FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 1
TOPIC 3:
FORMS OF BUSINESS ORGANIZATIONS

Objectives:
 Differentiate the forms of business organization.
 Identify the advantages and disadvantages of each form.
 Identify the forms of business organization by nature of ownership.
FORMS OF BUSINESS ORGANIZATIONS
Businesses are organizations commonly made to earn profit. Throughout its life, a company deals with
multiple groups of individuals to achieve its end goal of profit generation.
Nonetheless, there are organizations established not for the pursuit of profit. These are not-to-profit
organizations which include charitable institutions, public officials, public schools, etc.
FORMS OF BUSINESS ORGANIZATIONS

Cooperative
A) SOLE PROPRIETORSHIP

Sole proprietorship is the simplest and

most common form of business organization.
It is formed and owned by one person. It is not
separate from the owner. The business and the
owner is inseparable. The owner usually
transacts with other parties under his or her
own name. They can opt to operate the
business under their own names or use
fictitious names or trade names to instill brand
recall to customers. Sole proprietorship can
also sue and be sued under the owner’s name.
ADVANTAGES OF SOLE PROPRIETORSHIP
1)Ease of formation
-A sole proprietorship does not have to go through
a rigid registration process before it can operate.
-All sole proprietorship business should register in
DTI and then in local municipal hall for business
permits and other licenses. It can be formulated even
with small amount of capital. Ex. “Carinderia and
sari-sari store”
2) The owner has full control of business.
-Being sole proprietorship, the owner can single-
handedly decide on maters pertaining to the
business.
-The importance of fast decision-making is
emphasized when problems warrant immediate action.
-Having only a single owner, does not have internal
ADVANTAGES OF SOLE PROPRIETORSHIP
3)Owners can mix personal and business assets
-Owners may freely mix their personal assets with
business assets.
-If business is experiencing financial difficulties,
personal assets of the owner can be used to help the
business until recovery.
4) Owners have all he profits for themselves.
-All the profits generated from the business belong
to the owner.
5) Simple taxation
-The profits of a sole proprietorship are considered
the income of the owner. Thus, the owner needs to
declare the income of the business in his or her tax return
and it will be taxed accordingly.
DISADVANTAGES OF SOLE PROPRIETORSHIP
1)Unlimited liability
-An owner is personally liable for the debts
incurred by the business.
-Unlimited liability means that creditors,
customers, the government, and other outside parties can
go after the personal assets of the owner even after
extinguishing all the assets of the business in the
satisfaction of their claims.
2)Difficulty of raising additional capital
-The amount of capital is limited only on the
wealth of the owner. The initial investment is the
capital of the business. When fully used up, the owner
can only provide the additional capital.
- A sole proprietorship cannot sell interest or
ownership rights in the business.
DISADVANTAGES OF SOLE PROPRIETORSHIP
3)Owner’s bias
-Only the owner has the authority to make
decisions for the business. This can be detrimental
especially when the owner’s bias prevails and he or
she does not make rational decisions.
-Having more decision makers is equivalent to
having more minds to think of ideas on how to improve
the business.
4)The life of the business is limited to the life of the owner.
-Once the owner dies, the business will cease to operate
under the name of the proprietor.
 B) PARTNERSHIP

Partnership is a contract whereby 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. Two or more persons may also form
a partnership for the exercise of a profession.

•The details of the arrangement between the partners are outlined

in a written document called articles of partnership.
•Profits are divided among partners based on their agreed
sharing.
•The owner is called a partner.

Partnership code of the Philippines, Title IX of the Civil

Code of the Philippines
PARTNERSHIP (BASED ON DEFINITION)
1)Two or more persons are needed to form a
partnership.
2) Money is not the only resource that a person can
contribute in partnership.
Property refers to other assets owned by a person.
Ex. Land, building, vehicles, etc.
3) A partnership must be established for the purpose
of obtaining profit.
4) Partnership are the common form of business
organizations used by companies who generate
profits by the practice of a profession.

