LEGAL FORMS

OF BUSINESS
OWNERSHIP
GROUP 9
Choosing a Form
of Business
The legal form a firm chooses to operate under is
an important decision with implications for how a
firm structures its resources and assets. Several
legal forms of business are available to
entrepreneurial business owners. Each involves a
different approach to dealing with profits and losses

2
 The advantages and disadvantages of each
legal form of business

Advantage Disadvantage
 Financial Rewards
 Financial Risk
 Lifestyle Independence
 Stress and Health Issues
 Personal Satisfaction and Growth
 Time Commitment

3 RAULINE URIARTE
 “
OBJECTIVE

• To enable learners to understand the four

basic types of business ownership and the
advantages and disadvantages of each type.

4 ENTREP - 12
” 20XX
 RATIONALE
• A. One of the first decisions a small business owner must make is to ravine determine the legal form of
ownership of the enterprise. However, this initial decision may not be final. Not only may the business
grow and alter its operations over time, but financial and tax situations may affect the advantages and
disadvantages of the various legal forms of ownership.

• B. The vast majority of all legal business enterprises are organized in one of the following four legal
forms: sole proprietorships, partnerships, limited companies or cooperatives. Learners should have a
basic knowledge of all the legal forms of ownership available and be aware of the relative advantages
and disadvantages of each form of ownership. Competent legal advice should be sought when deciding
which legal form to adopt.

5 RAULINE URIARTE 20XX

 RATIONALE
• C. This topic will identify the advantages and disadvantages of each of the four basic forms of legal
ownership with regard to six areas of concern to a business:

• 1. legal costs and procedures • 4. management of the business

necessary for starting the business

• 2. liability of the owner(s) • 5. acquiring additional capital

• 3. continuity of the business • 6. taxation

CHARBEN PATRIA /
6 20XX
RAULUINE URIARTE
 ACTIVITIES
1. Have the learners read HANDOUT 1. 2. Have the learners read the information on
Discuss with the students each of the 8 major WORKSHEET 1. Ask the learners to answer
questions regarding business ownership the following questions on the bottom of the
show on TRANSPARENCY 1 and have the worksheet
learners discuss the advantages and
disadvantages of each legal form of business
ownership and compare their answers with
those of TRANSPARENCY 2

7 ACTIVITIES 20XX
 Questions Concerning Business
Ownership

1.How many owners are there in a sole proprietorship, a partnership, a

limited company and a cooperative?
A. The sole proprietorship has only one owner.
B. A partnership has two or more co-owners.
C. A limited company is an association of stockholders or owners chartered by the
government. It has the authority to transact business in same manner as one person.
D. A cooperative is a group of people operating a business through a jointly owned and
democratically run organization.

8 JASTIN COMPASION 20XX

 Questions Concerning Business
Ownership

2. What are the legal costs and procedures for starting all-Selman four types
of business ownership?

A. Sole proprietorship. The only requirements are to determine (a) if a license is required
for the particular business, (b) if a tax or license fee must be paid. Because of the limited
restrictions, the sole proprietorship is the easiest business to start and the initial costs are
usually low.

9 SOLAIMAN III SARIP

 Questions Concerning Business
Ownership
B. Partnership. The cost of organizing a partnership is usually low. In addition to any
necessary licenses, it is recommended that a partnership agreement, called the Articles of
Partnership, be prepared in writing by a competent attorney. The Articles of Partnership
should contain at least the following provisions:

 division of profit or loss

 compensation to each partner
 distribution of assets in the event of dissolution
 duration of the partnership
 duties of each partner

10 SOLAIMAN III SARIP

 Questions Concerning Business
Ownership
C. Limited company. It is more difficult to form a limited company than the other two
types of business given above, and it is usually more costly. This kind of business is
usually in the best position to obtain additional capital. In addition to pledging corporate
assets as collateral, a limited company may sell additional stock in the company to raise
funds.

D. Cooperative. The cost of registering a cooperative is low. A written cooperative

agreement is required and must be filed with the appropriate government authorities.

11 SOLAIMAN III SARIP

 Questions Concerning Business
Ownership

3. Why consult a lawyer when starting

a new business
All forms of legal ownership should be discussed
with a competent attorney before any decision
regarding the form to select is made. The attorney
will need to know as much about the business and
its owner(s) as possible, including the personal
financial position(s) of the owner(s), so that sound
recommendation can be made.

RAULINE URIARTE 12
 Questions Concerning Business
Ownership

4. What liability is involved in the four types of business ownership?

A. Sole proprietorship. A sole proprietor is personally liable for all the debts of the
business. If necessary, this liability includes all of the proprietor's personal property
and assets.

B. Partnership. Each member of a general partnership is fully liable for all the debts
owed by the business regardless of their personal investment in the business, and this
liability includes all personal property and assets. Each partner is also responsible and
liable for the acts of the other partners with regard to business obligations.

13 MELVIN JASIS
 Questions Concerning Business
Ownership

C. Limited company. The stockholders, or owners, of a corporation are liable only for the
amount corresponding to their investment. While stockholders may lose the money they
have invested in the business, they cannot be forced to pay off company debts with
additional money from their personal funds.

