FORMS OF BUSINESS

ORGANIZATIONS

PREPARED BY : PROF. JONAH C. PARDILLO

 LEARNING OBJECTIVES

After reading this chapter, you should be able to:

 Differentiate the forms of business organization

 Identify the advantages and disadvantages of each form

Sole proprietorship (Single Proprietorship)

 is the simplest form of business and the easiest to register, through the Bureau
of Trade Regulation and Consumer Protection (BTRCP) of the Department of
Trade and Industry (DTI). It is owned by an individual who has full
control/authority of its own and owns all the assets, as well as personally
answers all liabilities or losses. The fact that it is run by the individual means
that it is highly flexible and the owner retains absolute control over it.
Sole proprietorship (Single Proprietorship)

 The problem, however, is that a sole proprietor has unlimited liability. Creditors may
proceed not only against the assets and property of the business, but also after the
personal properties of the owner. In other words, the law basically treats the business
and the owner as one and the same. This uniform treatment also has important tax
implications. Partnerships and corporations may lessen their tax liability through a
myriad of business expenses and other tax avoidance techniques. These tax
deductions may not be applicable to a sole proprietorship. Also, the potential growth
and reach of a sole proprietorship pale in comparison with that of a corporation.
Advantages of Sole proprietorship

1. Easy formation - The formation of sole proprietorship business is very easy and
simple. No legal formalities are involved for setting up the business excepting a
license or permission in certain cases. The entrepreneur with initiative and certain
amount of capital can set up such form of business.

2. Direct motivation - The entrepreneur owns all and risks all. The entire profit goes to
his pocket. This motivates the proprietor to put his heart and soul in the business to
earn more profit. Thus, the direct relationship between effort and reward motivates the
entrepreneur to manage the business more efficiently and effectively
Advantages of Sole proprietorship

3. Better control - The entrepreneur takes all decisions affecting the business. A sole
proprietor has complete control and decision-making power over the business. This
results in better control of the business and ultimately leads to efficiency.

4. Promptness in decision-making - When the decision is to be taken by one person, it

is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive at quick
decisions concerning the business by which he can take the advantage of any better
opportunities.
Advantages of Sole proprietorship

5. Easy dissolution - Like that of formation, the dissolution of the sole proprietorship is
also very easy. Since the proprietor is the supreme authority and no regulations are
applicable for closure of the business he can dissolve his business any time he likes.

6. No corporate tax payments – individual income tax shall be imposed on the sole
proprietor. The proprietors shall be liable for income tax only in their separate and
individual capacities.
 Disadvantages of Sole proprietorship

1. Limited resources - The financial resources of any small entrepreneur as an individual is limited. He
mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his
capacity. Thus, limited resource is the major drawback of this form of business. Investors won’t usually
invest in sole proprietorships.

2. Limited managerial capability - Modern business requires updated managerial skills in each and every
sphere of activity. We cannot hope a single individual to possess all the managerial talents necessary to
carry on a business efficiently. The limited financial resources of the sole proprietorship are a hindrance to
hire the services of managers with expertise in different areas, thereby the growth of the business.
Disadvantages of Sole proprietorship

3. Unlimited liability - The sole proprietor of the business can be held personally liable
for the debts and obligations of the business. Additionally, this risk extends to any
liabilities incurred as a result of acts committed by employees of the company.

4. Uncertainty of continuity - The continuity of the business is uncertain because the

business may come to an end due to the incapacity or death of the proprietor. Even if
at all the business passes on to the successor of the proprietor, it is unlikely that they
may posses the business acumen like that of the proprietor.
Examples of Sole proprietorship

1. Computer Repair Services

 Computer repair companies are often operated as sole proprietorships. Some
business owners operate commercial shops, while others work from home.
Small computer repair businesses typically cater to individuals.
2. Catering Company
• Catering companies offer their services for parties, weddings, church
functions and business events. In most cases, a sole proprietor operating
a catering company needs to hire employees.
Examples of Sole proprietorship

