FINMA 2000 / FINANCIAL MANAGEMENT

Prepared by: Ms. HAZEL JADE E. VILLAMAR

E-mail Address: [email protected]________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

FINMA 2000 / FINANCIAL MANAGEMENT

Module 11
FORMS OF BUSINESS ORGANIZATIONS

Overview

This course is designed to help the student understand our present

monetary standard including the structure of the Philippine financial system.
It teaches the student how our monetary and financial system works. It is
designed to teach students on the different kinds of financial markets and
their functions, the different kinds of mutual funds, the classifications of
options and types of options commonly traded over the counter.

I. Objectives

At the end of the module, the following are expected:

A. Identify the different forms of business organizations.

B. Describe the various kinds of partners and partnerships.

C. Understand and apply the rules in sharing profits and losses.

D. Define Corporation.

E. Identify the attributes of a corporation.

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II. Learning Activities

FORMS OF BUSINESS ORGANIZATION

The most important form of business organization was the sole proprietorship.
Almost all businesses were formed this way, but as soon as men began to combine their
abilities and capital in various undertakings, other forms of business organizations
developed such as partnership and corporation.
Several factors to help choose which form of business organization to select from:
- Ease of formation
- Liability of the owners
- Authority to manage the business
- Stability of the business
- Flexibility of operation
- Extent of government control
- Tax liability

Sole Proprietorship
- sometimes called Individual Proprietorship or Single Proprietorship. The first
type and most common type of business organization and it is a business owned and
operated by only one person.

Advantages of Sole Proprietorship

- Ease of formation
- Business decisions are only made by one person, the owner
- All profits accrue to the sole proprietor
- He has the sole authority to manage the business
- A Sole Proprietorship is more stable than a partnership

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- There is less government control in a sole proprietorship compare to partnership

and corporation
- It has flexibility of operation
- In as sole proprietorship, it is easy to transfer ownership without endangering
the existence of the business
- Business secrecy can be easily preserved

Disadvantages of a sole proprietorship

- Sole proprietorship has unlimited liability in that he is solely liable for business
debts even to the extent of his personal properties.
- Sole proprietorship has a limited ability to raise added capital for his business.
- Business does not pay a separate income tax from the other income of the owner
since the business is an extension of the personality of the owner.
- In case of problems the owner has no one to share the burden of decisions
making not withstanding losses if any.

Partnership
- exist when two or more people contribute money, property and services to a
common fund for the purpose of going into business for a profit. Here, profit will be
divided among the partners.

Kinds of Partners
1. General Partner - contributes money and / or properties to a general or limited
partnership and has general liability for partnership obligations when partnership is
insolvent.
2. Limited Partner - contributes money and / or properties to the limited partnership
but who is not liable for partnership obligations incase properties of the business is not
sufficient to pay partnership obligations; he can only lose what he contributed to the
business.

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3. Capitalist Partner - a general or limited partner who contributes money or

properties to the partnership business.
4. Industrial Partner - partner who contributes his services or industry to the
business.
5. Managing Partner - general partner in a general or limited partnership who is in-
charge with the management of the business either by agreement or pursuance to the
operation of law.
6. Ostensible Partner - partner whose name appears in the firm name and who is
known to the public as such.
7. Secret Partner - one who is a member of the partnership but is not known publicly
as a partner.
8. Dormant Partner - partner in the partnership but is passive and does not participate
in the partnership business.
9. Nominal Partner - one who is not actually a partner in the partnership but who by
his acts or omissions is made liable to third parties for partnership obligations.
10. Silent Partner - partner that cannot participate in the management and decision
making of the partnership.
11. Winding up or Liquidating Partner - partner who is in-charge with the
responsibility to wind up the affairs of the partnership upon dissolution of the
partnership.

Delectus Personarum refers to a right of a partner to choose the people he wants to

be partners with.

Juridical Personality refers to a legal entity inherent to both a partnership and

corporation in that the partnership and the corporation acquire a personality of its own,
separate and distinct from the personality of the owners.

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Kinds of Partnership
1. General Partnership - partnership where all partners are general partners with one
or more industrial partner
2. Limited Partnership - partnership where there are one or more general partners
with one or more limited partners.
3. Joint Venture - an association of two or more persons for the purpose of carrying
a particular business transaction or deal.
4. Joint Stock Company - hybrid between a partnership and a corporation. It has
some features similar to a partnership and also a feature similar to that of a corporation.

