Forms of Business

Organization
Lesson 6
Sole Proprietorship

A sole proprietorship is a business that is owned

and managed by a single individual. Most of
existing businesses are usually owned by single
proprietor.
 Advantages of Sole
Proprietorship
1. Ease and Cost Formation

Among the three forms of business ownership, the sole

proprietorship is the easiest and least expensive to start up. It
only requires few to start up such as the personal choice and
decision of the owner when to start its operation and preparing
the necessary documents for its operation.
Advantage:

2. Secrecy

One way of effectively competing with others is for the

business person to determine the plans as well as the strengths
and weaknesses of his competitors.
 Advantage:
3. Distribution and Use of Profits

If, because of his efforts, his business made large profits,

the sole proprietor is the sole beneficiary. He does not have to
share the profits with anyone. If he decides to invest his profits
, his business made large profits, the sole proprietor is the sole beneficiary. He does not have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not re

for expanding his business, he is not required to consult

anybody. He may decide to use it any way he pleases and he is
free to do so.
 Advantage:
3. Distribution and Use of Profits

If, because of his efforts, his business made large profits,

the sole proprietor is the sole beneficiary. He does not have to
share the profits with anyone. If he decides to invest his profits
, his business made large profits, the sole proprietor is the sole beneficiary. He does not have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not re

for expanding his business, he is not required to consult

anybody. He may decide to use it any way he pleases and he is
free to do so.
 Advantage:
4. Control of the Business

The power to control the business is vested solely to the

single proprietor. This authority is very important especially
under critical moments of competitions.
, his business made large profits, the sole proprietor is the sole beneficiary. He does not have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not re
 Advantage:
5. Government Regulation

The sole proprietorship is spared from various government

rules which cover partnership and corporations. Also, sole
proprietorship are required to submit fewer reports to the
, his business made large profits, the sole proprietor is the sole beneficiary. He does not have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not re

government.
 Advantage:
6. Taxation

The net income of the sole proprietorship is regarded as the

personal income of the sole owner and is taxed accordingly.
This is not so in the case of partnerships and corporations
, his business made large profits, the sole proprietor is the sole beneficiary. He does not have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not re

wherein net income are taxed and will be subject to taxation

again when the owners individually receive their share of the
profits.
Advantage:
7. Closing the Business

Sole proprietorships can be dissolved at will. Although this

is done only when necessary, it remains an option of the owner.
Once the owner makes a decision to cease operations, he does
not need to seek the approval of co-owners or partners because
he is the sole owner.
Dis-Advantage:
1. Owner’s Lack of Ability & Experience

The success of the sole proprietorship will depend largely

on the management and entrepreneurial skill of the owner. If
the sole proprietor lacks the skills of a generalist, then it will be
hard for the firm to succeed.
Dis-Advantage:
2. Difficulty in Attracting Good Employees

The assurance that the firm will survive for a long period is
not a feature of sole proprietorships. As a consequence, good
employees will tend to join a more stable enterprise which is
most often corporation.
Dis-Advantage:
3. Difficulty in Raising More Capital

In a sole proprietorship, the amount of capital that could be

raised will depend on the financial resources of the sole owner. Even
if he can obtain credit, the amount will depend on his sole capacity to
pay. This problem is especially felt when business expansion is
required and more difficult when credit is getting tight and interest
rates are going up
Dis-Advantage:

4. Limited Life of the Firm

The existence of the sole proprietorship depends on the physical

well-being of the owner. Poor health on the part of the owner could
cause bankruptcy. His death will mean liquidation of the business.
Dis-Advantage:
5. Unlimited Liability of the Proprietor

Any liability incurred by the sole proprietorship extends to the

owner’s personal assets. In theory, the sole proprietor could lose even
his shirt if all his other assets have been exhausted in liquidating all
claims against is business. Unlimited liability is the greatest
disadvantage of sole proprietorships.
PARTNERSHIP
A partnership is a legal business engagement of two or
more individuals as co-owners of an un-incorporated
business. A partnership is formed with the purposes of
eliminating some of the disadvantages of sole
proprietorships while retaining some of their advantages.
Advantages of Partnership
1. Ease of Formation

Like sole proprietorship, partnerships are easy to form. The

only requirement before the partnership starts to operate is for
the partners to agree on basic aspects of the business like the
nature of the business, location, capitalization, and the like. A
written agreement called partnership agreement is drawn to
formalize what has been agreed upon.
Advantages:
2. Pooling of Knowledge and Skills

The combined knowledge and skills of the partners provide

the partnership with a distinct advantage. One partner, for
instance, may be very good at marketing, while another may
have a proven track record in research and development. These
skills may be used to the advantage of the partnership. This
condition leads to specialization which is a very important
competitive tool in business.
Advantages:
3. More Source of Capital

The combined resources of the partners provide a bigger

source of funding. Also, the partnership can enjoy the benefits
of a high credit rating. A combination of the resource potentials
of the partners and high credit rating is regarded as a
formidable financing capability of the firm.
Advantages:
4. Ability to Attract and Retain Employees

