FORM OF BUSINESS

OWNERSHIP
INTRODUCTION
The form of business ownership to adapt is strategic decision that
must be considered at the inception of the business. The decision may
later prove to be supportive of the owner’s objective or may be the
biggest obstacle to achieving them.

Careful thinking must be considered in determining the ownership

form as each of the various types has its own unique features, as well
as advantages and disadvantages.

There are three major types of business ownership: sole

proprietorship, partnership and corporation. The minor types consist
of the joint stock company, the joint venture, and the business trust
(Figure 10).
 Form of Business Ownership
Form of Business Ownership

MAJOR FORMS MINOR FORMS

MAJOR FORMS MINOR FORMS

SOLE CORPORATIO BUSINESS JOINT JOINT STOCK

PROPRIETORSHIP
SOLE CORPORATIO
N BUSINESS
TRUST JOINT
VENTURE JOINT STOCK
COMPANY
PROPRIETORSHIP N TRUST VENTURE COMPANY
 FIGURE 10
TYPES OF BUSINESS FORMS OWNERSHIP

SOLE PROPRIETORSHIP
The sole proprietorship is a type of business entity owned and operated by a single person. The big percentage of businesses owned
by sole proprietors indicates the popularity of this ownership type. This is so because of certain advantages unique to sole
proprietorship.

Advantage of Sole Proprietorship

sole Proprietorship are afforded with advantages pertaining to the following:
1. Ease and cost formation. Among the three ownership forms , the sole proprietorship is the easiest and least costly to organize. The only
requisites for its legal existence are the following

a. the sole owner’s resolve to start operating; and

b . getting the required permit and licences.

There are many activities that a sole proprietor can do which are extra difficult to do under the partnership or corporate forms. An example is the
setting of the date for the actual start of operation . The sole owner may change this date arbitrarily without consulting any body.

The cost involved in forming the sole proprietorship is less than either the partnership or corporation . This is because only one person makes the
decisions in the actual formation of the business. Also, documentary requirement are not as extensive as those of the other two forms of ownership.
2. Secrecy. One way of effectively competing with other firm is to know the moves, as well
as the strengths and weaknesses of competitors. The sole proprietor has the advantage of
keeping his intensions secret. As he does not have, and is not required by law, to share
information with anyone, he can proceed with his activities in secrecy. His competitors can
only guess what is intended moves are.

3. Distribution and use of profits. If because of his efforts, the business made some
profits, the sole proprietor is the sole beneficiary. He does not have to share these
with anyone.

4. Control of the Business. The owner also vested with the power to solely control
solely the business and sole authority is very important especially under critical
competitive situation. For instance, a consumer is confronted with a situation
where here he or she must choose to buy from a sole proprietorship, a partnership,
or a corporation. If all the prices quoted by three firms are identical and the
prospective buyer is asking for a lower one, the sole proprietor has the advantage
of making an immediate while the partners will still have to consult with each
other. Meanwhile , the corporation my be ready with lower quotation only after
undergoing a long process. If the prospective buyer is in a hurry, he or she may
have to decide in favor of the sole proprietor.
5. Government Regulation. The sole proprietorship is spared from various government rules, which apply to
partnership and corporation. Moreover, sole proprietorship are required by the government to submit fewer
reports.

Sole proprietorship are also spared from charter restriction on operation. An insurance corporation, for
example, cannot engage in the retailing of groceries. On the other hand, sole proprietorship manufacturing
furniture can switch to selling agricultural products in the few days without worrying about violating any
restriction

6. taxation. The net income of sole proprietorship is treated as a personal income of the sole owner and is
taxed accordingly. This is not true with partnership and corporation where their respective net income is
taxed and will be subject to taxation again when the owners individually receive their shares of the profits.

7. Closing the Business. Sole proprietorship can be dissolved by the owners at will although this is not always
exercised, it remains an option of the owners. If business condition had become unprofitable, the sole
proprietor has the advantage of immediate cessation of operation. This allows him to cut his losses to the
minimum. Once the owner decide to close shop, he does not need to seek the approval of co-owners or
partners for he does not have any.
Disadvantage of sole proprietorship
The smooth operation of sole proprietorship is hindered by the following disadvantages:

1. Owner’s Lack of Ability and Experience. The success of sole proprietorship will depend largely on
the management skills of the owner. The firm will need a “generalist” with sufficient grasp of the
various specialized functions like marketing production, finance, accounting, personnel, and
research.