Industry refers to the skills and expertise of a

person.
GENERAL FEATURES OF A PARTNERSHIP- (“GENERAL OR REGULAR
PARTNERSHIP”)

1)Separate legal existence

-A partnership can be defined as an artificial being created by operation of
law. This results in partnership having juridical personalities separate and distinct
from their owners (called partners).
-Being an artificial person, a partnership can perform the acts that the owner
can do like voting in elections (business related transactions)
-Partnership can enter into contracts under its own name.
-Partnership can also acquire property under its own name. Property
acquired by the partnership belongs to the partnership not to the individual
partners.
-Income in the partnership is not taxed as separate entity. After the income
has been distributed to the partners, it will be included in their respective tax
returns and taxed accordingly.
2)Mutual agency
-Mutual agency means that the acts of a partner are binding on a partnership though he or she
has no authority to do as long as the act concerns the normal business operations of the partnership.
GENERAL FEATURES OF A PARTNERSHIP- (“GENERAL OR REGULAR
PARTNERSHIP”)

3)Unlimited liability
-Even though a partnership has separate legal existence, partners are still
liable for debts and obligations that cannot be paid by partnership assets. Creditors
and other parties can go after the personal assets of the partners when
partnership assets are not enough to satisfy their claims.
4)Limited life
-the life of a partnership can be easily ended through partnership dissolution
or liquidation. Partnership dissolution occurs when one of the partners
withdraws from the partnership in the relationship among the partners.
Dissolution occurs when there is a change in the relationship among the
partners.
-Partnership liquidation, ends the operations of the partnership. Liquidation
ends the life of the partnership.
5)Co-ownership of partnership property
- Once a partner has contributed his or her money or property, it does not
GENERAL FEATURES OF A PARTNERSHIP- (“GENERAL OR REGULAR
PARTNERSHIP”)

5)Co-ownership of partnership property

- Profits or losses do not also belong to specific partner. The distribution of
profits should follow a profit-sharing scheme agreed upon during the
formation of the partnership. If no profit-sharing scheme, profits and losses
are distributed according to the original capital contribution of the partners.
6) Partnership Agreement
-It is ideal to form partnership in written contract. This written contract is
called articles of partnership. It contains the following information:
-Name of partnership
-Location of the principal office
-The names, citizenship, and residence of the partners
-Term for which the partnership is to exist
-The purpose for which the partnership is formed
-Original capital contributions of the partners
-Profit and loss sharing agreement among the partners.
-Stipulations of admission and withdrawals of partners, death of partners, partnership
liquidation
ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

Advantages Disadvantages
• Easier to create than a corporation • Unlimited liability
• Better ability to acquire additional • Mutual agency
capital than sole proprietorship • Limited life
• Larger pool of human capital than sole
proprietorships
OTHER FORMS OF PARTNERSHIP
1) Limited Partnership
-In limited partnership, at least one partner has unlimited liability and at least
one partner has limited liability.
- General partner- partner having unlimited liability.
-Limited partner- partner having limited liability.
-The maximum loss that a limited partner can shoulder amounts to his or her
initial investment. Creditors cannot go after his or her personal assets.
- To compensate the general partner for the higher risk, they are the one only
ones allowed to participate in the management of the partnership. If limited
partner wanted to participate in the management, he or she losses the limited
liability protection, and thus become a general partner.
2) Limited liability partnership
-The limited liability partnership is a type of partnership that aims to protect
innocent partners from the malpractice and wrongdoings of other partners. This kind
of partnership possesses multiple insurance claims to protect the partners from such
OTHER FORMS OF PARTNERSHIP
- wrongful acts of other partners. The limited liability partnership is mostly
used by individuals forming a partnership for the practice of a profession (e.g.,
lawyers, accountants, medical professionals, and auditors)
3) Limited liability Company
-The limited liability company is another form of organization having
partnership characteristics. Limited liability companies have features of both a
corporation and a partnership. The owners are called members. And they enjoy
limited liability. Unlike the limited partners in limited partnership, member of limited
liability company can participate in management without losing the limited liability
protection.

4) General or regular partnership

-as discussed previously.
C) CORPORATIONS

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 incident to its
existence.

This definition emphasized four things:

1) A corporation is an artificial being. It means that is it an entity
separate and distinct its owners.
2) A corporation is created by operation of law. Individuals cannot
Corporations can be classified as:
form a corporation by themselves. The law must play a role in the
1) Organize to profit or non-profit
formation of a corporation.
2) Publicly held corporation or
3) A corporation has the right of succession. Ownership rights can be
privately held corporation
passed to other persons through sale, donation, or any other mode
of transfer.
4) The law is the source of powers and attributes of a corporation.
Being the source, the law likewise restrict the authority of corp.
C) CORPORATIONS
•A corporation is a business organized as a separate legal entity (artificial person)
under the corporation law with ownership divided into transferable shares of stocks
•Emphasize that it is the law (Corporation Code of the Philippines) that creates a
corporation.
•The corporation begins its existence from the date the Articles of Incorporation is
approved by the Securities and Exchange Commission (SEC).
•The SEC (Securities and Exchange Commission) is the government agency
primarily tasked to regulate private corporations in the Philippines.
•The owners are called stockholders or shareholders.
•The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
•The voting rights of a shareholder is generally based on the percentage of
ownership.
•The management of the business is delegated by the shareholders to the Board of
Directors
•The ownership is divided into shares and the value of one share may be
denominated at a smaller amount, for example at PHP10 per share.
•The proof of ownership is evidenced by a stock certificate.
 GENERAL FEATURES OF CORPORATIONS
1) Separate legal existence
Corporations is treated by law as an artificial being separate and distinct from its owners. A corporation can
enter into contracts and transactions under its name.
In corporation, the acts of the owners or stockholders generally do not bind the corporation. Stockholders
are often involved in decision making through voting but this does not give them the right to perform acts for
the corporation.
2) Limited liability
-The personal assets of the stockholders are protected from the claims of creditors and other outside parties,
Thus, the maximum lost that a stockholder can bear equals his or her investments.
3) Transferable ownership rights.
-Ownership rights in a corporation are represented by stocks. A stock in an intangible asset evidencing a
proportionate share in the properties of a corporation. A stock is represented by a stock certificate.
Stocks can be transferred to other persons through sale, donation, or other modes of transfer.
-Corporations may sell additional stocks to existing stockholders or other
persons to acquire additional capital.
 GENERAL FEATURES OF CORPORATIONS
4) Virtually unlimited life
Corporations shall exist for a period not existing 50 years from the date of its formation and may be
extended for period not existing 50 years.
-A corporation is not affected by the withdrawal, death, and admission of stockholders.
5) Corporation Management
-Management of corporation is more complex compared to other forms of business organizations.
-Stockholders are the owners of a corporation. Stockholders may elect a board of directors to manage the
corporation. The board of directors represents the interest of the stockholders and they are responsible for
creating operating policies for the company.
6) Government regulations
- Corporations are subject to stricter government regulation. Being the major contributor to the income of
the whole economy, the operations are closely monitored.
7) Double taxation
- The income of a corporation is taxed on the corporate level and the individual level.
-The income is already taxed before being distributed to the stockholders. Once
the stockholder receives his share of income, it is included in his tax return and will be
taxed for the second time.
 GENERAL FEATURES OF CORPORATIONS
8) Dividends
Corporations are not required to distribute to stockholders the income it generated from the operations. The
stockholders of the corporation will only be entitled to received a share of the income once the board of
directors approves the distribution. The income distributed to stockholders is called dividends.
- Dividends may be in the form of cash, stock, or property.
-Cash dividends are normally stated as a nominal amount of P2 per share of stock.
-Stock dividends are distributions of income in the form of additional stocks. It is normally stated in
percentage terms.
-Property dividends enable the stockholders to receive a certain value of the property of the company for
every share of stock held.
-Dividends are given on a regular basis to keep them happy or else stockholders will be dissatisfied and sell
their stocks.
ADVANTAGES AND DISADVANTAGES OF CORPORATION

Advantages
• Ability to acquire additional capital
• Transferable ownership rights
• Limited liability of stockholders
• Virtually unlimited life
• Large pool of human capital
Disadvantages
• Heavily regulated by the government
• Double taxation
• Not easy to form
• More expensive to form than sole
proprietorship and partnership
D) COOPERATIVES

Cooperative is a duly registered association of persons, with a

common bond of interest, who have voluntarily joined together
to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a
fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.
•The owners are called members who contribute equitably to the capital of the
cooperative.
Cooperative Code of the •The members are expected to patronize their products and services.
Philippines. •The word ‘cooperative’ appears in the name of the entity.
•This form of business organization is regulated by the Cooperative
Development Authority (CDA).
D) COOPERATIVES
According to the code, the primary objective of a cooperative is to provide goods and
services to its members and enable them to attain increased income and savings. A
cooperative may be formed by at least 15 persons for any of the following purposes.
1. To encourage thrift and savings mobilizations among the members.
2. To generate funds and extend credit to the members for productive and provident
purposes.
3. To encourage systematic production and marketing
4. To provide goods and services and other requirements to the members
5. To develop expertise and skills
6. To acquire lands and provide housing benefits
7. To insure against losses
8. To promote and advance the economic, social and educational status
ADVANTAGES AND DISADVANTAGES OF COOPERATIVES
Advantages
• Enjoys certain tax exemption privilege
• Promotes the concept of sharing
resources
Disadvantages
• Limited distribution of surplus or
income
• Requires continuous education
program for members
• The members have active and direct
participation in the business
ACTIVITY 4