3. Housecleaning Service
 The start up costs for a housecleaning business are generally low. Business
owners can offer a variety of additional services, such as laundry, window
washing and carpet cleaning.
4. Financial Planners
 Sole proprietors work as financial planners, offering their services to
individuals and small businesses. They help families plan for retirement,
save for college expenses and invest in securities. Financial planners catering
to businesses may help a company set up its employee retirement packages and
other employee benefits.
Examples of Sole proprietorship

5. Landscaper
A landscaper may work alone or hire a small team of employees.
Landscapers maintain lawns, plants and trees of homeowners and
businesses. Most landscaping companies working with commercial
customers hire employees to work on projects.
6. Tutoring
 Tutoring businesses provide learning assistance to students in a
variety of subjects. Tutors may work with students in person or
through online video chats. Many tutors have teaching experience or
extensive knowledge in the subject they are teaching.
Examples of Sole proprietorship

7. Virtual Assistant
 Virtual assistants help entrepreneurs with administrative functions through
the Internet. The tasks completed by virtual assistants depend upon the
needs of clients. Common tasks may include checking emails, creating
excel spread sheets and typing documents.
Partnership

 A Partnership is defined in Articles 1767 to 1867 of the Civil

Code of the Philippines as “a contract whereby two or more
persons bind themselves to contribute money, property, or
industry into a common fund with the intention of dividing
profits among themselves.
Characteristics of a Partnership

1. Mutual Agency – Any partner may act as an agent of the partnership in

conducting its affairs.

2. Unlimited Liability – Generally, the personal assets (assets not contributed to

the partnership) of any partner may be used to satisfy the creditors’ claims of the
partnership, if the partnership assets are not enough to settle the liabilities to
outsiders upon liquidation except for limited liability partnership.

3. Limited Life – A partnership may be dissolved at any time by action of the

partners or by operation of law.

 
Characteristics of a Partnership

4. Mutual participation in profits – A partner has the right to share in partnership

profits.

5. Legal entity – A partnership has legal personality separate and distinct from
partnership profits (except general professional partnership).

6. Co-ownership of contributed assets – Property contributed to the partnership are

owned by the partnership by virtue of its separate legal personality.
Characteristics of a Partnership

7. Income tax – Taxable income of a partnership (except general professional

partnership) is computed in the same manner as in a corporation. Partners' shares
in taxable partnerships profits are treated like dividends. A general professional
partnership as such shall not be subject to corporate tax instead persons engaging
in business as partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
Advantages of Partnership

1. Easy to Organize. Partnership is easy and inexpensive to organize, as it is

formed by a simple contract between two or more persons.

2. Unlimited Liability. The unlimited liability of the partners makes it reliable

from the point of view of creditors.

3. Huge Resources. Possibility of bigger resources than in the single proprietorship

exists. Financial institutions may extend bigger loans to such business
organization considering the combined resources of the partners.
Advantages of Partnership

4. Better Management. The participation in the business by more than one

person makes possible a closer supervision of all its activities/operations.
5. Better distribution of Profits. The profits were distributed according to
the agreement of the partners or equally distributed among them. The
direct gain to the partners is an incentive to give close attention to the
business.
Disadvantages of Partnership

1. Unlimited liability of the partners. The personal liability of as partner for firm
debts deters many from investing capital in a partnership.

2. Partners are solidarity liable. A partner may be subject to personal liability for
the wrongful acts or omission of his associates.

3. It lacks stability. It is less stable because it can easily be dissolved by death or

withdrawal of any partners.

4. Conflict Arise. There is divided authority among the partners. There is constant
likelihood of dissention or disagreement when each of the partners has the same
authority in the management of the firm.
Kinds of Partnership

As to liability of Partners
 General Partnership - A general partnership is a partnership with only general
partners. Each general partner takes part in the management of the business, and
also takes responsibility for the liabilities of the business. If one partner is sued, all
partners are held liable. General partnerships are the least desirable for this reason.