Features of a Joint Stock Company:

1. Management is in the hands of the board of directors
2. Ownership is divided into shares of stock
3. Stockholders have unlimited liability
4. Shares of stock can be transferred to others

Unlimited Liability - a partner who is answerable for partnership debt up to the extent
of his personal properties in case the partnership becomes insolvent.

Limited Liability - partner who is not liable for partnership debts. What he can only
possibly lose is his agreed contribution

The term industry - refer to human faculties susceptible to useful application whether
physical, intellectual or moral.

Partnership capital - refer to cash, goods and real properties such as land and
buildings. It may also include the use of a property owned by one or more of the
partners, an effective credit such as a promissory note or evidences of indebtedness
contributed to the fund.

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Features of a Partnership
1. Contribution to a common Fund
- Each partners must contribute money, property or industry to the common fund.
2. Voluntary agreement
3. Division of profits or losses
- The essence of partnership is that each partners must share in the profits or losses
of the venture.
4. Lawful business
5. Contents of articles of co-partnership should be known to all partners.
6. Relationship among partners is fiduciary in character in that the partners are
considered agent of the firm and that of the other partner in respect to all partnership
acts.
7. It has a separate and juridical personality from that of the owners.

Co-ownership arises when two or more person become co-owners of a property either
by agreement or by operation of law.

Partnership Distinguished from a Co-ownership

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• A Conjugal Partnership - arises from marriage. It considered an inviolable social

institution whose incidents are determined by law.

• A syndicate - organized for temporary undertaking.

• A partnership contract - may either be oral or written. When the partnership

contract is oral and the essential requisite of the contract is present, the contract is
binding.

Registration of a partnership is necessary for issuance of license to engage into

business. The determination of the capital to be contributed is necessary factor for
registration. The partnership cannot evade tax liability in this case. The public should be
able determine more accurately their membership and capital before dealing with the
business.

Failure in registration doesn't prevent partnership to acquire Juridical Personality.

When immovable properties are contributed by partners, the law requires that the
contract of partnership must be in writing and a public instrument. An inventory of the
properties must be made and attached to the public instrument. All immovable
properties acquired by partnership including interest there in must only be acquired in
the partnership name.

Under Philippine constitution, an organized partnership with 60% of the capital

of which is owned by aliens, is qualified under the constitution to own real properties
whether land, be it an agriculture, residential or commercial property.

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Advantages of a partnership

1. It is a simple form of organization. A partnership is most commonly adopted in the

exercise of a profession (Accounting, law, engineering etc.).
2. Efficiency in raising needed funds. Partners may easily raise needed capital funds
since there are more to contribute.
3. More efficient in obtaining credit. In partnership there are more general partners who
have unlimited liability for partnership obligations. Personal properties of general
partners can be used to settle partnership debt if the partnership asset are insufficient
to satisfy partnership obligation.
4. Flexibility of operation. Partnership business can easily shift from one business activity
to another provided that all partners agree.
5. Limited government control. If the partnership business shift to another activity or
expand, government approval is not necessary.
6. A registered general partnership does not pay income tax except when such profit
distributed to the partners. The partners are the ones who pay the income tax together
with their other income.
7. A partnership is operated more efficiently because of the presence of more owners
who are equally concerned with the business.

Disadvantages of Partnership

1. Easily dissolve and thus unstable compared to a corporation. Dissolution of

partnership takes place when there is a change in the ownership of the business.
2. Compared to a corporation it has less ability to raise the needed capital funds.
3. Unlimited liability of the general partners. It may create a personal obligation to
partners.
4. It is harder to achieve large-scale operation.

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Procedure in organizing a partnership

1. Register the name with the Bureau of Trade.

2. Prepare a notarized partnership agreement to be signed by all parties.
3. Apply for tax account number with the Bureau of Internal Revenue.
4. Register the partnership agreement or articles of co-partnership with the Securities
and Exchange Commission.
5. Apply for the municipal license of the firm with the local government.
6. Apply for the Value Added Tax Account Number of the firm with the Bureau of Internal
Revenue.
7. Register the firm's book of accounts, sales invoice and official receipts with the Bureau
of Internal Revenue.