Unfortunately, it is difficult to find qualified generalist to manage sole proprietorships. If the sole
proprietor lacks the skills of generalist, then it will be very hard for the firm to succeed.

2. Difficulty in Attracting Good Employee. Sole proprietorship are not known for surviving long
periods. The existence of a sole proprietorship is co-terminus with the life f or its owner. As
consequence, good employees tend to get employment in a more stable enterprise, which is most
often a corporation.

3. Difficulty of Raising Capital. In sole proprietorships, raising capital will depend on the financial
resources of the sole owner. Even if he can obtain credit the amount will depend in his sole
capacity to pay. This problem is especially felt when business expansion is required and becomes
more difficult when credit is getting tight and interest rates become prohibitive. The difficulty in
raising additional capital often aggravates the problem of meeting competition.
4. Limited life of the firm. The existence of the sole proprietorship depends on
the physical ell- being of the owner. When he is ill, business operations
may be affected. Prolonged illness may make the firm go bankrupt. His
death will mean liquidation of the firm.

In any case, employees, customers, and creditors are saddled with some
degree of anxiety as a result of the limited life of the firm. This limits the
opportunities for growth and expansion, which could be afforded the sole
proprietorship.

5. Unlimited Liability of the Proprietor. Any liability incurred by the sole

proprietorship extend to the owner’s personal assets. In the theory, the sole
proprietor could lose “even his shirt” if all his other assets are not enough
to cover all claims against his business.

Unlimited liability is the greatest disadvantage of the sole proprietorship. The lives of
quite number of former sole proprietors became miserable because of this
disadvantage.
 Partnership
A partnership is a legal association of two or more persons as co-owners of an
unincorporated business.

Advantages of Partnership

Partnerships have the distinction of the eliminating some of the disadvantages of sole proprietorship
while retaining some of their advantages are as follows:

1. Ease of Formation. Like proprietorship, partnership are easy to form. The only requirement before the
partnership commences operations is for the partners to agree on basic aspects of the business like the
nature of the business, location, capitalization, and so on. A written agreement called the contract of
partnership is drawn to formalize what has been agreed upon.

2 . Pooling of knowledge and skills. The combined knowledge and skills of the partners prove the
partnership with a distinct advantages. One partner, for instance, may possess the required skills
manufacturing, while another has the skills in accounting, and another marketing. These skills may be
used to advantage of the partnership. This condition also paves the way for specialization, which is a
very important competitive tool in business.

The partnership form also has the advantage of inviting a person who possesses a much needed skill as a
partner if for some reason, he could not be hired as an employee
 3. More finds Available. The combined resource of the partners
provide a bigger source of funds. The condition leads to a higher
credit rating for the partnership. The resource potentials of the
partners combined with a high credit rating result in a formidable
financing capability for the partnership.

4. Ability to attract and retain employees. Attracting and retaining

employees is a difficulty inherent to sole proprietorships.
Partnership have the ability to overcome this difficulty by
offering partner status to valuable employees. This advantage
also minimizes the potential harm that may be done by a key
employee moving over to a competitor.

5. Tax Advantage. The income of the partnership is not taxed

separately by the partners’ incomes. Any profits derived by the
partner by treated and taxed as their individual incomes.
 DISADVANTAGE OF
PARTNERSHIP
The operation of partnership are hindered by the following disadvantages:

1. Unlimited liability. Partnership, like sole proprietorship, are saddled with the disadvantage of unlimited
liability although one or two partners may opt to have limited liability, the remaining partner or partners carry
the burden of unlimited liability.

2. Limited Life. When a partner dies or withdraws from the business, the partnership is terminated. The life of
partnership, is essence, is more limited than sole proprietorship. Whereas the sole of proprietorship depends
on the state of health and willingness of the sole owner to continue, the life of the partnership depend on the
health and willingness of all the partners. If there are five partners, the risk of discontinuance of the
partnership business is five time greater than with the sole proprietorship.