 Limited Partnerships – A limited partnership includes both general partners and

limited partners. A limited partner does not participate in the day-to-day
management of the partnership
Kinds of Partnership

 and his/her liability is limited. In many cases, the limited partners are merely
investors who do not participate in the partnership other than to provide an
investment and to receive a share of the profits. Limited partners have limited
liability to the extent of his contribution.

 Limited Liability Partnerships – A limited liability partnership (LLP) is different

from a limited partnership or a general partnership, but is closer to a limited
liability company (LLC). In the LLP, all partners have limited liability.
Kinds of Partnership

As to Duration
 Partnership at Will – one for which no term is specified and is not formed for a
particular undertaking or venture and which may be terminated any time by mutual
agreement of the partners or the will of one alone.

 Partnership with a fixed term – one in which the term or period for which the
partnership is to exist is agreed upon. It may also refer to a partnership formed for a
particular undertaking and upon expiration of the term and completion of the
particular undertaking; the partnership is dissolved, unless continued by the partners.
Kinds of Partnership

As to Representation to others
 Ordinary Partnership – One which actually exists among the partners and also
to third persons.

 Partnership by estoppels – one which in reality is not a partnership but is

considered partnership only in relation to those who, by their conduct or omission,
are precluded to deny or disprove its existence.
Classes of Partners

As to Contribution
 Capitalist Partner – one who contributes capital in money or property.

 Industrial Partner – one who contributes industry, labor, skill or service.

 Capitalist Industrial Partner – one who contributes money, property and industry.

As to Liability
 General Partner – one whose liability to third persons extends to his separate
personal properties.
Classes of Partners

 Limited Partner – one whose liability is limited only to the extent of his capital
contribution to the partnership.

As to Management
 Managing Partner – one who manages actively the business of the partnership.

 Silent Partner – one who does not participate in the management of the
partnership affairs.
Corporation

 A corporation is an artificial being created by

operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence. (Section 2.
Corporation Code of the Philippines)
Characteristics of a Corporation

 Separate Legal entity (Artificial being) – A corporation is an artificial

being with a personality that is separate from that of its individual
owners. Thus, it may, under its corporation name, take, hold or convey
property to the extent allowed by law, enter into contracts and sue or be
sued.
 Created by operation of Law – A corporation is generally created by
operation of law. The mere agreement of the parties cannot give rise to a
corporation.
 Characteristics of a Corporation

 Right of Succession – A corporation has the right of succession. Irrespective of the death, withdrawal,
insolvency, or incapacity of the individual members or stockholders and regardless of the transfer of their
interest or shares of the stock, a corporation can continue its existence up to the period of time stated in
the articles of incorporation but not to exceed 50 years.

 Powers, attributes, properties authorized by law – A corporation has only the powers, attributes and
properties expressly authorized by law or incident to its existence. Being a mere creation of law, a
corporation can exercise powers provided by law and those powers which are incidental to its existence.
Characteristics of a Corporation

 Ownership divided into shares – Proprietorship in a corporation is divided

into units known as shares of stocks. The buyers of this stock are called
stockholders and are considered as owners of the business.

 Board of Directors – Management of the business is vested in a board of

directors elected by the stockholders. The board of directors is the governing
body or decision making body of the corporation. The Corporation Law
provides that the number of directors be not less than five but more than fifteen.
Advantages of a Corporation

 Limited liability for the owners. Since a corporation is a separate and

distinct legal entity, owners of a corporation are only indebted to the
extent of their interest in the corporation. This means that the creditors of
a corporation can only run after the assets of the corporation and not the
personal assets of the stockholders in the settlement of the corporation’s
debts and obligations. In other words stockholders enjoy a “shield” from
most creditors.
Advantages of a Corporation