Contents of the Partnership Contract

1. The partnership name (If limited partnership, the word limited is attached to its firm
name), nature, purpose and location.
2. The names, citizenship and residences of the partners.
3. The date of formation and the duration of the partnership.
4. Capital contribution of each partner.
5. When may the contribution of limited partners be returned?
6. The right and duties of partners.
7. The method of sharing profit or loss, frequency of income measurement and
distribution, including any provisions for the recognition of differences in contribution
8. Compensation for the services to be rendered by each partner
9. Treatment of additional investment and withdrawals of partners
10. Procedure of settlement of partnership assets upon dissolution
11. How may disputes be settled?
12. Accounting period whether Calendar year or Fiscal year is adopted

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13. The right given to a limited partner to substitute an assignee as contributor in his
place and the terms and condition of such substitution
14. The right to admit additional limited partner if agreed upon
15. The right of a limited partner if give, to demand a property other than cash in return
for his capital contribution.

When may a limited partner receive out of the general partnership property,
a return of part or all of his contribution?
1. If all liabilities of the partnership, except to general partners and to limited partners
by way of their contribution, have been paid and sufficient amount still remains to pay
them
2. If all the other partners consent to the return of their capital contribution
3. When the certificate of co-partnership is amended allowing the reduction of capital
contribution
4. After giving six (6) month notice in writing to all of the other partners provided there
is no time indicated in the certificate either for the return of their capital contribution or
dissolution of the partnership.

When is a limited partner liable to the partnership?

1. For any unpaid contribution he has agreed to make in the certificate of co-partnership
2. For the difference of his supposed contribution and the contribution he has actually
made to the business
A limited partner can only have the right to demand return of his contribution in
cash, even though he has contributed properties to the partnership.
Every partner is indebted to the partnership for whatever he has promised to
contribute. He shall be answerable for the interest and damages arising from the time
he should have complied with his obligation. A partner shall deliver to the partnership
at the beginning of the partnership or at a date designated, such capital, whether in
cash or in property.

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Authority of each partner

Each partner is an agent of the partnership for all business entered into by the
partners. They bind the firm for all acts that is apparently done by carrying on the
business of the partnership in the usual way. Agreement between partners may be made
which will limit the authority of any one of the partners to act in behalf of the
partnership. In case of limitation of the act of any partner, this is not binding to outside
parties unless, such party is aware of such limitation. Should the act be done outside
the partnership business, the partnership is not bound by the partner's act.

The following acts cannot be done partners without the consent of other partners.
• Assign partnership properties in trust for creditors
• Do acts that would prevent the business to be carried on in the unusual way
• Confess a judgement
• Sell the goodwill of the business
• Submit a partnership claim to arbitration
• Sell a part or all the properties of the partnership

The appointed manager in the articles of partnership may exercise all the acts of
administration despite the opposition of his partners, unless he should act in bad faith.
And if two or more partners have been entrusted with the management of the
partnership without specification of their respective duties, if one of them would oppose
the act of the others, the decision of the majority shall prevail. In case of tie, the matter
shall be decided by the partners owning the controlling interest.

When the manner of managing the partnership has not been agreed upon,
the following rules shall be observed:
1. All partner shall be considered agents
2. None of the partners may without the consent of other, make any important
alternation in the immovable property of the partnership even if it may be useful to the
partnership.

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Property rights of a partner

1. His right in a specific partnership property
2. His interest in the partnership
3. His right to participate in the management
A person admitted as a partner into an existing partnership is liable for all
obligations of the partnership arising before his admission except that this liability shall
be satisfied only out of partnership properties, unless there is a stipulation to the
contrary.

Distribution of Profit or Losses in a Partnership

Articles of 1797 of the Law on Business organization states, that profits and losses
shall be distributed in conformity with the agreement. In the absence of a stipulation in
the contract, sharing of profits or losses shall be in accordance with capital contribution.