Attracting and retaining good employees is a difficulty

inherent to sole proprietorships. Partnerships are able to
overcome this difficulty by offering partner status to valuable
employees. This advantage also minimize the potential harm
that may be done when a key employee moves over to another
firm.
Advantages:
5. Tax Advantages

The income of the partnerships is not taxed separately from

the partner’s incomes. Any profits derived by the partners are
taxed as their individual incomes.
Dis -Advantages:
1. Unlimited Liability

Partnership, like sole proprietorships, are saddled with the

disadvantage of unlimited liability. Although one or more
partners may opt to have limited liability, the remaining partner
carries the burden of unlimited liability.
Dis -Advantages:
2. Limited Life

When a partner dies or withdraws from the business, the

partnership is terminated. In essence, the life of partnership is
more limited than that of the sole proprietorship. This is so
because the life of a sole proprietorship depends on the state of
health and the willingness of the sole owner to continue while
the life of a partnership depends on the state of health and the
willingness of the partners to continue.
Dis -Advantages:
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 the following:
1. adding new products or services carried by the business;
2. hiring new employees
3. decisions on credit extensions; and
4. the grant of additional benefits to employees
Dis -Advantages:
3. Potential Conflict Between Partners

When conflict between partners persists, operations are

affected. The condition may even lead to bankruptcy. For
instance, an employee may be at the receiving end of conflicting
orders from the partners. The ensuing confusion may affect the
employee’s performance.
Dis -Advantages:
4. Difficulty in Dissolving the Business

Partners are not easy to dissolve as sole proprietorship.

Whatever assets or liabilities are left after dissolving a sole
proprietorship is the concern of the sole owner. In a partnership
dissolution, it may not be easy to divide whatever assets are left
for distribution to the partners as some of the assets may be fixed
or immovable. The more difficult the dissolution becomes when
certain depts. are to be shared by the partners.
CORPORATION
A corporation is a legally chartered enterprise with
most of the legal rights of a person, including the right to
conduct a business, to own and sell property, to borrow,
money, and to sue and be sued.
CORPORATION
The corporate form of business is the third
ownership option available to the entrepreneur or the small
business owner. Corporations are owned by stockholders.
They are issued with certificates of ownership called
stocks. When large amounts of capital is needed by the
firm. The corporate form is the most appropriate.
Advantages of Partnership
1. Limited Liability

The liability of a stockholder is limited to his shareholdings.

He may lose the entire value of his stocks in the event of a
bankruptcy. Beyond the said vale, he has no more liability. The
advantages of limited liability attract all kinds of investors, big
or small.
Advantages:
2. Ease of Expansion

The authority granted to a corporation to sell its own share

of stock provides a means to pool large amounts of funds. The
price per share of the stocks can be made low enough to attract
even the smallest investor. As the owner –prospective investor
to buy shares.
Advantages:
3. Ease of Transferring Ownership

If a stockholder loses interest in maintaining part ownership

of the corporation, he may disassociate himself from it by
selling or donating his shares to another person. this feature
allows the corporation to change ownership as often as required
without actually dissolving it.
Advantages:
4. Relatively Longer Life

Corporations are established to have a life up to 50 years

and is extendible for longer periods. Because ownership is
readily transferable, the death or withdrawal of any or all
stockholders do not terminate the corporation. This advantage
makes the corporation the most stable among the three forms of
ownership.
Advantages:
5. Greater Ability to Hire Specialized Management

The expanded operation of corporations make it possible to

subdivide the overall task into smaller specialized positions. As
the created positions will be quite dissimilar from each other,
the demand for management expertise will be little more
challenging than those for sole proprietorship and partnerships.
Dis-Advantages of
Partnership
1. More Expensive and Complicated to Organize

The liability of a stockholder is limited to his shareholdings.

He may lose the entire value of his stocks in the event of a
bankruptcy. Beyond the said vale, he has no more liability. The
advantages of limited liability attract all kinds of investors, big
or small.
Dis-Advantages:
1. More Expensive and Complicated to Organize

Among the three forms of business ownership, the corporation

requires more time and money to organize. A corporation may start
operations only after receiving from the Securities and Exchange
Commission (SEC) a certificate of incorporation. The SEC will only
issue the certificate of incorporation after reviewing the articles of
incorporation previously submitted by the initial set of corporate
officers.
Dis-Advantages:
2. Double Taxation

The profits derived by stockholders are taxed twice by the

government: first, when the corporation realizes profits, and second
when individual stockholders declare as part of their personal income
the dividends they receive from the corporation. This is not the case
with sole proprietorships and partnership.
Dis-Advantages:
3. More Extensive Government Restrictions & Reporting
Requirements

Corporations are subject to stringent government restrictions and

are required to submit various reports in periodic basis. An example
of a restriction is the prohibition of certain actions without the
approval of the SEC. For instance, corporations cannot distribute
stock dividends without prior approval of the SEC.
Dis-Advantages:
4. Employees Lack Personal Identification and
Commitment

Many stockholders are detached from the daily operations of the

corporations. Those who are employed by the corporation mostly do
not own even a share of the company’s stocks. The relationship
between the corporation and the employees are too impersonal.
Thank
you!