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Chapter Three
Business Structures and Legal Ownership

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Contents of the chapter
1. Introduction
2. Sole proprietorship
3. Partnership
4. Corporations
5. Cooperatives

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 Introduction
• Various legal forms of business organizations are available
to organize small businesses.
• The most common forms currently in wide use by small
business are:
– Sole proprietorship
– Partnership
– Corporations and
– Cooperatives
• Each has key advantages and disadvantages.

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 A. Sole proprietorship
• It is an individual or single ownership.
• The sole proprietorship is a form of business organization in
which an individual introduces his capital, use of his own skill
and intelligence in the management.
• It is the oldest and simplest among them.
• Establishing this business is easy and simple because the legal
requirement is less.
• The proprietorship is the simplest and cheapest way to start
operation and is frequently the most appropriate form of a new
business.
Example: Photo studio, bookshop, bakeries, small town
restaurants, retail stores, radio and watch repair shops, etc.

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Advantages of Sole proprietorships
• Ease and low cost of formation and dissolution
• Direct motivation and personal care
• Freedom and promptness of action
• Business Secrecy
• Social Desirability
• Single Tax

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Disadvantages of sole proprietorship
• Limited resources and size
• Limited managerial skill
• Unlimited liability
• Uncertain future/Death of the owner terminates the
business/
• Difficulty in hiring and keeping high achievement
employees
• Few fringe benefits

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B. Partnership
• The association of two or more persons to carry as co-
owners of a business where the relationship is based on
agreement is called partnership.
Kinds of Partners
• The most common types of partners are the following:
1. General partner
2. Limited or special partner
3. Secret partner
4. Silent partner
5. Dormant or sleeping partner
6. Nominal partners
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Advantages of partnership
• Ease of starting
• Increased source of capital
• Combined managerial skill
• Definite legal status
• Personal supervision
• Motivation of important employees
• Reduced risk
• Tax advantage over a corporation

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Disadvantages of partnership
– Unlimited liability
– Risk of implied authority
– Lack of harmony
– Lack of continuity/instability/
– Difficulty in investment withdrawals

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 C. Corporation
• It is also known as Joint Stock Company.

Characteristics of Corporation
• Separate legal entity
• Limited liability
• Transferability of shares
• Perpetual existence
• Common seal
• Separation of ownership from management
• Supervision
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Advantages of a corporation
– Financial strength
– Limited liability
– Scope of expansion
– Managerial efficiency
– Ease in transferring ownership
– Legal entity status

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Disadvantages of a corporation
– Difficulty of formation
– Lack of owner’s personal interest
– Delay in decision-making
– Lack of secrecy
– Double taxation

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D. Cooperatives
• This particular type of business is called a cooperative and
is somewhat like a corporation.

• It is an organization owned by members/customers who pay

an annual membership fee and share in any profits.

• Owners, managers, workers, and customers are all the same

people.

• A cooperative is an enterprise owned and controlled by all

those who work in it.

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 .
It has to adopt the following principles:
• Members have an equal vote in decisions
• Membership is open to everyone who fulfills specified
conditions.
• Assets controlled and usually owned jointly by
members
• Profit shared equally between members.
• Members benefit from participation, not investment

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 .

END OF CHAPTER THREE

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