Rules in Sharing of Profits

1. In accordance to stipulation in the contract.
2. In the absence of stipulation in the contract, profit is shared as follows:
a. Capitalist partners share profits in accordance to their capital contribution
b. If it is a partnership with capitalist and industrial partners, the industrial partner gets
a just and equitable share for the services he has contributed while the capitalist
partners share according to their capital contributions for the remainder of the profits
c. When a capitalist industrial partner exists, such partner gets a share in the profits as
an industrial partner and gets an additional share for his capital contribution.

Rules in the sharing of losses

1. Losses will be shared according to stipulation in the partnership contract
2. In the absence of a stipulation in the contract, but the contract provides for sharing
in profits, such profits, such profit sharing rates shall also be the same sharing for losses

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3. In the absence of a contract for sharing losses, the loss shall be shared on proportion
to their capital contribution.

A purely industrial partner does not share in the losses of the partnership because
industrial partner would have contributed his labor in vain and he cannot withdraw the
physical or mental contribution he has done for the partnership.

If a partner has received the return in whole or part of his contribution to the
business, he is liable to the partnership for any amount in excess of such return paid
with interest to creditors whose claims arose before the return is made of such capital
contribution.

When may a limited partner rightfully demand the return of his capital
contribution?
1. Upon the dissolution of the partnership.
2. When the date of the expansion specified in the certificate for the return of a limited
partner’s contribution has arrived.
3. After giving 6-month notice in writing to all other partners provided there is no time
indicated in the certificate either for the return of capital contribution or dissolution of
the partnership.

A partner is entitled to the return of his capital contribution only in the

following circumstances:
1. When all liabilities of the partnership to outside creditors and partner creditors are
paid and the remaining assets of the partnership is sufficient to pay him.
2. When the consent of the other partners are obtained.
3. When the certificate of agreement is amended, allowing the withdrawal or reduction
of the capital contribution.

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Dissolution of a Partnership
Dissolution takes place when the partners agree to cease operating the
business.

Causes of Dissolution
The following are the cause of dissolution:
1. When the term of existence as agreed in the Articles of Co-partnership is expired
2. When a partner expresses in good faith his decision to terminate his relationship with
the business as long as there is no definite term or particular undertaking specified in
the contract
3. By the express will or decision of the partners who have not assigned their interests
or allowed their interests to be charged for a separate debt, whether before or after a
termination of the specified term or undertaking
4. Expulsion of a partner in accordance with the power stated in the agreement
5. When the business of the partnership becomes unlawful
6. The death of a Partner
7. Insolvency of the partnership or any of the general partners
8. Civil interdiction of any partner
9. When the court issues a decree to that effect

Cases when the court issues a decree for dissolution of a partnership:

1. When a partner is declared insane in a judicial proceeding
2. When the partnership business can only be carried at loss
3. When a partner intentionally commits a breach on the partnership contract
4. When the acts of the partner or partners become prejudicial to the business
5. When a partner becomes incapable of performing his duties as specified in the
partnership contract

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In the settlement of partnership accounts upon dissolution the following order should
be followed:
1. Partnership Assets:
a. Pay debt to creditors other than the partner creditors
b. Pay debt to partner creditors other than their capital contribution
c. Return of partnership capital contribution
d. Division of profits in accordance with partnership agreement

2. Personal assets of general partners in case of emergency:

a. Pay personal debt of the partner
b. Pay partnership debt to outside creditors
c. Pay partnership debt to partner creditor other than his capital contribution

Article 1826 of the new Civil Code – states that persons admitted as a partner into
an existing partnership is liable for all the obligations of the partnership arising before
his admission as though he had been a partner when such obligations were incurred,
except that this liability shall be satisfied only out of partnership property, unless there
is stipulation to the contrary.

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Corporation
-an artificial being created by the operation of law, having the rights of succession, and
of the power, attributes and properties expressly authorized by law or incident to its
existence

Attributes of a Corporation
1. It is an artificial being.
2. It is created by the operation of law.
3. It has the right of succession.
4. It has the powers, attributes and properties expressly authorized by law or incident
to its existence.
Similarities features found in both a corporation and partnership
1. Corporation and partnership have a juridical personality
2. Both comprise of several people as part owners
3. Both act only thru their respective agents

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REFERENCE:
Laman, et.al.(2014). Financial System, Market & Management The Basics. Manila,
Philippines: GIC Enterprises & Co.,INC.

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