CHAPTER 8

FORMS OF
SMALL BUSINESS
OWNERSHIP
 01 02 03
SOLE
PROPRIETORSHIP PARTNERSHIP CORPORATION
SMALL BUSINESS OWNER
(SBO)
One of the most important decisions a prospective
entrepreneur or SBO has to make is the form of
ownership that has to be adapted.

The decision must be clear at the inception of the

business.

Each form has its own unique character and the

inherent advantages and disadvantages of each
must be taken into consideration before the
decision is made (Table 13)
TABLE 13. FORMS OF BUSINESS OWNERSHIP: IMPLICATIONS ON VARIOUS ASPECTS
SMALL BUSINESS OWNER
(SBO)

The choice would depend largely on the

resources and personal objectives of the
prospective owner.

The forms of ownership applicable to small

business are sole proprietorship,
partnership, and corporation.
 SOLE
PROPRIETORSHIP
A sole proprietorship is a business
owned and operated by a single person.

Majority of businesses are owned by sole

proprietors and this is an indication of
the popularity of this particular form.

Most business owners choose this form

because of certain advantages unique to
sole proprietorships.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
Sole proprietorships are afforded with
advantages pertaining to the following:

1. ease and cost of formation;

2. secrecy;
3. distribution and use of profits;
4. control of the business;
5. government regulation;
6. taxation; and
7. closing the business.
 ADVANTAGES OF SOLE
PROPRIETORSHIPS
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:
a. the sole owner's resolution to start
operating; and
b. getting the required permit and license.
 ADVANTAGES OF SOLE
PROPRIETORSHIPS
1. Ease and cost of formation;
There are many activities that a sole
proprietor can do that cannot be done
in a partnership and corporate set-up.

example: is the setting of the date for the

actual start of operations.

The sole proprietor may change this

date arbitrarily without getting the
approval of anybody.
 ADVANTAGES OF SOLE
PROPRIETORSHIPS
1. Ease and cost of formation;

This kind of advantage is very important

especially when businesses are in tight
competition with one another.

Another advantage is that the cost of

forming a sole proprietorship is less than
either the partnership or corporation.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
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.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
2. Secrecy;

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.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
3. Distribution and Use of Profits;

If, because of his efforts, his business

made large profits, the sole proprietor is
the sole beneficiary.
He does not have to share the profits with
anyone.
If he decides to invest his profits for
expanding his business, he is not required
to consult anybody.
He may decide to use it any way he
pleases and he is free to do so.
 ADVANTAGES OF SOLE
PROPRIETORSHIPS
4. Control of the Business;

The power to control the business is vested

solely in the single proprietor
.
This authority is very important, especially under
critical moments of competition.
 ADVANTAGES OF SOLE
PROPRIETORSHIPS
4. Control of the Business;
For instance:
a consumer is confronted with a situation where he must
choose to buy a product from either a sole proprietorship,
a partnership, or a corporation. If all the prices quoted by
the three firms are identical and the consumer is asking
for a 10% discount, the sole proprietor has the advantage
of making an instant decision. On the other hand, the
partners will have to consult one another, and the
corporation will be ready with a reply after undergoing a
process. If the customer is in a hurry, he will decide in
favor of the sole proprietor.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
5.Government Regulation;

The sole proprietorship is spared from

various government rules which cover
partnerships and corporations.

Also, sale proprietorships are required to

submit fewer reports to the government.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
5.Government Regulation;

A corporation producing movies, for

example, cannot engage in the production of
vegetable crops.

In contrast, a sole proprietorship

manufacturing "pastillas de leche" can
switch to the manufacturing of kitchen
utensils without violating any legal
restriction.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
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.
ADVANTAGES OF SOLE
PROPRIETORSHIPS
7.Closing the Business;

Sole proprietorships can be dissolved at will.

Although this is done only 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
The following disadvantages are inherent to
sole proprietorships:

1. possibility that the owner lacks ability

and experience;
2. difficulty in attracting and keeping
quality employees;
3. difficulty in raising additional capital;
4. limited life of the firm; and
5. unlimited liability of the proprietor.
 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 skills 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.
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
1. Possibility that the Owner Lacks
Ability and Experience.

Unfortunately, it is hard to find qualified

generalists to manage the sole
proprietorships.

If the sole proprietor lacks the skills of a

generalist, then it will be hard for the firm to
succeed.
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
2. Difficulty in Attracting and Keeping
Good 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,
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
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.
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
4. Limited Life of the Firm

The existence of the sole proprietorship

depends on the physical well-being of the
owner.

Ill health on the part of the owner could cause

bankruptcy.

His death will mean liquidation of the

business.
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
4. Limited Life of the Firm

In any case, employees, customers, and

creditors feel some degree of anxiety
about the limited life of the sole
proprietorship.

This limits the number and magnitude

of transactions undertaken by the firm.
 DISADVANTAGES OF
SOLE PROPRIETORSHIPS
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 his other assets have been
exhausted in liquidating all claims against his
business.

