LESSON 4

FORMS OF BUSINESS ORGANIZATIONS

LEARNING OBJECTIVES
1. To differentiate the forms
of business organizations
according to ownership.
2. To enumerate the
advantages and disadvantages
of each form of business
organization.
SOLE PROPRIETORSHIP
 The Sole or Single Proprietorship is the simplest form of
business organization.
 Owned by one person known as the PROPRIETOR or
ENTREPRENEUR.
 The Sole Proprietorship enjoys the ease of formation compared
with the other two types of organizations.
 The government requirements for the sole proprietorship are
minimal.
 Decisions can easily be made in as much as they are made by
the owner himself, and do not require any consent from other
persons, and profits from operations are not shared with
anybody but belong only to the owner.
This form of business organization
is limited with the ability to raise
capital. The business depends
only on the financial resources
that can be provided by the sole
owner, hence, a limited ability to
expand.
ADVANTAGES
 There are minimal costs and
requirements in the formation.
 The owner can withdraw the assets
and profits of the business anytime at
his or her own discretion.
 Decision making is solely in the hands
of the owner.
 The duration of the life of the business
solely depends on its owner.
DISADVANTAGES
 Resources are limited as the capital is
provided only by the owner.
 The liability of the owner is unlimited
as he or she is accountable to all
creditors of the business.
 Infusion of knowledge in the
management of the business is limited
to one person only, which is the owner.
PARTNERSHIP
 The partnership form of business organization is
governed by the provisions of the Civil Code,
articles 1767 to 1867.
 It is defined as an association of two or more
persons who bind themselves to contribute
money, property, or industry to a common fund
with the intention of dividing the profits among
themselves.
 It begins to exist from the moment of the
execution of the partnership contract, unless it is
otherwise stipulated.
 The partnership enjoys also the ease of
formation. It may be formed by mere consent
or in writing by a group of persons.
 It can be easily dissolved by mere
disagreement among the partners, or in cases
like, withdrawal of a partner, retirement, or
death of any of the partners.
 Partnership is grounded on common trust and
confidence, thus if the original relationships
of the partner is changed, the partnership is
dissolved.
ADVANTAGES
 There are minimal costs and
requirements in the formation.
 There are more funds contributed from
the investment of the partners.
 There is infusion of more knowledge,
experience and skills from two or more
partners.
 There can de division of labor between
or among partners.
DISADVANTAGES
 The partners are liable for the actions of such
partner as a result of mutual agency.
 A general partner has unlimited liability if the
other partners are limited partners or are
insolvent.
 Disagreement between or among partners can
lead to the withdrawal of one or more partners.
 The death, retirement, withdrawal or incapacity
of a partner results in the dissolution of the
partnership.
 Admission of a new partner depends upon the
approval of the other partners.
CORPORATION
 The Corporation is an entity held by five or more
individuals whose ownership is evidenced by shares
of stocks. The corporation, enjoys the benefit of
accumulating big amount of capital contributed by
millions of owners called STOCKHOLDERS.
 This form of organization is difficult to organize as
compared with the other two types of
organizations. Corporations require compliance with
different government requirements such as
registration to the Securities and Exchange
Commission, National Internal Revenue and
oftentimes, compliance with the requirements of
the Bangko Sentral ng Pilipinas.
Section 2 of the Corporation Code
defines corporation as an artificial
being created by the operation of
law having the rights of succession
and the powers, attributes and
properties expressly authorized by
law or incident to its existence (BP
no. 68, sec. 2)
ADVANTAGES
 Thestockholders only have limited liability,
as their liability extends only up to the
amount of their capital investment.
A corporation has continuous existence as
its life is indefinite.
 There is more infusion of funds from the
stockholders or investors.
 Sharesof stocks can be transferred without
the consent of other shareholders.
 Management of the corporation is vested
upon its board of directors.
DISADVANTAGES
A corporation entails many
requirements and is more costly than a
partnership.
 The government exercises strict control
over corporations and imposes high
taxes.
 Shareholders have little or no
participation in the management of the
corporation.
ADVANTAGES AND DISADVANTAGES OF EACH FORM OF BUSINESS
ORGANIZATION
SOLE PROPRIETORSHIP
 ADVANTAGES DISADVANTAGES

Easiest to start and set up Unlimited liability

Only one owner decides for Limited capital or source of
business capital
All profits are for the owner Loss are solely shouldered by
the owner
Easy to dissolve Limited life
Only minimal requirements set
by the government
PARTNERSHIP
 ADVANTAGES DISADVANTAGES
Easy to form; mere agreement All partners may be held liable
unless stipulated can organize for the action of one partner
and form one partnership (Agent or Partnership)
Combined resources of Unlimited liability
partners (capital, skill and
industry)
Lesser government Limited life
requirement and supervision
Tax-exempt; if professional Restricted transfer of
partnership but taxed as ownership. Requires the
corporation if commercial consent of all partners before
corporation transfer of interest be
enforceable
CORPORATION
 ADVANTAGES DISADVANTAGES
Limited liability – shareholders Most costly and difficult to
are not legally liable for the organize (higher cost of
corporate unpaid outside and incorporation)
within liabilities
Ease of transfer on interest in More government requirement
case of incapacity of one and regulations of supervision to
shareholder follow
Power of succession – corporation Taxed at flat 25%
can still exist and continue in
spite of incapacity of one
shareholder
Greater source of resources
Unlimited life – may renew its life
every 50 years
4. COOPERATIVES
 Under section 3 of Republic Act 6938, a
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.
 In short, a cooperative is an association of small
producers and consumers who come together
voluntarily to form a business which they own,
manage and patronize.
ADVANTAGES
 The prices of products offered to
consumers are lower due to direct
purchases of cooperative members
from producers or manufacturers.
 Cooperatives are managed by the
members themselves; thus, saving on
management costs which leads to
lower prices of products inuring to the
benefit of the consumers.
DISADVANTAGES
There is limited capital due to
underprivileged members.
The cooperative is strictly for
members only and shares cannot
be transferred to non-members.
Lack of efficient management as it
is managed only by its members.
DEFINITION OF TERMS
 1. Sole Proprietorship - is a form of business
organization owned and managed by only one
individual.
 2. Partnership – is a business composed of two or
more individuals who contribute money, property
or industry to a common fund to put up a
business, generate profit and divide the profit
among themselves.
 3. Corporation – is an artificial being created by
operation of law.