FORMS OF BUSINESS

ORGANIZATION
 ORGANIZATION

Having two or more individuals working

towards the attainment of a goal or goals.
FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship
2. Partnership
3. Corporation
 SOLE PROPRIETORSHIP

Organized, owned and managed by a single

person, who alone assumes the risk of the
enterprise.
Where an individual owns all the assets.
The simplest business form.
He/she must also raise a sufficient
amount of capital to support the survival of
his/her business.
 ADVANTAGES

 Easy to start. Anyone with a good idea and the willingness to

accept risks can start a business as a proprietorship.
 Little government regulation. Accurate tax records must be
kept and certain employment guidelines must be followed. In
most cases, proprietorship has the least regulations.
 Profits stay with owner. Owner does not have to share money
from the business with anyone else.
 Pride of ownership. The owner can see the progress of the
business and feel proud to run it.
 Complete control. Owner has complete authority over
business decisions. The owner decides alone on what product
to produce, how many hours will the firm be open for service
and who will be the manager of the firm.
 Lower taxes. The tax is the same as the personal income of
the proprietor.
 DISADVANTAGES

Unlimited liability. The owner’s personal assets can

be used to pay bill of the business or it can also be
used to pay debts of the business.
Limited life of the business. If the owner dies, the
business ceases to exist.
Difficult to raise money. It is difficult and
expensive to raise money due to financial
limitations of the owner.
 PARTNERSHIP

An agreement in which two or more persons combine

their resources in a business with a view to make a
profit.
Article 1767 of the New Civil Code states: “By the
contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits
among themselves.”
In order to establish the terms of the business and to
protect partners/shareholders in the event of
disagreement or dissolution of the business, a
partnership/shareholders agreement should be drawn
up, usually with the assistance of a lawyer. Partners
share in the profits according to the terms of the
agreement.
 Partnership Agreement . A legally binding document that specifies
how the responsibilities and profits/losses from a partnership will
be divided between the partners.
 General Partnership . All members share the management of the
business and each is personally liable for all the debts and
obligations of the business. This means that each partner is
responsible for and must assume the consequences of the actions
of the other partner(s).
 Limited Partnership. Some members are general partners who
control and manage the business and may be entitled to a greater
share of the profits, while other partners are limited and
contribute only capital, take no part in control or management and
are liable for debts to a specified extent only. A legal document,
setting out specific requirements, must be drawn up for a limited
partnership.
 ADVANTAGES

 Easy to start. Partners need only to agree on how they will

share both responsibilities and rewards.
 Little government regulation. They only need to keep good
records for tax purposes and meet guidelines related to
employment practices.
 Not difficult to raise funds. All partners’ financial assets
are considered by a bank or other lender. This makes it
possible for the partners to borrow more than anyone of
them. Each partner may have some money available to put
into the business directly.
 Combination of skills. Using the distinct skills of each
partner may increase the efficiency of the firm. One partner
may be good at selling and the other better at record
keeping.
 DISADVANTAGES

 Unlimited liability. The owner’s personal assets can be used

to pay debts of the firm. Even a partner who has not put any
money into the business is subject to unlimited liability.
 Profits are shared. Profits must be shared according to their
partnership agreement. Even if you work hard or not, the
share will depend on the agreement.
 Limited life of the business. Business stops when any one of
the partners dies or is unable to participate. Thus, a
successful business may have to be ended even though other
partners may want to continue it. A new partnership can be
formed to continue the business. Part of the firm’s assets
may have to be sold to pay off the deceased partner’s share.
 Disagreements. They may have the same plan but they may
differ in carrying out these plans. Disagreements could lead
to inefficient operations and even to the end of partnership.
 CORPORATION

A separate body consisting of at least five individuals

is treated by law as a unit.
A legal entity that is separate from its owners, the
shareholders.
No shareholder of a corporation is personally liable for
the debts, obligations or acts of the corporation.
Directors, officers and insiders can bear some liability
for their involvement with the corporation.
A corporation is identified by the terms "Limited",
(Ltd.), "Incorporated", (Inc.) and "Corporation" (Corp.).
Whatever the term is, it must appear with the
corporate name on all documents, stationery, and so
on, as it appears in the incorporation document.
 Articles of incorporation . Refers to the written application to the
government requesting permission to form a corporation.
 Charter. Pertains to the legal authorization to organize a business
as a corporation.
 Stock. Refers to the share of ownership in a corporation. Normally,
stockholders must elect a Board of Directors. The members of the
board supervise the operation of the business but usually do not
take an active part of running it and select the people who will run
the company.
 Private Corporation . It can be formed by one or more people.
Furthermore, it cannot sell shares or securities to the general public
unless it applies for an IPO (initial public offering) which would then
make the corporation a public one.
 Public Corporation . It is a kind of corporation that offers its
securities to the public.
Stock Corporation. An ordinary business corporation
organized by private persons, created and operated for
the purpose of making a profit which may be distributed
in the form of dividends to stockholders on the bases of
their invested capital.
Non-stock, Non-profit Corporation . A business
corporation which does not issue stock to its members
and created not to profit but for the public good and
welfare.

Cooperative. An organization composed primarily of

small producers/consumers who voluntary join together
to form a business enterprise, which they themselves
own, control and patronize.
 ADVANTAGES

 Easy to raise funds. More alternatives or methods of

acquiring funds.
 Limited liability. It is the concept that owners of a business
are only responsible for its debts up to the amount they
invest in the business. Stockholders (owners) only risk the
money they paid for the stock. If the corporation goes
bankrupt or is sued, the owner’s other assets cannot be
used to pay the debts of the business.
 Unlimited life. Even if all the owners of stock died, the
corporation will continue.
 Specialized management. They can hire specialized
managers in all parts of the business.
 Risks are shared. Each stockholder takes some risk.
However, it is not necessary for the stockholders to accept
all the risk.
 DISADVANTAGES

 Difficult to start. This requires government approval which could

result into bureaucracy. Bureaucracy refers to a
business/government system that is characterized by “red tape”
and other complicated processes.
 Less direct control. Professional managers run the business and
are in charge of the firm’s operations. Owners are usually far
from the day-to-day operation of the business.
 Double taxation. The corporation’s profits are taxed by corporate
income taxes. The corporation also pays dividends which are out
of the firm’s after-tax income. Dividends are parts of the
corporation’s income that is paid to its stockholders. Then,
stockholders pay personal income taxes on the dividends. Thus,
each peso of the corporation earnings may get taxed twice.
 Limited activities. Corporations are limited to activities that are
stated in their articles of corporation. This states the purpose of
the business.