FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Content 4 – Forms of Business Organizations

Intended Learning Outcomes (ILO)

1. Differentiate the forms of business organization
2. Identify the advantages and disadvantages of each form

FORMS OF BUSINESS ORGANIZATIONS (ILO 1-2)

Business firms operate in a complex environment of legal, political, economic, and financial forces that affect decision
making. Two of the most important factors making up the firm’s operating environment are the legal form of business
organization and taxes. There are three major forms of business organization: proprietorship, partnership, and
corporation. In sheer numbers, proprietorships are the most common form of business organization.

Sole Proprietorship Partnership Corporation

A sole proprietorship is owned by A partnership is owned by more A corporation is owned by
one person. The owner is often than one person. One or more stockholders (or shareholders).
called a proprietor, and the partners may manage the Corporations may have many
proprietor is often also the business. Like proprietors, owners, and they usually employ
manager of the business. The partners assume the risks for the professional managers. The
owner assumes all risks fort the business, and their assets may be owners’ risk is usually limited to
business, and personal assets can taken to pay creditors. An their initial investment, and they
be taken to pay creditors. An advantage of a partnership is that usually have very little influence
advantage of a sole proprietorship owners share risks and decision on the business decisions.
is that the owner can make all the making. A disadvantage is that
business decisions. A disadvantage partners may disagree about the
is that if the business cannot pay best way to run the business.
its obligations, the business owner
must pay them, which means that
the owner could lose some of his
or her personal assets (e.g. house
or savings).

A business generally assumes one of these forms of organization. The accounting procedures depend on which form the
organization takes.

In addition to these three major forms of business organization, cooperative, which is an association of men organized
for the purpose of promoting and protecting the interests of its members, and not primarily for profit, is the fourth
classification of business organization according to legal form. Detailed discussion of these forms of business
organizations follow:

1. Sole Proprietorship
This business organization has a single owner called the proprietor who generally is also the manager. Sole
proprietorships tend to be small service-type (e.g. Physicians, lawyers and accountants) businesses and retail
establishments. The owner receives all profits, absorbs all losses and is solely responsible for all debts of the business.
From the accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the accounting records of
the sole proprietorship do not include the proprietor’s personal financial records.

Advantages of a Sole Proprietorship Disadvantages of a Sole Proprietorship

1. Easy to set—up and discontinue. 1. Unlimited personal liability.
2. Requires a small amount of capital to start. 2. Limited management skills.
3. Profits all accrue to the owner. 3. Limited access to capital.
4. Total control on the part of the owner. 4. Lacks continuity in case of death or incapacity
of owner.

FABM 1 – (4) Forms of Business Organizations Page 1 of 5

 2. Partnership
In a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profit among themselves. Two or more persons may also form a
partnership for the exercise of a profession (Civil Code of the Philippines, Article 1767).

The partnership has a juridical personality separate and distinct from that of each of the partners (Civil Code of the
Philippines, Article 1768). Thus, for example, where Angelo Timajo and Joshua Cadena established a partnership, three
persons are involved, namely: the partnership and the partners, Timajo and Cadena. Accounting considers the
partnership as a separate organization, distinct from the personal affairs of each partner.

Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each owner is
called a partner. Partnerships are often formed to bring together various talents and knowledge. Partnerships provide a
means of obtaining more equity capital than a single individual can obtain and allow the sharing of risks for rapidly
growing businesses.

A profession is an occupation that involves a higher education or its equivalent, and mental rather than manual labor.
Strictly speaking, the exercise of a profession is not a business or an enterprise for profit but the law allows two or more
persons to act as partners in the practice of their profession. Partnerships are generally associated with the practice of
law, public accounting, medicine and other professions. Partnerships of this nature are called general professional
partnerships. 0n the other hand, service industries, retail trade, wholesale and manufacturing enterprises may also be
organized as partnerships.

Characteristics of a Partnership
The characteristic of partnerships are different from the sole proprietorships. Some of the more important characteristic
are as follows:
a. Mutual Contribution. There cannot be a partnership without contribution of money, property or industry (i.e.
work or services which may either be personal manual efforts or intellectual) to a common fund.
b. Division of Profits or Losses. The essence of partnership is that each partner must share in the profits or losses
of the venture.
c. Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by the partnership
by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, all
partners jointly own it in a special sense.
d. Mutual Agency. Any partner can bind the other partners to a contract if he is acting within his express or implied
authority.
e. Limited Life. A partnership has a limited life. It may be dissolved by the admission, death, insolvency, incapacity,
or withdrawal of a partner or expiration of the term specified in the partnership agreement.
f. Unlimited Liability. All partners (except limited partners), including industrial partners, are personally liable for
all debts incurred by the partnership. If the partnership cannot settle its obligations, creditors' claims will be
satisfied from the personal assets of the partners without prejudice to the rights of the separate creditors of the
partners.
g. Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the rate of 30% (per
RA. No. 9337) of taxable income.
h. Partners' Equity Accounts. Accounting for partnerships are much like accounting for sole proprietorships. The
difference lies in the number of partners’ equity accounts. Each partner has a capital account and a withdrawal
account that serves similar functions as the related accounts for sole proprietorships.