D. Cooperative. Each member of the cooperative is fully liable for the debts of the
cooperative.

14 MELVIN JASIS
 Questions Concerning Business
Ownership

5. How does the legal ownership affect the continuity of the business?
A. Sole proprietorship. The business is terminated upon the death or incapacity of the
owner.
B. Partnership. The partnership is terminated upon the death, incapacity or withdrawal of
any one of the partners, unless the remaining business partners buy the deceased,
incapacitated or withdrawn partner's interest.
C. Limited company. This kind of company has a separate and continuous life of its own,
and does not dissolve if a stockholder dies or the stock is sold to another person.
D. Cooperative. The cooperative has a life of its own.

15 JASTIN COMPASION 20XX

 Questions Concerning Business
Ownership

6. How does the legal structure affect management of the business?

A. Sole proprietorship. The sole proprietor may operate the business in any way he or
she likes, as long as the law is not broken. When all management decisions are made
by one person, it can be a disadvantage.

B. Partnership. In a general partnership, each partner typically has an equal role in

management with the various duties divided among them. Their combined abilities
and knowledge may give the partnership an advantage over the sole proprietorship
regarding management. The division of management duties may, however, lead to
disagreements.

16 MELVIN JASIS
 Questions Concerning Business
Ownership
C. Limited company. Legal procedures must be followed strictly according to company
law. The officials of the limited company must file a special document, called the Articles
of Incorporation, with the government, pay initial taxes and filing fees, and hold official
meetings to deal with specific details of operation and organization.

D. Cooperative. The management of a cooperative is elected by the members of the

cooperative.

17 MELVIN JASIS
 Questions Concerning Business
Ownership

7. How will the legal structure affect taxes?

A. Sole proprietorship. Personal income tax must be paid on all business profits.
B. Partnership. Personal income tax must be paid by all partners on their individual
share of the business profits.
C. Limited company. It is taxed twice. First there is tax on the amount of the business
profits. Then the owners are also taxed on any dividends they may receive.

D. Cooperative. Depending on government regulations, taxes may be paid by the

cooperative.

18 SOLAIMAN III SARIP

 Questions Concerning Business
Ownership

1. How many owners are there in a sole proprietorship, a partnership, a limited company and a
cooperative?
2. What are the legal costs and procedures for starting all four types of business ownership?
3. Why should a lawyer be consulted when starting a new business?
4. What liability is involved in the four types of business ownership?
5. How does the legal ownership affect the continuity of the business?
6. How does the legal structure affect management of the business?
7. How will the legal structure affect taxes?
8. How will the legal structure affect conditions of employment?

19
 Advantages and Disadvantages of Different Forms of
Ownership
Sole proprietorship

ADVANTAGE DISADVANTAGE

1. Low costs to start 1. Unlimited liability

2. Minimum regulations 2. Lack of continuity

3. Direct control of business 3. Difficulty in raising capital

4. Low working capital requirements 4. Responsible for all decisions

5. Tax advantages

6. Owner receives all profits

20 JASTIN COMPASION
 Advantages and Disadvantages of Different Forms of
Ownership
Partnership

ADVANTAGE DISADVANTAGE

1. Easy to form 1. Unlimited liability

2. Low costs to start 2. Lack of continuity

3. Added capital sources 3. Shared authority

4. Shared management 4. Difficulty in raising additional capital

5. Possible tax advantages 5. Difficulty in finding suitable partners

21 MELVIN JASIS
 Advantages and Disadvantages of Different Forms of
Ownership
Limited company

ADVANTAGE DISADVANTAGE

1. Limited liability 1. Closely regulated

2. Management can specialize
2. Most expensive form to organize
3. Transferable ownership
4. Continuous existence 3. Charter restrictions
5. Legal entity
4. Extensive record keeping required
6. Potential tax advantages
7. Easier to raise capital 5. Double taxation (company and stockholders)

22 SOLAIMAN III SARIP

 Advantages and Disadvantages of Different Forms of
Ownership
Cooperative

ADVANTAGE DISADVANTAGE

1. Means to empower poor 1. Hard to keep qualified members

2. Joint self-help
2. Members contributing to cooperative unequal
3. Organizational structure helps all members
4. Shared risk-taking 3. Shared authority

5. Easier to raise capital 4. Gender issues

6. Combines individual skills

23 RAULINE URIARTE
 ORGANIZING A BUSINESS

Ted has lived in a small community for the past ten years. The town, which has a population
of 275 people, is on the edge of a large lake. Hunting and fishing are excellent in the area.
The old road that served the community is narrow and rough. Spring and summer rains
sometimes make the road impassable in some spots. A new road is being built into the area
and should be completed in about four months time.
Ted thought about starting a tourist outfitting shop now that the new road is nearing
completion. Tourists will easily be able to drive into the area. They will be eager to take
advantage of the good fishing and hunting.
Ted has considered the advantages and disadvantages of the ways he could legally organize
his business. He considered being a sole proprietor because he likes to be his own boss. He
has saved 4,200 and he could borrow additional money to start a small business,

24 WORK SHEET 20XX

 ORGANIZING A BUSINESS

A partnership is also appealing. One or two partners could provide the extra money needed to
start a larger business. Another possibility would be start a limited company and sell shares.
The amount of money available would be much greater and he wouldn't have a loan to repay.
He would also have money to advertise. Ted has talked to a number of people in the
community to see if they would be interested in starting a limited company. The amount of
money available to start the business would be greater than for a proprietorship or
partnership. Furthermore, a much greater number of people in the community would benefit.

Questions
1. Which form of business ownership would you choose if you were Ted?
2. What additional information does Ted need to make an informed decision regarding the
best form of legal ownership for his business?

25 WORK SHEET 20XX

THANK
YOU
GROUP 9