FORMS OF BUSINESS

OWNERSHIP

▪ SOLE PROPRIETORSHIP
▪ PARTNERSHIP
▪ CORPORATION
▪ MODIFICATIONS OF THE
CORPORATE OF OWNERSHIP
▪ OTHER FORMS OF BUSINESS
ORGANIZATION
 SOLE PROPRIETORSHIP

The sole proprietorship is a type of

business entity owned and operated by a
single person. The big percentage of
businesses owned by sole proprietors
indicates the popularity of this ownership
type. This is so because of certain
advantages unique to sole proprietorships.
 Advantages of Sole Proprietorship

1) Ease and Cost of Formation. Among the three ownership forms,

the sole proprietorship is the easiest and least costly to organize.
The only requisites for its legal existence are the following:
a. the sole owner's resolve to start operating; and
b. getting the required permits and licenses.

2) Secrecy. One way of effectively competing with other firms is to

know the moves, as well as the strengths and weaknesses of
competitors. The sole proprietor has the Business Organization and
Management advantage of keeping his intentions secret.
3) Distribution and Use of Profits. If because of his efforts, the business made
some profits, the sole proprietor is the sole beneficiary. He does not have to
share these with anyone.
4) Control of the Business. The owner is also vested with the power to solely
control solely the business and sole authority is very important especially
under critical competitive situations.
5) Government Regulation. The sole proprietorship is spared from various
government rules, which apply to partnerships and corporations. Moreover,
sole proprietorships are required by the government to submit fewer reports.
6) Taxation. The net income of the sole proprietorship is treated as the
personal income of the sole owner and is taxed accordingly. This is not true
with partnerships and corporations where their respective net income is taxed
and will be subject to taxation again when the owners individually receive
their shares of the profits.
7) Closing the Business. Sole proprietorships can be
dissolved by the owners at will. Although this is not
always exercised, it remains an option of the
owners. If business conditions had become
unprofitable, the sole proprietor has the advantage
of immediate cessation of operations. This allows
him to cut his losses to the minimum. Once the
owner decides to close shop, he does not need to
seek the approval of co-owners or partners for he
does not have any.
 Disadvantages of Sole
Proprietorship
1) Owner's Lack of Ability and Experience. The success of the sole
proprietorship will depend largely on the management skills of the
owner. The firm will need a "generalist" with sufficient grasp of the
various specialized functions like marketing, production, finance,
accounting, personnel, and research.
2) Difficulty in Attracting Good Employees. Sole proprietorships are
not known for surviving long periods. The existence of a sole
proprietorship is co-terminus with the life of its owner. As a
consequence, good employees tend to get employment in a more
stable enterprise, which is most often a corporation.
3) Difficulty of Raising Capital. In sole proprietorships, raising capital will
depend on the financial resources of the sole owner. Even if he can
obtain credit, the amount will depend on his sole capacity to pay. This
problem is especially felt when business expansion is required and
becomes more difficult when credit is getting tight and interest rates
become prohibitive.
4) Limited Life of the Firm. The existence of the sole proprietorship
depends on the physical well-being of the owner. When he is ill, business
operations may be affected. Prolonged illness may make the firm go
bankrupt. His death will mean liquidation of the firm.
5) Unlimited Liability of the Proprietor. Any liability incurred by the sole
proprietorship extends to the owner's personal assets. In theory, the sole
proprietor could lose "even his shirt" if all his other assets are not enough
to cover all claims against his business. Unlimited liability is the greatest
disadvantage of the sole proprietorship.
PARTNERSHIP

A partnership is a legal association of

two or more persons as co-owners of an
unincorporated business.
 Advantages of Partnerships

1) Ease of Formation. Like sole proprietorships, partnerships are easy to form.