Advantages versus Proprietorship Disadvantages of a Partnership

1. Brings greater financial capability to the 1. Profits are shared.
business. 2. Easily dissolved and thus unstable compared
2. Combines special skills, expertise and experience to a corporation.
of the partners. 3. Mutual agency and unlimited liability may
3. Offers relative freedom and flexibility-of action in create personal obligations to partners.
decision-making. 4. Less effective than a corporation in raising
4. Risks are shared. large amounts of capital.

FABM 1 – (4) Forms of Business Organizations Page 2 of 5

 Advantages versus Corporations
1. Easier and less expensive to organize.
2. More personal and informal.

Partnership Distinguished From Corporation

Partnership Corporation
1. Manner of Creation By mere agreement of the By operation of law1
partners
2. Number of Persons 2 or more persons (partners) 5-15 persons (incorporators2)
3. Commencement of Juridical From the execution of the From the issuance of certificate
Personality articles of partnership of incorporation by the
Securities and Exchange
Commission (SEC)
4. Management Every partner is an agent of the Vested on the Board of
partnership if the partners did Directors (BOD)
not appoint a managing partner
5. Extent of Liability Each of the partners except a Stockholders are liable only to
limited partner, is liable to the the extent of their interest or
extent of his personal assets investment in the corporation.
6. Right of Succession NO right of succession There is right of succession.3
7. Terms of Existence For any period of time Not to exceed fifty (50) years
stipulated by the partners but subject to extension
1
Corporation Code of the Philippines or a Special Law
2
Incorporators – are the names written on the articles of incorporation
3
A corporation has the capacity of continued existence regardless of the death, withdrawal, insolvency or incapacity of its
directors or stockholders.

3. Corporation
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 incident to its existence (The Corporation Code of the Philippines, Sec. 2).

A corporation is a business owned by its stockholders. The stockholders are not personally liable for the corporation's
debts. The corporation is a separate legal entity.

Attributes of a Corporation
1. A corporation is an artificial being with a personality separate and apart from its individual shareholders or members.
2. It is created by operation of law. It cannot come into existence by mere agreement of the parties as in the case of
business partnerships. Corporations require special authority or grant from the State, either by a special incorporation
law that directly creates the corporation or by means of a general corporation law (i.e., The Corporation Code of the
Philippines).
3. It enjoys the right of succession. A corporation has the capacity of continued existence subject to the period stated in
the Articles of Incorporation. The death, withdrawal, insolvency or incapacity of the individual shareholders or members
will not dissolve the corporation. The transfer of ownership of shares of stock does not dissolve the corporation.
4. It has the powers, attributes and properties expressly authorized by law or incident to its existence.

FABM 1 – (4) Forms of Business Organizations Page 3 of 5

 Advantages of a Corporation Disadvantages of a Corporation
1. The corporation has the legal 1. A corporation is relatively complicated in formation and
capacity to act as a legal entity. management.
2. Shareholders have limited 2. There is a greater degree of government control and
liability. supervision.
3. It has continuity of existence. 3. It requires a relatively high cost of formation and operation.
4. Shares of stock can be transferred 4. It is subject to heavier taxation than other forms of business
without the consent of the other organizations,
shareholders. 5. Minority shareholders are subservient to the wishes of the
5. Its management is centralized in majority.
the board of directors. 6. In large corporations, management and control have been
6. Shareholders are not general separated from ownership.
agents of the business. 7. Transferability of shares permits the uniting of incompatible
7. Greater ability to acquire funds. and conflicting elements in one venture.

4. Cooperative
A cooperative is an autonomous and duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable
contributions to the capital required; patronizing their products and services and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative principles. The entity is registered with
the Cooperative Development Authority (CDA).

Purposes of Cooperatives
A cooperative may be organized and registered for any or all of the following purposes:
1. To encourage thrift and savings mobilization among the members;
2. To generate funds and extend credit to the members for productive and provident purposes;
3. To encourage among members systematic production and marketing;
4. To provide goods and services and other requirements to the members;
5. To develop expertise and skills among its members;
6. To acquire lands and provide housing benefits for the members;
7. To insure against losses of the members;
8. To promote and advance the economic, social and educational status of the members;
9. To establish, own, lease or operate cooperative banks, cooperative wholesale and retail complexes, insurance and
agricultural/industrial processing enterprises, and public markets;
10. To coordinate and facilitate the activities of cooperatives;
11. To advocate for the cause of the cooperative movements;
12. To ensure the viability of cooperatives through the utilization of new technologies;
13. To encourage and promote self—help or self-employment as an engine for economic growth and poverty alienation;
14. To undertake any and all other activities for the effective and efficient implementation of the provisions of the
Cooperative Code.