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 disagreement. Among these are adding new
product lines, hiring new employees decision on credit extension, and granting employee welfare benefits.

When conflict between partners persists, operations are affected. These may even lead to bankruptcy. An
employee, for instance, may receive conflicting orders from the partners. The employee may get confused,
which in turn, may affect his or her performance.
4. Difficulty in Dissolving the Business. Partnership are not as easy to dissolve as sole
proprietorship. After dissolving the sole proprietorship, what ever assets or liabilities left are
the concern of the sole owner alone. In partnership dissolution, it may not be easy to divide
whatever assets are left or distribution to the partners. This is because the assets may be
fixed or immovable. More difficult dissolution happens when liabilities are o be shared by
the partners.

Types of Partnership
1. General Partnership  is an agreement between partners to
establish and run a business together. It is one of the most
common Legal entities to form a business. All partners in a
general partnership are responsible for the business and are
subject to unlimited liability for business debts.

2. Limited Partnership is arrangement in which the liability of

one or more partner is limited to the amount of assets they
have invested in the business.
Corporation
A corporation is an enterprise chartered by law,
most of the legal rights of a person, including
right to conduct a business, to own and sell
property, to borrow money, and to sue or sued.

The corporate form of business in the third

ownership option open to businessperson. Owner
of corporations are called stockholders. They are
issued certificates of ownership called stock. Some
of these are openly traded in the country’s stock
exchange
 Advantage of Corporation
The advantage of inherent to corporation are the following:

1. Limited liability. The liability of stockholder is limited to the amount of their

shareholdings. A stockholder may lose the entire value of his stock in the event of a
bankruptcy. Beyond the said value, he has no more liability.

2. Ease of Expansion. The authority granted to corporations to sell its own share of stock
provides a means to pool large amounts of funds. The price per share of the stock could
be made low enough to attract even the smallest investor. Because the ownership of the
stock can be easily transferred, this provides more reason for the investor to buy stocks.
The ability of corporations to accumulate large amount of capital makes it easier for
them to consider business expansion.

3. Ease of Transferring Ownership. If a stockholder loses interest in the corporation he

partly owns, he may disassociate him self from it by selling or donating his shares to
another person. In effect, the ownership of a corporation may change as often as it could
without actually dissolving it.
4. Relatively Long Life. Corporations may be established to have
lives of up to 50 years and may be extended indefinitely through
renewals of documents. Since ownership is readily transferable,
the death or withdrawal of any or all stockholders does not
terminate the corporation. This advantages makes the corporation
the most stable among the three major forms of ownership.

5. Greater Ability to Hire Specialized Management. The expanded

operation of corporation make it possible to divide overall job
into smaller specialized position. As the various positions will be
quite dissimilar from each other, the demand for management
expertise will be a little more exacting than those required for sole
proprietorship and partnership. The said requirement paves the
way for hiring fully trained management experts. With
specialized management, the corporation is provided with the
opportunity to grow and develop more vigorously.
 Disadvantages of Corporation
Corporation also also have disadvantages. These are the following:

1. More Expensive and Complicated to Organize. Among the three major forms of ownership,
more time and money are required to organize a corporation. It takes months or even years
before a corporation can begin serving its customers. It may start operation only after receiving a
certificate of incorporation from the Securities and Exchange Commission (SEC). The SEC will
only issue the certificate of incorporation if it finds that the articles of incorporation are fully
compliant with the requirements.

The articles of incorporation contains the following:

a. specific purpose of purposes;

b. the name of corporation;
c. principal office of corporation;
d. term of existence of the corporation;
e. names, nationalities, and residences of incorporation;
f. number of directors or trustees;
g. names, nationalities, and residences of directors;
h. amount of authorized capital stock; and
i. other 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

conform with the requirements of the Corporation Code. Complying with
these requirements takes time. However, and this makes it a distinct
disadvantages of corporation.

