Chapter 4

Forms of Business
Ownership
P R E PA R E D B Y G R O U P 1

BSA 1 -5
Introduction
• The form of business ownership to
adapt is a strategic decision that
must be considered at the business's
inception.

• Each of the various types has its

own unique features, as well as
advantages and disadvantages.
 Major Type of Business
Sole Proprietorship
01 02 Partnership 03 Corporation

Minor Type of Business

Joint Stock Company
01 02 Joint Venture 03 Business Trust
 Sole Propreitorship
A business entity owned and operated by a single person.

Advantages
1. Ease and Cost of Formation
2. Secrecy
3. Distribution and Use of Profits
4. Control of the Business
5. Government Regulations
6. Taxations
7. Closing of the business
 1. Ease and Cost of Formation
Easiest and least costly to organize among the three. The only requisites for its
legal existence are the following:
a. the sole owner's resolve to start operating, and
b. getting the required permits and licenses.

2. Secrecy
Has the advantage of keeping his intentions 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.
 3. Distribution and use of profits
He does not have to share his profits with anyone. He is free
to use it any way he pleases.

4. Control of the business

The owner is also vested with the power to solely control the business and sole
authority is very important, especially under critical competitive situations.

5. Regulations
Sole proprietorships are required by the government to submit fewer reports and
are spared from charter restrictions on operations.
6. Taxation
The net income of the sole proprietorship is treated as the
personal income of the sole owner and is taxed
accordingly.

7. Closing of the Business

Sole proprietorships can be dissolved by the
owners at will.
 Sole Propreitorship

Disadvantages
1. Owner’s Lack of Ability & Experience
2. Difficulty in Attracting Good Employees
3. Difficulty in Raising Capital
4. Limited Life of the Firm
5. Unlimited Liability of Proprietor
 1. Owner’s Lack of Ability & Experience
The success of the sole proprietorship will depend largely on the
management skills of the owner. The firm will need a "generalist” with a
sufficient grasp of the various specialized functions like marketing,
production, finance, accounting, personnel, and research.

2. Difficulty in Attracting Good Employees

Sole proprietorships are not known for surviving long periods. The existence of a
sole proprietorship is a co-terminus with the life of its owner. As a consequence,
good employees tend to get employment in a more stable enterprise, which is most
often a corporation.
 3. Difficulty in Raising Capital
In sole proprietorships, raising capital will depend on the financial
resources of the sole owner.

4. Limited Life of the Firm

The existence of the sole proprietorship depends on the
physical well-being of the owner.

5. Unlimited Liability of Proprietor

Any liability incurred by the sole proprietorship extends to the owner's personal
assets. Unlimited liability is the greatest disadvantage of the sole proprietorship.
The disadvantage. lives of quite a number
Partnership
A legal association of two or more persons as co-owners of an
unincorporated business.

Advantages
1. Ease and Cost of Formation
2. Pooling of Knowledge and Skills
3. More Funds Available
4. Ability to Attract and Retain Employees
5. Tax Advantage

Disdvantages
1. Unlimited Liability
2. Limited Life
3. Potential Conflict Between Partners
4. Difficulty in Dissolving the Business

Types of Partnership
General Partnership Limited Partnership
 Advantages
1. Ease and Cost of Formation
Partnerships are easy to form
• Contract of Partnership
- A written agreement to formalize what has been agreed upon.

2. Pooling of Knowledge and Skills

The combined knowledge and skills of the partners provide the partnership with a distinct
advantage

3. More Funds Available

The combined resources of the partners provide a bigger source of funds
 Advantages
4. Ability to Attract and Retain Employees
Ability to overcome this difficulty by offering partner status to
valuable employees.

5. Tax Advantage
Any profit derived by the partners are treated and taxed as their
individual incomes.
 Disadvantages
1. Unlimited Liability
Like sole proprietorships, they are saddled with the disadvantage of unlimited
liability.

2. Limited Life
When a partner dies or withdraws from the business, the partnership is terminated.

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.

4. Difficulty in Dissolving the Business

Partnerships are not as easy to dissolve as sole proprietorships. This is because the
assets may be fixed or immovable.
 TYPES OF PARTNERSHIP

GENERAL PARTNERSHIP LIMITED PARTNERSHIP

An association of two or more Arrangement in which the liability of
persons, each with unlimited one or more partners is limited.
liability.
Corporation
• According to Republic Act No. 11232, known as the "Revised Corporation Code of the
Philippines.” 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 incidental to its existence.