In consonance with the above stated purposes, various types of cooperatives are organized, namely: credit, consumer,
producers, marketing, service, multi-purpose, advocacy, agrarian reform, bank, dairy, education, electric, financial
service, fisherman, health services, housing, insurance, transport, workers or water service cooperative.

Objectives and Goals of a Cooperative

The primary objective of every cooperative is to help improve the quality of life of its members. Towards this end, the
cooperative shall aim to:
1. Provide goods and services to Its members to enable them to attain increased income, savings, investments,
productivity, and purchasing power, and promote among themselves equitable distribution of net surplus through
maximum utilization of economies of scale, cost-sharing and risk-sharing;
2. Provide optimum social and economic benefits to its members:
3. Teach them efficient ways of doing things in a cooperative manner;
4. Propagate cooperative practices and new ideas in business and management;
5. Allow the lower income and less privileged groups to increase their ownership in the
FABM 1 – (4) Forms of Business Organizations Page 4 of 5
wealth of the nation; and
6. Cooperate with the government, other cooperatives and people—oriented organizations
to further the attainment of any of the foregoing objectives.

Advantages of a Cooperative Disadvantages of a Cooperative

1. Unlimited life. 1. Shared control.
2. Equality of members. 2. One member, one vote.
3. Tax benefits. .
4. Limited liability.
5. Greater ability to attract capital.
6. Affords greater business volume with the resulting benefit of
bigger profits which will be shared by more people.

Part 1. Identify whether the business being referred to is a partnership or corporation

1. This is created by mere agreement of the business owners
2. This is created by operation of law.
3. Two or more persons may form this business organization.
4. At least five (5) persons, not exceeding fifteen (15) may initially form this business.
5. Juridical personality commences from the execution of the articles of this business
6. Juridical personality commences from the issuance of certificate of incorporation by the Securities and Exchange
Commission.
7. Every owner is an agent of this business if the owners did not appoint a managing person
8. Management is vested on the Board of Directors.
9. Each of the owners except a limited owner, is liable to the extent of his personal assets.
10. The owners are liable only to the extent of their interest or investment in the business.
11. There is no right of succession in this business
12. There is right of succession in this business ; it has the capacity of continued existence regardless of the death,
withdrawal, insolvency or incapacity of its directors or stockholders.
13. The term of existence of this business is for any period of time stipulated by the partners
14. The term of existence of this is not to exceed fifty (50) years but subject to extension.
15. There cannot be a business without contribution of money, property or industry (i.e. work or services which may
either be personal manual efforts or intellectual) to a common fund.
16. The essence of this business is that each owner must share in the profits or losses of the venture.
17. All assets contributed into the business are owned by the business by virtue of its separate and distinct juridical
personality; If one owner contributes an asset to the business, all the owners jointly own it in a special sense.
18. Any owner of this business can bind the other owners to a contract if he is acting within his express or implied
authority.
19. This business has a limited life; it may be dissolved by the admission, death, insolvency, incapacity, or withdrawal of
one owner or expiration of the term specified in the agreement.
20. If the business cannot settle its obligations, creditors' claims will be satisfied from the personal assets of the owners
without prejudice to the rights of the separate creditors of the owners.
21. Each owner of this business has a capital account and a withdrawal account that serves similar functions as the
related accounts for sole proprietorships.
Part 2. Identify the legal form of business organization being described.
1. Unlimited life; equality of members; tax benefits; limited liability; greater ability to attract capital; affords greater business
volume with the resulting benefit of bigger profits which will be shared by more people.
2. Unlimited personal liability; limited management skills; limited access to capital; lacks continuity in case of death or
incapacity of owner.
3. This has the legal capacity to act as a legal entity ; owners have limited liability; it has continuity of existence; shares of
stock can be transferred without the consent of the other shareholders; its management is centralized in the board of
directors; shareholders are not general agents of the business; greater ability to acquire funds.
4. Profits are shared; easily dissolved and thus unstable compared to a corporation; mutual agency and unlimited liability may
create personal obligations to owners; less effective than a corporation in raising large amounts of capital.
5. Brings greater financial capability to the business; combines special skills, expertise and experience of the partners; offers
relative freedom and flexibility-of action in decision-making; risks are shared by the owners; compared to corporation, this
is easier and less expensive to organize, and it’s more personal and informal.
6. This is relatively complicated in formation and management; there is a greater degree of government control and
supervision; it requires a relatively high cost of formation and operation; it is subject to heavier taxation than other forms of
business organizations; minority shareholders are subservient to the wishes of the majority; in large business, management
and control have been separated from ownership; transferability of shares permits the uniting of incompatible and
conflicting elements in one venture.
7. Easy to set-up and discontinue; requires a small amount of capital to start; profits all accrue to the owner; total control on
the part of the owner.
8. Shared control; one member, one vote.

FABM 1 – (4) Forms of Business Organizations Page 5 of 5