2. Double Taxation. The profits derived by stockholders are taxed twice by the
government. First, when the corporation realize profits, and second, when
individual stockholders declare the dividends they receive from the
corporation as part of their personal income. This disadvantages is not
present in sole proprietorships and partnerships.

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. An example of a
restrictions is the prohibitions of certain actions by the corporation without
the approval of the SEC. For instance corporations are not allowed to
distribute stock dividends without first securing the approval of the SEC.
The submission of financial statements is an example annual
reports required by the SEC. In complying with this requirement,
the corporation is exposing itself to the scrutiny of its
competitors. This is because annual reports are made available to
the public. Competitors do not enjoy this privilege when
competing with sole proprietorships and partnerships.

4. Employees Lack Personal Identification With and Commitment

to Corporate Goals. Many stockholders are detached from the
daily operations of the corporation. Those who work for the
corporation mostly do not own the company’s stock the
relationship between the corporation and employees is too
impersonal. Employees do not feel deep attachment to the
corporation, resulting in less commitment to his work.
Employees of sole proprietorships and partnerships most often
know the owners personally. This feeling of attachment pushes
employee to make the company successful. Such concern is
rarely present in a corporate work atmosphere.
Area of Concern Sole Proprietorship Partnership Corporation
1. Liability of unlimited Limited/unlimite limited
owners d
2. Ease of expansion Not easy Not easy easy
3. Life of firm Dependent on the Dependent on the Independent of
owner partner the owners
4. Decision making Can be made Tends to be Tends to be the
quickly slower slowest
5. Taxation of income once Once twice
6. Ease of formation easiest easy Not easy

Figure 11

A Summary of the Positive and Negative Features

of the Forms of Business Ownership
 MODIFICATION OF THE CORPORATE FORM
OF OWNERSHIP
The corporate form of ownership has been modified to cater to
special needs. Those that have become popular are cooperative
and mutual companies.

Cooperatives

A cooperative is defined as “an organization composed of

individuals or small businesses that have banded together to
reap the benefits o a larger organization.” A cooperative is an
organization composed of individual businesses that have
banded together to reap the benefits belonging to a large
organization. Cooperatives are not organized for profit, but to
make it members individually profitable or to save money.
 Cooperatives are of various types. They are classified according
to the special interests of its members. They are as follows:

1. Credit Union - accepts deposits from members and lends

money to its members at a very reasonable interest rate.
2. Producers Cooperative – assists one another in the
procurement of raw materials, machinery, equipment, and
other time-saving devices.
3. Marketing Cooperative – assist members in the marketing of
their produce.
4. Consumers Cooperative – provides members with quality
goods and services at reasonable prices.
5. Service Cooperative – makes services readily available and a
lower price.
 Mutual Copanies
A mutual company is a financial-service firm ( such as an insurance
company or a savings and loan association) owned by its
policyholders or depositors. Mutual companies may be classified
according to products or services they carry. They are as follows:

1. Mutual Savings Banks – are owned by depositors and specialize

in savings and mortgage loans. The profits of the company are
credited to the account of the depositors.
2. Mutual Insurance Company – is a cooperative corporation
organized and owned by it policyholders. Voting control is in the
hands of the insured. Profits earned by the company can be used
to pay policy dividends to policyholders, and to strengthen the
insure by the building its surplus.
 OTHER FORM OF BUSINESS
ORGANIZATION

Minor forms of business organization consist of the

following:

1. The Joint Stock Company. Bannock and others defined joint stock
company as “a form of business enterprise in which the capital is divided
into small units permitting a number of investors to contribute varying
amounts to the total, profits being divided between stockholders in
proportions to the number of shares they own.” It is largely similar in
form to the corporation, although it has certain additional features like
fewer taxes, greater ease of formation, mobility, and freedom from
government regulation. The disadvantage of joint stock companies,
however, is they lack the legal personality to enter into contracts and
hold title to real property. In addition, the unlimited liability of the
stockholders makes it less popular as a form of business organization .
2. The Joint Venture. It is best regarded as a particular partnership
established for a specific undertaking. This type of organization
is created for the purpose of bringing together several partners
to engage in a business activity, which is normally very
specialized and which exists for a limited, specific purpose. A
joint venture is mostly formed for the purpose of producing a
movie or a concert, engaging in oil or mining exploration,
constructing a major project such as a dam or an airport, or
perhaps the underwriting or selling of securities.