The only requirement before the partnership commences operations is for
the partners to agree on basic aspects of the business like the nature of the
business, location, capitalization, and so on. A written agreement called the
contract of partnership is drawn to formalize what has been agreed upon.
2) More Funds Available. The combined resources of the partiers provide a b
source of funds. The condition leads to a higher credit rating for the partner
The resource potentials of the partners combined with a high credit rating
res a formidable financing capability for the partnership.
3) Pooling of Knowledge and Skills. The combined knowledge and
skills of the partners provide the partnership with a distinct
advantage. One partner, for instance, may possess the required
skills in manufacturing, while another has the skills in accounting,
and another in marketing. These skills may be used to the
advantage of the partnership.
4) Ability to Attract and Retain Employees. Attracting and retaining
the employees is a difficulty inherent to sole proprietorships.
Partnerships have the ability to overcome this difficulty by offering
partner status to valuable employees.
5) Tax Advantage. The income of the partnership to not taxed
separately from the partners' incomes. Any profits derived by the
partners are treated and taxed as their individual incomes.
 Disadvantages of Partnerships

1) Unlimited Liability. Partnerships, like sole proprietorships, are

saddled with g disadvantage of unlimited liability: Although one or
two partners may opt to have limited liability; the remaining partner
or partners carry the burden of unlimited liability.
2) Limited Life. When a partner dies or withdraws from the business, the
partnership is terminated. The life of the partnership, in essence, is
more limited than the so proprietorship. Whereas, the sole of
proprietorship depends on the state of health and willingness of the
sole owner to continue, the life of the partnership depend on the health
and willingness of all the partners.
3) Potential Conflict Between Partners. There are occasions when
partners disagree on certain ways of operating the business; and
there are many potential areas for disagreement. Among these are
adding new product lines, hiring new employees decisions on credit
extensions, and granting employee welfare benefits.
4) Difficulty in Dissolving the Business. Partnerships are not as easy
to dissolve a sole proprietorships. Atter dissolving the sole
proprietorship, whatever assets o liabilities left are the concern of
the sole owner alone. In partnership dissolution, it may not be easy
to divide whatever assets are left for distribution to the partners.
This is because the assets may be fixed or immovable. More
difficult dissolution happens when liabilities are to be shared by the
partners.
Types of Partnership

A.General Partnership- is an association of two

or more persons, each with unlimited liability,
who are actively involved n the business.
B.Limited Partnership- is an arrangement in
A.
which General Partnership-
the liability of oneis anor more partners is
association of two or more persons,
limitedeach
to with
the unlimited
amountliability,
of assets
who
they have
invested in theinvolved
are actively business.
n the business.
B. Limited Partnership- is an
arrangement in which the liability of
Corporation

A corporation is an enterprise chartered by law, with most of

the legal rights of a person, including the right to conduct a
business, to own and sell property, to borrow money, and to
sue or be sued. The corporate form of business is the third
ownership option open to businesspersons. Owners of
corporations are called stockholders. They are issued
certificates of ownership called stocks. Some of these stocks
are openly traded in the country's stock exchange.
 Advantages of Corporations

1. Limited Liability. The liability of stockholders is limited to the amount

of their shareholdings. A stockholder may lose the entire value of his
stocks in the event of a bankruptcy. Beyond the said value, he has no
more liability.
2. Ease of Expansion. The authority granted to corporations to sell its
own shares of stock provides a means to pool large amounts of funds.
The price per share of the stocks could be made low enough to attract
even the smallest investor. Because the ownership of the stocks can be
easily transferred, this provides more reason for the investor to buy
stocks. The ability of corporations to accumulate large amounts of
capital makes it easier for them to consider business expansion.
3. Ease of Transferring Ownership. If a stockholder loses interest
in the corporation he partly owns, he may disassociate himself
from it by selling or donating his shares to another person. In
effect, the ownership of a corporation may change as often as it
could without actually dissolving it.
4. Relatively Long Life. Corporations may be established to have
lives of up to 50 years and may be extended indefinitely through
renewals of documents. Since ownership is readily transferable,
the death or withdrawal of any or all stockholders does not
terminate the corporation. This advantage makes the corporation
the most stable among the three major forms of ownership.
5. Greater Ability to Hire Specialized Management. The
expanded operations of corporations make it possible to
divide the overall job into smaller specialized positions.
As the various positions will be quite dissimilar from each
other, the demand for management expertise will be a
little more exacting than those required for sole
proprietorships and partnerships. The said requirement
paves the way for hiring fully trained management
experts. With specialized management, the corporation is
provided with the opportunity to grow and develop more
vigorously.
 Disadvantages of Corporations