Unlimited liability is the greatest disadvantage

of sole proprietorships.
 PARTNERSHIP

Partnership
A partnership is a legal association of two or
more persons as co-owners of an
unincorporated business. A partnership is
formed with the purpose of eliminating some
of the disadvantages of sole proprietorships
while retaining some of their advantages.
 ADVANTAGES OF PARTNERSHIP

Partnerships have advantages pertaining to the

following:

1.ease of formation;
2. pooling of knowledge and skills;
3. more sources of capital;
4. ability to attract and retain employees; and
5. tax advantage.
 ADVANTAGES OF PARTNERSHIP

1. Ease of Information

• Like sole proprietorships, partnerships are easy to

form. The only requirement before the partnership
starts to operate is for the partners to agree on basic
aspects 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.
 ADVANTAGES OF PARTNERSHIP

2. Pooling of Knowledge and Skills

• The combined knowledge and skills of the partners

provide the partnership with a distinct advantage. One
partner, for instance, may be very good at marketing, while
another may have a proven track record in research and
development. These skills may be used to the advantage of
the partnership. This condition leads to specialization which
is a very important competitive tool in business.
 ADVANTAGES OF PARTNERSHIP

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 formidable financing capability of
the firm.
 ADVANTAGES OF PARTNERSHIP

4. Ability to Attract and Retain Employees

Attracting and retaining good employees is a difficulty
inherent to sole proprietorships. Partnerships are able to
overcome this difficulty by offering partner status to valuable
employees. This advantage also minimize the potential.

5. Tax Advantage
• The income of the partnership is not taxed separately from the
partners' incomes. Any profits derived by the partners are taxed as their
individual incomes.
 DISADVANTAGES OF PARTNERSHIP

• Operating partnerships are hindered by the following disadvantages:

1. unlimited liability;
2. limited life;
3. potential conflict between partners; and
4. difficulty in dissolving the business.
1. Unlimited Liability
• Partnerships, like sole proprietorships, 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 unlimitied liability.
 DISADVANTAGES OF PARTNERSHIP

2. Limited Life

• When a 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 a sole proprietorship depends on the state of health and
the willingness of the sole owner to continue while the life of a
partnership depends on the state of health and the willingness of
the partners to continue. If there are five partners, the risk of the
termination of the life of the partnership is five times greater than
that of a sole proprietorship.
 DISADVANTAGES OF PARTNERSHIP

3. Potential Conflict Between Partners

• There are occasions when partners disagree on certain ways of
operating the business, and there are many potential areas for dis-
agreement. Among these are the following:
1. adding new products or services carried by the business;
2. hiring new employees;
3. decisions on credit extensions; and
4. the grant of additional benefits to employees.
When conflict between partners persists, operations are affected. The
condition may even lead to bankruptcy. For instance, an employee
may be at the receiving end of conflicting orders from the partners.
The ensuing confusion may affect the employee's performance.
 DISADVANTAGES OF PARTNERSHIP

•
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.
The more difficult the dissolution becomes when certain debts
are to be shared by the partners.
 TYPES OF PARTNERSHIP

Partnerships may be classified according

to the liability of the partners. They an as
follows:

1. General Partnership
2. Limited Partnership.
 GENERAL PARTNERSHIP

A general partnership involves

two or more people who each
have unlimited liability and are
actively involved in the business
operations.
 LIMITED PARTNERSHIP

In a limited partnership, the

liability of one or more partners is
limited to the extent of their
investment in the business.
 PARTNERSHIP AGREEMENT

The partnership agreement is a

document designed to prevent or
at least minimize disagreements
between partners.
 IT USUALLY COVERS THE
FOLLOWING:

1. Purpose of the business

2. Terms of the partnership

3. Goals of the partners and the

partnership;
IT USUALLY COVERS THE
FOLLOWING:

4. Financial contribution made by each

partner at the beginning and during the
lifetime of the business

5. distribution of profits and losses;

6. Withdrawal of contributed assets or

capital by a partner;
 IT USUALLY COVERS THE
FOLLOWING:

7. Management powers and work

responsibilities of each partner;

8. Provisions for admitting new

partners;

9. Provisions for expelling a partner;

 IT USUALLY COVERS THE
FOLLOWING:

10. Provisions for continuing the business

in the events of a partner's death, ill-
ness, disability, or withdrawal;

11. Provision for determining the value of

a departing partner's interest and
method of payment of that interest;
 IT USUALLY COVERS THE
FOLLOWING:

12. Methods of settling disputes

through mediation or arbitration; and

13. Duration of the agreement and

the terms of dissolution of the
business
 CORPORATION

A corporation is 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
CORPORATIONS

1. limited liability
2. ease of expansion
3. ease of transferring ownership
4. Nelatively long life; and
5. greater ability to hire
specialized management.
 DISADVANTAGES OF
CORPORATIONS

1. more expensive and

complicated to organize,
2. double taxation;
3. more extensive government
restrictions and reporting
requirements; and
4.employees lack personal
identification and commitment.
THE ARTICLES OF INCORPORATION
CONTAINS THE FOLLOWING:

1. Name of the corporation;

2. Specific purpose or purposes

3. Principal oftice of the corporation:

4. Term of existence of the corporation;

THE ARTICLES OF INCORPORATION
CONTAINS THE FOLLOWING:

5. Names, nationalities and residences

of incorporators:

6. Number of directors:

7. Amount of authorized capital stock:

and

8. Other matters.
 SUMMARY
Small business operators have three primary ownership
choices: sole proprietorship, partnership, and corporation. Each
option comes with its own set of advantages and disadvantages,
including control over the business, profit-sharing
arrangements, liability considerations, and potential for growth.
Sole proprietorships offer sole control to the owner,
partnerships allow for additional capital sources but necessitate
power-sharing among partners, and corporations facilitate
easier expansion along with limited liability for stockholders.
Ultimately, the best choice depends on the individual's
preferences, circumstances, and long-term goals.