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Instructional Module for ABM Track 3: Business Ethics and Social Responsibility

Instructional Module for ABM Track 3: Business Ethics and Social Responsibility

Lesson 1 – Basic Forms of Business Organization

(Week 1)

Your Learning Materials

Basic Forms of Business Organization

What is Business?
A business is an organization or economic system where goods
and services are exchanged for one another or for money. Every
business requires some form of investment and enough customers to
whom its output can be sold on a consistent basis to make a profit.
Business can be privately owned, not-for-profit, or state-owned.

Basic Forms of Business Organizations

1. Sole Proprietorship
Also known as a sole trader, is owned by
one person and operates for their benefit. The
owner may operate the business alone or with
other people. A sole proprietor has unlimited
liability for all obligations incurred by costs or
judgments against the business. All assets of
the business belong to a sole proprietor,
including for example a computer
infrastructure, any inventory manufacturing
equipment, and/or retail fixtures, as well as
any real property owned by the business.
The vast majority of small business start out as sole proprietorships. These
firms are owned by one person, usually, the individual who has day-to-day
responsibility for running the business. Sole proprietorships own all the assets of the
business and the profits generated by it. They also assume complete responsibility
for any of its liabilities or debts.
Advantages of a Sole Proprietorship
• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law,
may make decisions as they see fit.
• Profits from the business flow-through directly to the owner’s personal tax
return.
• The business is easy to dissolve if desired.
 Disadvantages of a Sole Proprietorship
• Sole proprietors have unlimited liability and are legally responsible for all
debts against the business. Their business and personal assets are at risks.
• May be at a disadvantage in raising funds and are often limited to using funds
from personal savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are
motivated by the opportunity to own a part of the business.
• Some employee benefits such as owner’s medical insurance premiums are
not directly deductible from business income (only partially as an adjustment
to income).

2. Partnership
A business owned by two (2) or more people. In
most forms of partnerships, each partner has
unlimited liability for the debts incurred by the
business. In a partnership, the partners should have
a legal agreement that sets forth how decisions will
be made, profits will be shared, disputes will be
resolved, how future partners will be admitted to the
partnership when needed; yes, it is hard to think
about a “break-up” when the business is a defined
process, there will be even greater problems. They
also must decide up front how much time and
capital each will contribute.
Advantages of a Partnership
• Partnership are relatively easy to establish; however, time should be invested
in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal
tax return.
• Prospective employees may be attracted to the business if given the incentive
to become a partner.
• The business usually will benefit from partners who have complementary
skills.
Disadvantages of a Partnership
• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax
returns.
• The partnership may have a limited life; it may end upon the withdrawal or
death of a partner.

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3. Corporation
The owners of a corporation have
limited liability and the business has a
separate legal personality from its
owners. Corporations can be either
government-owned or privately
owned. They can organize either for
profit or as not-for-profit
organizations. A privately owned, for-
profit corporation is owned by its
shareholders, who elect a board of
directors to direct the corporation and
hire its managerial staff. A privately
owned, for- Profit Corporation can be either privately held by a small group of
individuals, or publicly held, with publicly traded shares listed on a stock exchange.

Advantages of a Corporation
• Shareholders have limited liability for the corporation’s debts or judgments
against the corporation.
• Generally, shareholders can only be held accountable for their investment in
the stock of the company.
• Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and
employees.

Disadvantages of a Partnership
• The process of incorporation requires more time and money than other forms
of organizations.
• Corporations are monitored by the government and some local agencies, and
as a result, may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to
shareholders are not deductible from business income; thus, this income can
be taxed twice.

4. Cooperative

Often referred to as a “co-op”, a cooperative is a limited

liability business that can organize for-profit or non-profit. A
cooperative differs from a corporation in that it has
members, not shareholders, and they share decision-
making authority. A cooperative is a business
organization owned by a grouped of individuals and is
operated for their mutual benefit. The persons making
up the group are called members. Cooperatives may be
incorporated or unincorporated.

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 Advantages of a Cooperative Organization
• Generally inexpensive to register.
• A cooperative organization is owned and controlled by members.
• Members have an equal vote at general meetings regardless of their level of
investment or involvement. One member, one vote.
• All members must be active in the co-operative.
• This type of organization has a limited liability.
• Profit distribution (surplus earnings) to members is carried on in proportion
to the use of service; surplus may be allocated in shares or cash.