3. The Business Trust. It is a legal form of organization in which a

trustee is appointed to manage the business and its operations
through a trust relationship. Under the trust agreement, the
owners of property, securities, or other assets convey these to a
trustee in exchange for transferable trust certificates. The
certificates entitle the owners to participate in the profits of the
operation. However, the liability is transferred to the trustee.
 SUMMARY
When considering the ownership of business, the
businessperson may choose from among three
options: sole proprietorship, partnership, or
corporation.

Each of the three forms of ownership has its own

unique advantages and disadvantages. The
differences the three forms relate to effective
control of the business, sharing of profits and
liabilities, and potential for expansion.
The greatest advantages of sole proprietorship is the
concentration of the power of control in a single
individual, the owner.

Partnership provide opportunities for additional source

of capital but power has to be shared among the
partners.

The nature of corporations allow for easier expansion of

operation. An additional advantages is the limited
liability provision enjoyed by stockholder.

The need to cater to special requirements brought about

modifications the corporate form, which later, took
the shape of cooperatives and mutual companies.
A cooperative is an organization of members that have banded
together to reap the benefits belonging to a large organization.

A mutual company is one owned by the people it serve.

There are minor form of business organizations: the joint stock

company, the joint venture, and the business trust.

CHAPTER EXERCISES
1. Construct a table comparing each of the common forms of
ownership based on the following criteria:
a. Ease of raising capital;
b. Ease and cost of formation

c. Quickness of decision making; and

d. Provision for quick expansion
2. Briefly differentiate general partnership from limited partnership.

3. Contrast the following forms of ownership based on its respective

purposes:
a. cooperative;

b. Mutual company;

c. Joint stock company;

d. Joint venture; and

e. Business trust.

SUGGESTED ITEM FOR RESEARCH

1. Collect data on the number of businesses in the Philippines classified

according to ownership.
2. Write your comments on why one form bigger is percentage to total
compared with the others.
Case 4. RISTORANTE FILIPINO: More
After finishing the course in Hotel and Restaurant Management at St.
Paul’s College, Ms. Remedios Espiritu immediately starts to assists
her mother in operating “Ristorante Filipino,” a big restaurant in San
Fernando , Pampanga. The firm’s total personnel complement of 30,
which includes her mother as proprietor and manager, consists of
waiters, cooks, cashier, a security guard, utility boy, technician and
supervisor. A five-piece band plays middle-of-the-road music every
evening. By all indications, the business appears to be succeeding.

As a consequence of favorable results, Remedios is requested by her

mother to prepare a plan for expanding the business. The fist move
will be to open a branch within San Fernando. The ten-year target
will be to establish branches in Tarlac, Bulacan, Nueva Ecija, Bataan,
and Zambales.
Remedios has a sister who is an accountant, another is an industrial
engineer, a brother is a chemist, and another is the training director of a
company. All of them, except Remedios, are employed outside of the
family business, with an average job experience of five years. All of them
have indicated that they prefer working with their mother, if given the
opportunity.

All the parts of expansion plan appear to be manageable task for Remedios,
except that part which identifies the source of funding for the expansion.
Even if the family owns the restaurant, their mother does not want to
rely on bank loans as source of capital.

Remedios knows that the family’s assets are not sufficient to finance even
the branch. However, her mother insists on opening new branches
within two years. According to her mother “timing is very important in
business” the next two years is very crucial to are continued success. To
finance the proposed expansion, Remedios is considering a change in
ownership form as an option. However, she must think hard on the type
of ownership that will suit their family’s business.
 Learning Assessment
1. Evaluate possible proposed re-organization to
suit for the planned expansion. Present various
pros and cons for each of the proposed form of
ownership that may serve as basis for decision
making.
2. Prepare for a cost-benefit analysis for each of
the possible form of ownership other than its
current business structure.