 Shares of ownership are transferable. The shares of stock or interest of a

publicly traded corporation can be traded easily though a stockbroker. Shares
of corporations are freely transferable except when shareholders have “buy-
sell” agreements restricting when and to whom share may be sold or
transferred. Securities laws and regulations may also limit the transferability
of certain shares. For non-publicly traded corporations, the stock certificate
can be transferred or assigned to another owner by executing a deed of
assignment of shares of stock.
Advantages of a Corporation

 Continuity. The corporation’s power of succession enables it to enjoy a

continuous existence. The life-span of a corporation is 50 years, and subject
to renewal for another 50 years. The death, withdrawal of some officers and
members does not affect the existence of the corporation. Unlike a sole
proprietorship and partnership, the death of a stockholder will not terminate
the corporation. The corporation will continue as a separate and distinct legal
entity and the shares of its interest can be transferred from one owner to
another owner.
Advantages of a Corporation

 It attracts more investors. Corporations attract investors because of its stock

structure, perpetual existence, ownership transferability, and limited liability.
Attracting more investors allows a corporation to raise more capital or equity
to manage and expand their operations. Furthermore, because of a more
regulated form of corporation and the fiduciary duties of its board of
directors, it earns more trust and confidence not only from investors, but also
from its employees, creditors, suppliers, customers and other outside
stakeholders.
Advantages of a Corporation

 Centralized Management. As can be gleaned from Sec. 23 of Corporation

Code “It is the board of directors or trustees which exercises almost all the
corporate powers in a corporation. ”Firmev. Bukal Enterprises and Dev.
Corp., 414 SCRA 190 (2003). The exercise of the corporate powers of the
corporation rest in the Board of Directors save in those instances where the
Corporation Code requires stockholders’ approval for certain specific acts.
Disadvantages of a Corporation

1. Incorporation is costly. Incorporating a business needs to file with the Securities and
Exchange Commission (SEC) and may involve a lot of formal and legal papers, such
as by laws, articles of incorporation, affidavit and board resolutions. This is sometimes
done by getting the service of a corporate attorney or firms which are specialized in
incorporating a business. It may also require higher amount of initial or paid-up capital
for other types of corporation like financing and lending corporations. Furthermore,
the amount of subscribed capital is taxed with documentary stamp tax, which may
result to additional expenses to be incurred by the incorporators.
Disadvantages of a Corporation

2. Corporations are highly regulated. Ordinary corporations are regulated by the SEC.
Special corporations may be required with secondary licenses and are further regulated
by other government agencies, such as Bangko Sentral ng Pilipinas (BSP) for
financing and lending companies, Commission on Higher Education (CHED) for
companies operating secondary schools and Insurance Commission (IC) for insurance
companies.
Disadvantages of a Corporation

Moreover, corporations also need to comply with the quarterly or annual reportorial
requirements with the SEC and other agencies requiring those reports for certain types
of corporations. This also means that the more compliance it requires, the more paper
works and cost it involves. And when there are more to comply, bigger penalties are
awaiting to be paid if they are not complied.
Disadvantages of a Corporation

3. Limited liability may discourage creditors. The limited liability feature of the
corporation can be an advantage for stockholders. However, it can also be a
disadvantage when a corporation doesn’t have a good financial condition and
performance. Because of the limited liability, a corporation with a low credit score
may discourage creditors to lend their money to the corporation.
Disadvantages of a Corporation

4. It may result to double taxation. Since the corporation is already taxed on its
income, distributing this income to shareholders in the form of dividends may result
to double taxation. Dividends income received by the shareholders are subject to
final 10% tax and shareholders is also taxed on their personal income tax returns.
Disadvantages of a Corporation

5. It is not easy to dissolve. Corporations are difficult to dissolve as it is also difficult

to form. Everything is regulated from formation, to operation, and to dissolution. An
application for dissolution must be filed with the S.E.C with complete requirements,
including tax clearance with the Bureau of Internal Revenue. The liquidation process
is also regulated to ensure that the rights of any creditor having a claim against it are
not prejudiced.
Classes of a Corporation

As to membership holdings
 Stock Corporation – a private corporation in which the capital is divided into shares
of stock and is authorized to distribute corporate earnings to holders on the basis of
shares held. The owners of a stock corporation are called stockholders or
shareholders.