Disadvantages of a Cooperative Organizations

• A cooperative organization entails longer decision-making process.
• It requires members to participate for success.
• It has less incentive, and there’s also a possibility of development of conflict
between members.
• As co-cooperatives are formed to provide a service to members rather than a
return on investment, it may be difficult to attract potential members seeking
a financial return.
• There is usually limited distribution of profits to members and some co-
cooperatives may prohibit the distribution of any surplus.
• Members providing greater involvement or investment than others will still
only get one vote.
• Extension record keeping is necessary in this form of organization.

Basic Classification of Business

1. Service Businesses
A service type of business provides intangible
products (products with no physical form). Service type
firms offer professional skills, expertise, advice, and
other similar products. Examples of service business are
schools, repair shops, hair salons, banks, accounting
firms, and law firms.

a. Service business - typically charge for labor or other services provided to

government, to consumers, or to other business. Interior decorators, consulting
firms and entertainers are service business.
b. Financial business – include banks and other companies that generate profits
through investment and management of capital.
c. Transportation business – deliver goods and individuals to their destinations
for a fee.
d. Utilities – produce public services such as electricity or sewage treatment,
usually under a government.

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 2. Merchandising Businesses
This type of business buys
products at wholesale price and
sells the same at retail price. They
are known as “buy and sell”
business. They make a profit by
selling the products at prices higher
that their purchase costs. A
merchandising business sells a
product without changing its form.
Examples are grocery stores,
convenience stores, distributors, and other resellers.
a. Retailers and distributors – act as middleman and get goods produced by
manufacturers to the intended consumers; they make their profits by marking
up their prices. Most stores and catalog companies are distributors or retailers.

3. Manufacturing Businesses
Unlike a merchandising business, a
manufacturing business buys products with the
intention of using them as materials in making a
new product. Thus, there is a transformation of
the products purchased. A manufacturing
business combines raw materials, labor, and
factory overhead in its production process. The
manufactured goods will then be sold to
customers.
a. Agriculture and mining business – produce raw material, such as plants or
minerals.
b. Manufacturers – produce products, either from raw materials or from
component parts, then sell their products at a profit, for example cars, clothing or
pipes.
c. Real-estate business – sell, rent and develop properties including land,
residential homes and other buildings.

Purpose of Establishing a Business Enterprise

Why Start a Business?
1. To make money and have financial independence
2. To be your own boss
3. To self-actualize / To fulfill own interest and enjoyment
4. To Make Dreams Come True
5. To use your skills and knowledge for yourself
6. To have a second career
7. To have variety at work
8. To create opportunities
9. To take up a challenge
10. To employ relatives, friends, and community members
11. To come up with better ways, to create, to innovate

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 12. To be efficient
13. To set and meet own deadlines
14. To avoid commuting
15. To create a customer
16. To offer value
17. To have more life, more freedom
18. To solve problems
19. To move society, to change the world, to make the world better
20. To build our future

GLOSSARY

Business An organization or economic system where goods and services are

exchanged for one another or for money.

Cooperative Often referred to as a “co-op”, a cooperative is a limited liability

business that can organize for-profit or non-profit.

Corporation The owners of a corporation have limited liability and the business has
a separate legal personality from its owners.

Partnership A business owned by two (2) or more people. In most forms of

partnerships, each partner has unlimited liability for the debts incurred
by the business.

Sole Also known as a sole trader, is owned by one person and operates for
Proprietorship their benefit.

Reference:
Jerusalem, V., Palencia M, & Palencia J. (2017). Business ethics and social responsibility:
concepts, principles, & practices of ethical standards. Manila, Philippines:
FASTBOOKS Educational Supply, Inc.
Orjalo, V. & Frias S. (2016). Business ethics and social responsibility: Principles, policies,
programs and practices. Quezon City, Philippines: The Phoenix Publishing House,
Inc.
Cortez, F. (2016). Business ethics and social responsibility. Quezon City, Philippines: Vibal
Group, Inc.

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