Chapter 6: LEGAL FORMS AND CHARACTERISTICS OF BUSINESS

ORGANIZATION

FORMS OF BUSINESS ORGANIZATION

There are three forms of business organization based on ownership structure. These are
sole proprietorship, partnership, and corporation. A wise manager should consider the
characteristic of the business organization that he or she wishes to establish n making
the business plan as each present’s unique advantages, opportunities, and challenges.

SOLE PROPIETORSHIP
Sole proprietorship are companies owned by one person who is usually hands-on in
managing the day-to-day activities. Many small businesses start in this type of business
ownership. Sole proprietor owns the entire business, including all assets and profits.
Since they own all the assets, sole proprietors are also responsible for all the liabilities of
the business ASSETS are resources with economic value that are own and controlled by
the business owners. Example of assets are facilities, equipment, machinery, cash, office,
supplies, and raw materials. LIABILITIES are debts or obligation which arise in the course
of the business operation.

Sole proprietorship are also considered single taxpayer and are assigned a single Tax
Identification Number (TIN). Owners also apply for a business trade name and register
the business with the Department of Trade and Industry.

ADVANTAGES AND DISADVANTAGES OF A SOLE PROPRIETORSHIP

The main advantage of a sole proprietorship is that it is the most manageable and least
expensive form of ownership. Proprietors have complete control over the business and
can make decision based on their own judgement. Thus, it is easy to implement changes
in the business setup. Furthermore, if desired by the owner, the business can also be
easily dissolved.

However, the disadvantage is that sole proprietors have unlimited liability since they
assume all the debts of the business. They may put personal assets at risk when the
business experiences losses. Obtaining additional capital is also difficult because of a low
guarantee of profitable to lenders. There is also a possibility that high skilled employees
will not advance in their carriers and to get attractive compensation packages.

PARTNERSHIP

Partnership is a form of business organization where ownership of the business is

shared by two or more members. The partners mutually agree as to how decisions will
be made and how the profits and losses will be shared. They also agree on how future
partners will be admitted and how disputes will be resolved legal. The amount of
contribution, the type of work to be inputted, and the time to be devoted by each partner
is also outlined to ensure a clear distinction of responsibilities. Under the civil code of the
Philippines is considered a juridical person or an entity having a separate legal personality
from the partners. A partnership can either be a general partnership or a limited
partnership.

GENERAL PARTNERSHIP is a form of partnership wherein the partners have unlimited

liability for the debts and obligations of the partnership.
LIMITED PARTNERSHIP is a form of partnership wherein one or more general partners
have unlimited liability and the limited partners have liability that is only up to the amount
equal to their capital contribution.

Partnerships with a capital of more than three thousand pesos should register with the
SEC. Income tax computations for partnership are the same with corporations

ADVANTAGES AND DISADVANTAGES OF A PARTNERHIP

One of the of a partnership is its wider capital base. Having more partners in the
business allows for diversification of the contributed monetary funds, skills, and
resources. Expansion is also easier since there are more people who will manage the
different branches of the business. In addition, those who would like to be employed in
the partnership may be attracted by the incentive of becoming a partner later on.

One disadvantage od partnership is that a partner jointly liable for all the obligations
and affect stemming from the decision of the other partners. Unless the individual
responsibilities and liabilities are clearly delineated, this may cause this may cause
disagreement among the partners. Partnerships have a limited life because of its general
instability. This instability is not referring to business unprofitability but rather to several
internal factors which makes the partnership vulnerable to dissolution. These internal
factors include the death, withdrawal, or insolvency of a partner.

CORPORATION

The third of business organization is the corporation. A corporation has a distinct

personality separates from its owners. This means that it is treated like an individual
person with benefits from certain rights as well as obligations and responsibilities. A
corporation can enter into a contracts, secure loans, sue and be sued, hire employee,
and pay taxes. A corporation has a minimum of five and maximum of fifteen owners who
are called shareholders. Each shareholder owns a part of a company and has some
authority over its direction. Shareholders elect a board of directors who oversee the major
policies and decision of the corporation.
 A corporation is owned and establish under the corporation code and regulated by the
SEC. The shareholders of the corporation are also registered with the SEC and are
assigned at least one share of the company stock. The total shares of the company stock
that shareholders may acquire will depend on the capital they have invested into the
company. Their liability is only up to the extent of their share capital. The minimum paid-
up required of the corporations of the Philippines is five thousand pesos.

Corporations are subjects to tax, which is separate from the individual taxes of its
shareholders. Corporate taxes are not deductible from the individual taxes of its
shareholders. This is because the corporation is a separately entity distinct from its
shareholders.

There are two types of corporation. These are as follows:

A STOCK CORPORATION has a capital stock divided into shares and dividends. Surplus
profits are given to shareholders depending on the number of shares held.

A NON-STOCK CORPORATION does nor issue share of stock and is established

primarily for public interest such as foundation to charitable, educational, social, cultural,
and other similar purposes.

ADVANTAGES AND DISADVANTAGES OF A CORPORATION

One of the advantages of the corporation is its limited to liability to its shareholders.
They can be held accountable for their individual investment of shares in the corporation
another advantage is that a corporation can deduct the benefits it provides to its
employees and consider them as expenses.it also has general stability since the death
or withdrawal of one shareholder does not result in its dissolution.

The process of forming the corporation or incorporation is more complicated than

forming a sole proprietorship and partnership. A corporation is closely monitored by the
government and other local agencies like the SEC. Thus, more paperwork is required of
a corporation to comply with permits and other legal requirements.

COOPERATIVES

A cooperative organized and controlled by its members, who pool resources together to
provide themselves and their patrons with goods, services or other benefits.

Advantages
Owned and controlled by members
Democratic control (one member, one vote)
Limited liability
Profit distribution (surplus earnings) to members in the form of dividends
Dividends are in proportion to a member’s use of cooperative services
Highly encouraged by government due to benefits received a greater number of people

Disadvantages
Possible development of conflict between members
Numerous members tend to diminish one’s share in total dividends
Longer decision-making process than corporations due to more votes to count
Requires members to participate for success
Extensive record keeping necessary
Less incentives for members to invest additional capital