 Non-stock Corporation – a private corporation in which capital comes from fees

paid by the individuals composing it. The owners of the non-stock corporation are
called members.
 Classes of a Corporation

As to Purpose

 Public Corporation – a corporation that is organize to perform a governmental function or to operate

under government control such as government controlled corporations and statutory corporations.

 Private Corporation –a corporation that is organized for a private benefit, aim or end.

 Quasi-public Corporation – a private corporation which is given a franchise to perform functions of a

public character. Classified under this type are the so called public utility corporations such as
MERALCO and PLDT.
 Classes of a Corporation

 As to Law of Creation

 Domestic Corporation – a corporation that is organized under Philippine Laws.

 Foreign Corporation – a corporation that is organized under the laws of other countries.

As to Extent of Membership

 Open Corporation – a corporation whose ownership is widely held by many investors usually a private
stock corporation.

 Closely held corporation or Family Corporation – a private corporation in which 50% or more of its
stock is owned by five (5) persons or less.
 Components of Corporation

 Incorporators – they are the persons who originally formed the corporation and whose names appear in
the Articles of Incorporation. They must be natural persons as distinguished from artificial persons

 Corporators – they are the persons who compose the corporation whether are stockholders or members.

 Stockholders or shareholders – they are the corporators of a stock corporation.

  Members – they are the corporator’s of non-stock corporation.

 Organizing a Corporation

The process of organizing the corporation generally consists of three stages which normally require the aid
of legal, competent advisers.

1. Promotion – the incorporators make preliminary arrangements to set up a tentative working

organization and to solicit subscription to raise sufficient capital for the business.

2. Incorporation – the process of formalizing the organization of the corporation. This stage includes:

 Drafting the articles of incorporation which must be duly executed and acknowledge before a notary
public.
 Organizing a Corporation

 Filing the articles of incorporation with the Securities and Exchange Commission (SEC) together
with the statement showing that at least 25% of the total authorized capital stock has been subscribed
and that at least 25% of the total subscription has been paid.

 After the required fees have been paid and upon approval of the articles of incorporation, the SEC
issues a certificate of incorporation, the date of which being considered as the date of registration or
incorporation.
 Organizing a Corporation

3. Commencement of Business

 The business should start within two years from the date of incorporation. Failure to do so
will automatically dissolve the corporation without the need for a hearing.
 Cooperative

 A co-operative is a member-owned business structure with at least five members, all of whom have equal voting rights
regardless of their level of involvement or investment. All members are expected to help run the cooperative.

 A co-operative is a separate legal entity and members, directors, managers and employees are not liable for any debts
incurred unless they are the result of recklessness, negligence or fraud.

 A co-operative usually only allows a limited distribution of profits to members (some don’t allow any). This business
structure encourages a democratic style of management and promotes the concepts of sharing resources and delegation
to increase competitiveness.
 Advantages of Cooperative

 Generally inexpensive to register.

 All members must be active in the co-operative.

 Members have an equal vote at general meetings regardless of their level of investment or
involvement.

 Other than directors, members can be aged under 18 years. These members cannot stand for
office and don’t have voting rights
 Disadvantages of Cooperative

 As co-operatives are formed to provide a service to members rather than a return on

investment, it may be difficult to attract potential members seeking a financial return.

 There is usually limited distribution of profits to members and some co-operatives may
prohibit the distribution of any surplus.

 Members providing greater involvement or investment than others will still only get one vote.

 Requires ongoing education programs for members.

 THE END

References:

Kimwell, M.B., “Fundamentals of Accounting”

Manuel, Z.C “Accounting Process, Basic Concepts and Procedures, Int’l Ed.”