• A corporation must be registered with the Securities and Exchange Commission

(SEC) in order to legally exist and operate.
• Corporators are those who compose a corporation, whether as stockholders or
shareholders in a stock corporation or as members in a nonstock corporation.

• Corporations are generally governed by a board of directors elected by the

shareholders.
• According to RA no. 11232, the minimum member of the corporation is 1 and the
maximum is 15.
Advantages
1. Limited Liability
The liability of stakeholders is limited to the amount of their shareholdings. This means that
if the business incurs debts, losses, or legal liabilities beyond its assets, the personal assets of
the individuals are shielded from being used to settle those obligations.

2. Ease of Expansion
The authority granted to corporations to sell their own shares of stocks provides a means to
pool large amounts of funds.

3. Relatively long life.

There is no limit to the life of a corporation since ownership of it can pass through many
generations of investors.

4. Ownership transfers.
If a stockholder loses interest in the corporation he/she partly owns, he/she may dissociate
himself from it by selling or donating his/her shares to another person.
 Disadvantages
1. More Expensive and Complicated to Organize.
Among the 3 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.

2. Double Taxation.
The profits derived by stockholders are taxed twice by the government.

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.

4. Difficulty of Termination.
The difficulty of terminating a corporation poses distinct disadvantages due to its complex
legal procedures and potential consequences.
 Area of Concern Sole Proprietor Partnership Corporation

1. Liability of Owner unlimited limited/unlimited limited

2. Ease of Expansion not easy not easy easy

dependent on the dependent on the independent of the

3. Life of Firm
owner partner owner

4. Decision Making can be made quickly tends to be slower tends to be slowest

5. Tax of Income once once twice

6. Ease of Formation easiest easy not easy

Modifications 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 cooperatives and mutual companies.
 VARIOUS TYPES OF
COOPERATIVE
Credit Union Producers Marketing Consumer Service
Cooperative Cooperative Cooperative Cooperative

assists one another in the

accepts deposits from
procurement of raw
members and lends provides members with
materials, machinery, assists members in the makes services readily
money to its members at quality goods and
equipment, and other marketing of their available and at a lower
a very reasonable services at reasonable
time-saving devices. produce price.
interest rate. prices.
 Mutual Companies
a financial-service firm (such as an insurance company or a savings and loan
association) owned by its policyholders or depositors.

Classifications
Mutual Savings Bank
are owned by depositors and specialize in savings
and mortgage loans. The profits of the company
are credited to the account of the depositors.
Mutual Insurance Company
is a cooperative corporation organized and
owned by its 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 insurer by building its surplus.
 Other Forms of Business Organization
1. The Joint Stock Company
“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
proportion to the number of shares they own”. (Bannock and others)

Types of The Joint Stock Company

1. Registered Company
A company registers with state and local
authorities to be legally allowed to
conduct business in the organizational
form it selects (e.g., corporation, S-
corporation, limited liability partnership,
limited liability company, etc.).
2. Chartered Company
• Incorporated under a nation’s royal
charter (under a special order
granted by king or queen).
• Set up only in the countries having a
system of monarchy.
3. Statutory Company
One that is established by an act of
the nation’s legislature to provide
public services that benefit the
populace.
2. The Joint Venture
Bring together several partners to engage in a business
activity, which is normally very specialized and which
exist for a limited, specific purpose.

Examples: producing a movie or concert, engaging in

oil and mining exploration

3. The Business Trust

• A trustee is appointed to manage the business and its operations
through a trust relationship.
• Assets , debts, properties and profits of a business are handed over
to a nominated and appointed trustee. The trustee manages these
during the operations and all profits go to beneficiaries, which are
people who receive income from all the income-producing assets.
 Summary
The ownership of businesses presents three primary options: sole
proprietorship, partnership, and corporation. Each ownership form offers
distinct advantages, disadvantages, liabilities, and expansion
possibilities.

A sole proprietorship grants the owner concentrated control, a key

advantage.
Partnerships, while providing access to additional capital, necessitate
shared decision-making among partners.
Corporations facilitate operational growth and offer stockholders limited
liability protection.
 Summary
Special requirements have led to adaptations in corporate structures,
resulting in the creation of cooperatives and mutual companies.
Cooperatives unite members to leverage the benefits of a larger
organization,
while mutual companies are owned by the individuals they serve

Additionally, there are minor business organization forms, namely: joint

stock companies, joint ventures, and business trusts.
 Chapter 4

Thank You
F O R Y O U R AT T E N T I O N