1. More Expensive and Complicated to Organize. Among the

three major forms of ownership, more time and money are
required to organize a corporation. It takes months or even
years before a corporation can begin serving its customers. It
may start operations only after receiving a certificate of
incorporation from the Securities and Exchange Commission
(SEC). The SEC will only issue the certificate of incorporation
if it finds that the articles of incorporation are fully compliant
with the requirements.
2. Double Taxation. The profits derived by stockholders are
taxed twice by the government. First, when the corporation
realizes profits, and second, when individual stockholders
declare the dividends they receive from the corporation as part
of their personal income. This disadvantage is not present in
sole proprietorships and partnerships.
3. More Extensive Government Restrictions and Reporting
Requirements. Corporations are subject to stringent
government restrictions and are required to submit various
reports on a periodic basis. An example of a restriction is the
prohibition of certain actions by the corporation without the
approval of the SEC.
4. Employees Lack Personal Identification With and
Commitment to Corporate Goals. Many stockholders are
detached from the daily operations of the corporation.
Those who work for the corporation mostly do not own
the company's stocks. The relationship between the
corporation and employees is too impersonal. Employees
do not feel deep attachment to the corporation, resulting
in less commitment to his work. Employees of sole
proprietorships and partnerships most often know the
owners personally. This feeling of attachment pushes the
employee to make the company successful. Such concern
is rarely present in a corporate work atmosphere.
MODIFICATIONS OF THE
CORPORATE FORM OF
OWNERSHIP
A cooperative is defined as "an organization
composed of individuals or small businesses that
have banded together to reap the benefits of a
larger organization.”
Cooperatives are not organized for profit, but to
make its members individually profitable or to save
money.
 Cooperatives are of various types. They are classified according to the special
interests of its members. They are as follows:
1. Credit Union - accepts deposits from members and lends
money to its members at a very reasonable interest rate.
2. Producers Cooperative - assists one another in the
1. Credit Union - accepts deposits
procurement of raw from members andmachinery,
materials, lends money to its members at a very
equipment, and reasonable interest rate. 2. Producers
Cooperative - assists one another in the procurement of raw materials, machinery, equipment, and other time-saving devices. 3. 4.
otherCooperative
Marketing time-saving devices.
- assists members in the marketing of their produce. Consumers Cooperative - provides members with
quality goods and services at reasonable prices. 5. Service Cooperative - makes services readily available and at a lower price.
3.
Mutual Marketing
Companies Cooperative
A mutual - assists members
company is a financial-service ininsurance
firm (such as an the company or a savings and loan association)
owned by its policyholders or depositors
marketing of their produce.
4. Consumers Cooperative - provides members with quality
goods and services at reasonable prices.
5. Service Cooperative - makes services readily available and
at a lower price.
 Mutual Companies

A mutual company is a financial-service firm (such as an insurance company or

a savings and loan association) owned by its policyholders or depositors. Mutual
companies may be classified according to products or services they carry. They
are as follows:
1. Mutual Savings Banks - are owned by depositors and specialize in
savings and mortgage loans. The profits of the company are
credited to the account of the depositors.
2. Mutual Insurance Company - is a cooperative corporation
organized and owned by its policyholders. Voting control is in the
hands of the insured. Profits earned by the company can be used to
pay policy dividends to policyholders, and to strengthen the insurer
by building its surplus.
 OTHER FORMS OF
BUSINESS ORGANIZATION

1. The Joint Stock Company. as "a form of business

enterprise in which the capital is divided into small units
permitting a number of investors to contribute varying
amounts to the total, profits being divided between
stockholders in proportion to the number of shares they
own." The disadvantage of joint stock companies,
however, is they lack the legal personality to enter into
contracts and hold title to real property.
2. The Joint Venture. It is best regarded as a particular partnership
established for a specific undertaking. This type of organization
is created for the purpose of bringing together several partners
to engage in a business activity, which is normally very
specialized and which exists for a limited, specific purpose.
3. The Business Trust. It is a legal form of organization in which a
trustee is appointed to manage the business and its operations
through a trust relationship. Under the trust agreement, the
owners of property, securities, or other assets convey these to a
trustee in exchange for transferable trust certificates. The
certificates entitles the owners to participate in the profits of the
operation.