CHAPTER 4

FORMS OF BUSINESS ORGANIZATIONS

Content Standard
1. the various forms of business organization, as follows:
 sole / single proprietorship
 Partnership
 Corporation
 cooperatives
2. the types of business according to activities, particularly:
 Service business
 Merchandising business
 manufacturing business

Performance Standard
1. Differentiate the forms of business organization in terms of nature of ownership
2. Make a list of existing business entities in their community and identify the form of business
organization.
3. Differentiate the types of business according to activities.
4. Make a list of businesses in their community according to their activities

Learning Competency/ Code

1. Differentiate the forms of business organization. ABM_FABM11- IIIb-11
2. Identify the advantages and disadvantages of each form. ABM_FABM11- IIIb-12
3. Compare and contrast the types of business according to activities-ABM_FABM11- IIIb-13
4. Identify the advantages, disadvantages, and business requirements of each type.
ABM_FABM11- IIIb-14

DISCUSSION PROPER

Introduction

A business is an organization that uses economic resources or inputs to provide

goods or services to customers in exchange for money or other goods and services.
Business organizations come in different types and forms.
It is important that the business owner seriously considers the different forms of
business organization—types such as sole proprietorship, partnership, and
corporation. Which organizational form is most appropriate can be influenced by tax
issues, legal issues, financial concerns, and personal concerns. For the purpose of this
overview, basic information is presented to establish a general impression of
the business organization.
 LESSON 1: Forms of Business Organization
1. Sole Proprietorship
A type of business unit where one person is solely responsible for providing the capital
and bearing the risk of the enterprise, and for the management of the business.
A sole proprietorship is a business owned by only one person. It is easy to set-up and is
the least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may go after
the personal assets of the owner if the business cannot pay them. The sole
proprietorship form is usually adopted by small business entities.
Characteristics of sole proprietorship form of business organization
a. Single Ownership: The sole proprietorship form of business organization has a single
owner who himself/herself starts the business by bringing together all the resources.
b. No Separation of Ownership and Management: The owner himself/herself manages
the business as per his/her own skill and intelligence. There is no separation of
ownership and management as is the case with company form of business
organization. A sole proprietor contributes and organizes the resources in a
systematic way and controls the activities with the objective of earning profit.
c. Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organization does not involve any legal formalities. Thus, its formation is quite
easy and simple.
d. No Separate Entity: The business unit does not have an entity separate from the
owner. The businessman and the business enterprise are one and the same, and the
businessman is responsible for everything that happens in his business unit.
e. No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same
time, the entire loss is also borne by him. No other person is there to share the profits
and losses of the business. He alone bears the risks and reaps the profits. (f) Unlimited
Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business
assets are not enough to pay the business liabilities, his personal property can also
be utilized to pay off the liabilities of the business.
f. One-man Control: The controlling power of the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will.
Advantages of Sole proprietorship
a. Easy to Form and Wind Up.
b. Quick Decision and Prompt Action.
c. Direct Motivation.
d. Flexibility in Operation.
e. Maintenance of Business Secrets.
f. Personal Touch.
Disadvantages of sole proprietorship
a. Limited Resources.
b. Lack of Continuity.
c. Unlimited Liability.
d. Not Suitable for Large Scale Operations
e. Limited Managerial Expertise.

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. In general partnerships, all partners have unlimited
liability. In limited partnerships, creditors cannot go after the personal assets of the
limited partners.

Characteristics of partnership form of business

a. Two or More Persons: To form a partnership firm at least two persons are
required.
b. Contractual Relationship: Partnership is created by an agreement among the
persons who have agreed to join hands. Such persons must be competent to
contract.
c. Sharing Profits and Business: There must be an agreement among the partners
to share the profits and losses of the business of the partnership firm.
d. Existence of Lawful Business: The business of which the persons have agreed to
share the profit must be lawful.
e. Principal Agent Relationship: There must be an agency relationship between
the partners. Every partner is the principal as well as the agent of the firm.
When a partner deals with other parties he/she acts as an agent of other
partners, and at the same time the other partners become the principal.
f. Unlimited Liability: The partners of the firm have unlimited liability. They are
jointly as well as individually liable for the debts and obligations of the firms.

Advantages of partnership
a. Easy to Form
b. Availability of Larger Resources
c. Better Decisions
d. Flexibility
e. Sharing of Risks
f. Benefits of Specialization
Disadvantages of partnership
a. Unlimited Liability
b. Instability
c. Limited Capital
d. Non-transferability of share
e. Possibility of Conflicts

3. Corporation
Corporations are probably the dominant form of business organization. A
corporation is a legal entity doing business, and is distinct from the individuals within
the entity. Public corporations are owned by shareholders who elect a board of
directors to oversee primary responsibilities. Along with standard, for-profit
corporations, there are charitable, not-for-profit corporations.

