Chapter 4
Forms of Business Organization
Learning Objectives:
At the end of this chapter, the learners should be able to:
1. Differentiate the forms of business organization;
2. Identify the advantage of each form;
3. Compare and contrast the types of business according to activities; and
4. Identify the advantages, disadvantages, and business requirements of each
type.
Opening Case
Jose Mercado established JM Photocopying Center, a business engaged in
rendering photocopying services, using his personal savings and the money he
borrowed from his father. He rented a commercial space near the school gate and
hired a staff to operate the business.
What do you think is JM Photocopying Center’s type of business according to
ownership? What is JM Photocopying Center’s type of business according to
activity?
A business is an organization that utilizes resources and information, supplying
the wants and needs of the customers through goods and services.
There are several types of businesses, categorized according to ownership and to
activities.
TYPES OF BUSINESSES ACCORDING TO OWNERSHIP
There are four types of business according to ownership- sole proprietorship,
partnership, corporation, and cooperative. All of these vary in some aspects and
have different risks and benefits.
Sole Proprietorship
A sole proprietorship is a business that is owned by only one individual for the
practice of trade or profession. It is the simplest and least costly form of
ownership among other forms of business. However, a business under sole
proprietorship is quite risky since the owner assumes unlimited liability and in
most cases even his or her personal assets are on the line if the business cannot
pay the creditors. This form is common to small business entities like grocery
store, repair shop, and beauty parlor.
Advantages Disadvntages
Full control of operations Unlimited liability-the owner is
legally obliged to pay all
business debts
Easy to start, easy to dissolve Limited life-the business ceases
to operate if the owner dies,
becomes physically or mentally
incapacitated, or is imprisoned
All profits go directly to the Difficulty in raising capital
owner
Less regulations
The government taxes the
owner and not the business.
Steps Used in Registering Sole Proprietorship
Register the preferred business name with the Department of Trade and
Industry (DTI). The approved registration should be renewed every five
years.
Secure a barangay permit in the barangay where the business will be
located.
This permit should be renewed every year.
Apply for a business permit in the municipality where the business is
situated.
This permit is renewable every year.
Register the business with the Bureau of Internal Revenue (BIR). BIR
requires a sole proprietorship business to pay its registration fee every
year.
Register the business with Social Security System (SSS), Philippine Health
Insurance Corporation (PhilHealth) and Home Development Mutual Fund
(HDMF) or Pag-ibig.
Partnership
A partnership is a business that is owned by two or more individuals pooling their
resources together as common fund. The partners are normally involved in the
management and operation of the business. The profit of the business is divided
among the partners as per partners’ agreement. The written agreement between
or among partners is called articles of co-partnership.
The articles of co-partnership contains the following: name of partnership;
names of partners; place of business; partnership’s effectivity date; nature of
business; investments of each partner and the corresponding capital credit;
rights, power, and duties of the partners; accounting period; profit and loss
sharing; compensation for services offered by partners, and dissolution
procedures.
There are two main types of partnership. The first type is a general partnership
where each partner with unlimited liability. The second type is a limited
partnership with limited partners and at least one general partner. The general
partner has unlimited liability while the limited partners enjoy limited liability to
the extent only of their capital contribution.
Advantages Disadvantages
Increased potentials from two or Unlimited liability of one or all
more different strengths owners
Easy to form with proper Limited life-the business ceases
agreements on its formation to operate if one of the partners
dies, becomes physically or
mentally incapacitated, or is
imprisoned
Less regulations compared to High possibility of dispute and
corporations conflicts between partners
Steps Used in Registering Partnership
Verify business name with the Securities and Exchange Commission (SEC)
File articles of co-partnership with SEC
Register the business name with DTI (optional)
Secure a barangay permit in the place where business is located
(renewable every year)
Apply business permit in the municipality where the business is located
(renewable every year)
Register the business with the BIR (BIR requires an annual registration fee)
Register the business with the SSS, Philhealth, and HDMF
Corporation
A corporation is a business required to have five to fifteen incorporators.
Incorporators refer to those who originally formed the corporation. Section 2 of
the Corporation Code of the Philippines defines corporation as “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”.
It has a legal personality that is separate and distinct from the owners. The
owners have limited liability and limited involvement from the operations. The
Board of Directors, who are elected by the owners themselves, will take control of
the corporation’s activities. A profit corporation issues to its owners or
shareholders shares of stocks which are evidenced by stock certificates. A non-
profit corporation, on the other hand, does not issue shares of stocks. Its owners
are called members.
The existence of the corporation is evidenced by articles of incorporation and
by-laws that are duly approved by SEC. The articles of incorporation detail the
powers and limitations bestowed by the government. It includes the following:
name of corporation; purpose of corporation; location of principal office of
business; term of existence of the corporation; name, nationalities, and address
of incorporators, name of board of directors; authorized share capital, types of
shares to be issued, and par value per share, subscription amount, subscribers’
names, and their corresponding subscriptions; and the total paid subscriptions of
each subscriber.
By-laws contain provisions for internal administration of the corporation. These
normally contain the following date, place and manner of calling the annual
shareholders’ meeting; manner of conducting meeting; conditions which may
warrant special meeting; manner of voting and use of proxies; manner of electing
board of directors and the number of directors; term of office of directors,
manner of appointing officers; authority and responsibilities of officers,
procedures to amend articles of incorporation; and procedures to amend by-laws.
Advantages Disadvantage
More sources of funds More regulations to be followed
Easy to transfer ownership Profit is taxed at the corporate
tax rate
Liability of owners is limited Costly to incorporate
Unlimited commercial life Stockholders are taxed again
when profits are distributed to
them
Steps Used in Registering Corporation
Verify business name with SEC
Draft and execute the articles of incorporation and by-laws by
incorporators
Deposit the cash collected from subscription
File articles of incorporation and by-laws with SEC
Register the business name with DTI (optional)
Secure a barangay permit in the place where business is located
(renewable every year)
Apply business permit in the municipality where the business is located
(renewable every year)
Register the business with the BIR (BIR requires an annual registration
fee)
Register the business with the SSS, PhilHealth, and HDMF
Cooperative
A cooperative is a business that is owned by a group of individuals who also serve
as benefactors to the business endeavor. A cooperative usually requires at least
fifteen members to function. Usually, a board of directors and officers are elected
to manage the business operation. Members can become a part of the
cooperative by purchasing shares. A cooperative can either be incorporated or
unincorporated.