxes
ownership
4.Ability to raise capital
Important Business Trends
Four important business trends should be noted,
namely:
1. Increased globalization of business
2. Ever improving information technology (IT)
3. Corporate governance
4. Outsourcing
Increase Globalization of Business
Most large corporations operate on a global basis and
with good reason: investing abroad has proven to be
highly profitable. Decisions to build plants and produce
goods abroad are also motivated by the attraction of
low-cost labor and the easy transfer of highly efficient
technology that gives competitive price advantages to
foreign operations.
Ever Improving Information Technology
Improvements in IT are spurring globalization, and they
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.
Corporate Governance
This trend relates to the way the top managers operate
and interface with stakeholders. At the same time, the
Securities and Exchange Commission (SEC) which has
jurisdiction over the shareholders and the information
must be given has made easier to activist shareholders
to changes the way things are done within firm.
Outsourcing
Outsourcing occurs when domestic firms invest and
produce goods in foreign countries or when these firms
choose to rely on imparts rather than build domestic
plans and produce these goods domestically. Low labor-
cost countries, like China, open up new investment
opportunities for corporations from the United States,
Europe and Middle East. Growing competitive pressures
are forcing domestic firms to invest abroad or to import
cheap foreign products.
➢QUESTIONS????
➢REACTIONS!!!!!
END