Advantages of a corporation:
a. Unlimited commercial life. The corporation is an entity of its own and does not
dissolve when ownership changes.
b. Greater flexibility in raising capital through the sale of stock. c. Ease of
transferring ownership by selling stock.
d. Limited liability. This limited liability is probably the biggest advantage to organizing as a
corporation. Individual owners in corporations have limits on their personal liability.
Even if a corporation is sued for billions of dollars, individual shareholder’s liability is
generally limited to the value of their own stock in the corporation.
Disadvantages

 Regulatory restrictions. Corporations are typically more closely monitored by

governmental agencies, including federal, state, and local. Complying with
regulations can be costly.
 Higher organizational and operational costs. Corporations have to file articles of
incorporation with the appropriate state authorities. These legal and clerical
expenses, along with other recurring operational expenses, can contribute to
budgetary challenges.
 Double taxation. The possibility of double taxation arises when companies
declare and pay taxes on the net income of the corporation, which they
pay through their corporate income tax returns. If the corporation also pays
out dividends to individual shareholders, those shareholders must declare that
dividend income as personal income and pay taxes at the individual income tax
rates. Thus, the possibility of double taxation.

4. 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. Some examples of cooperatives are: water and electricity (utility)
cooperatives, cooperative banking, credit unions, and housing cooperatives.

Characteristics of cooperative society

a. Voluntary Association: Members join the cooperative society voluntarily
i.e., by their own choice. Persons having common economic objective can join
the society as and when they like, continue as long as they like and leave the
society and when they want.
b. Open Membership: The membership is open to all those having a common
economic interest. Any person can become a member irrespective of
his/her caste, creed, religion, color, sex etc.
c. Number of Members: A minimum of 10 members are required to form a
cooperative society. In case of multi-state cooperative societies the
minimum number of members should be 50 from each state in case the
members are individuals.
d. Capital: The capital of the cooperative society is contributed by its members.
e. Democratic Set Up: The cooperative societies are managed in a
democratic manner. Every member has a right to take part in the
management of the society. However, the society elects a managing
committee for its effective management. The members of the managing
committee are elected on the basis of one-man one-vote irrespective of the
number of shares held by any member.
LESSON 2: Types of business according to activity:
There are 3 Types:
1 . Service Business
A service type of business provides intangible products (products with no physical
form). Service type firms offer professional skills, expertise, advice, and other similar
products. Examples of service businesses are: schools, repair shops, hair salons,
banks, accounting firms, and law firms.

One of the advantage of a service activity is the absence of tangible assets held by the
business. Holding inventory entails proper management and control
which makes it costly. It does not require production facilities so funds can be allocated
for other business concerns.

The disadvantage is the inability to standardize services since the needs of one client
differs from the other. In order to ensure that services are of high quality, constant
evaluation and training are to be conducted. Employment benefits are also
important to attract, retain and motivate highly skilled workers.
Operating cycle is the time it take for a company to create products, sell these
products and collect cash from its customers. For a service company, the major
phase of the operating cycle includes payment of salaries and other operating
expenses, performing services, and receiving payments from customers.

2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail
price. They are known as "buy and sell" businesses. They make profit by selling the
products at prices higher than their purchase costs. A merchandising business sells
a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other resellers.
 There are two types of merchandizing business: retailers and wholesalers.
Retailers directly sells products to the end user while wholesaler sells products in
bulk to retailers. One advantage is that these companies generally consume less
conversion time, effort and cost. However, holding inventory involves cost which
becomes a disadvantage,

The operating cycle of merchandizing company starts with the purchase of goods for
sale called inventory and eventually sells them to customer. The cycles end when
payments are collected form customers.

3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the
intention of using them as materials in making a new product. Thus, there is a
transformation of the products purchased. A manufacturing business combines raw
materials, labor, and factory overhead in its production process. The manufactured
goods will then be sold to customers.

The operating cycle starts from the purchase of raw materials, process the materials in
to finish products and sell them for profit. The cycle ends when cash is received from
customers.
The advantages are quality control and products are visible. Manufacturing firms
generally need production facilities, requires high conversion cost, high conversion cost
and cost of quality control are the disadvantages.
 CHAPTER SUMMARY:
Types of Business Organization According to ownership

It is important that the business owner seriously considers the different forms of
business organization—types such as sole proprietorship, partnership, corporation and
cooperative.
1. Sole Proprietorship- consists of one individual doing business.
Advantages
a. Ease of formation and dissolution.
b. Ownership of all profits.
c. Sole Proprietorships are typically subject to fewer regulations.

Disadvantages
a. Unlimited liability.
b. Limited life.
c. Limited capital.

2. Partnership- consists of two or more individuals in business together.

Advantages
a. Synergy
b. Relatively easy to form
c. Subject to fewer regulations than corporations.
d. Stronger potential of access to greater amounts of capital.

Disadvantages
a. Unlimited liability.
b. Limited life.
c. Possibility of disputes or conflicts between partners which could lead to dissolving
the partnership

3. Corporation- is a legal entity doing business, and is distinct from the

individuals within the entity.
Advantages
a. Unlimited life
b. Greater flexibility in raising capital through the sale of stock
c. Ease of transferring ownership by selling stock
d. Limited liability

Disadvantages
a. Regulatory restrictions
b. Higher organizational and operational costs
c. Double taxation

4. Cooperative is a business organization owned by a group of individuals and is operated

for their mutual benefit.

Types of businesses according to activities:

1. Service Business A service type of business provides intangible products
(products with no physical form).
2. Merchandising Business – purchase finished products and sells if for profit.
3. Manufacturing Business – buys raw materials, process them into finished
products and sells the products.