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Business Organization
A business (also known as enterprise of firm) is an organization designed to
provide goods, services or both to consumers. Businesses are predominant in capitalist
economies, in which most of them are privately owned and formed to earn profit to
increase the wealth of their owners. Businesses may also be not-for-profit or state-
owned.
There are several common forms of business according to ownership such as:
1. Sole Proprietorship. It is the simplest form of business organization. It is owned by
only one person who generally acts as the manager of the business. The capital of the
business may be solely financed by the owner or may be partially financed by a
creditor. Most sari-sari stores in the Philippines are sole proprietorship.

Advantages of a Sole Proprietorship

1. Ease of Formation. Sole proprietorships are much easier to establish than other
forms of business organizations. It does not have to go through a rigid
registration process before it can operate.
2. The owner has full control of the business. The owner can single-handedly decide
on matters pertaining to the business. Sole proprietors can easily make decisions
to solve problems faced by the business. The importance of fast decision-making
is emphasized when problems warrant immediate action. Sole proprietorship
does not experience internal conflict regarding business decisions.
3. Owners can mix personal and business assets. Owners may freely mix their
personal assets with business assets since sole proprietorships are not separate
juridical entities distinct from the owners. If a business is experiencing financial
difficulties, a sole proprietor may use personal assets to help the business recover.
4. Owners have all the profits for themselves. All the profits generated by a
business operating as a sole proprietorship belong to the owner.

Disadvantages of a Sole Proprietorship

1. Unlimited liability. An owner of a sole proprietorship is personally liable for all
the debts incurred by the business since it has no separate legal existence distinct
from the owner. Unlimited liability means that creditors, customers, the
government, and other outside parties can go after the personal assets of the
owner even after extinguishing all the assets of the business in the satisfaction of
their claims. The sole proprietor will not only lose his investment in the business;
it is possible that he may also lose all personal assets as well.
2. Difficulty of raising additional capital. When all the initial investments are used
up, the owner is the only person that can provide additional capital. The only
remedy available to the business it to look for creditors willing to lend additional
funds.
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3. Owner’s bias. Only the sole proprietor has the authority to make decisions for the
business. When deciding how the company will move forward, the owner always
has the final word. This can possibly be detrimental to the business especially
when owner’s bias prevails and he does not make rational decisions.
2. Partnership. A partnership is formed by two or more persons who agreed to
contribute money, property or industry into a common fund with the intention of
dividing the profits among themselves. (Art. 1767 of the New Civil Code). Each
partner acts as an agent of the partnership in the absence of any agreement to the
contrary.

General Features of a Partnership

1. Separate legal existence. A partnership can also be defined as an artificial being
created by operation of law. This results in partnership having juridical
personalities separate and distinct from their owners (called partners).
2. Mutual agency. Partners, being co-owners of the business, can perform acts for the
partnership even without asking permission from the other partners. Mutual
agency means that the acts of a partner are binding on a partnership even though he
has no authority to do so as long as the act concerns the normal business operations
of the partnership.
3. Unlimited liability. Even though a partnership has separate legal existence, partners
are still liable for debts and obligations that cannot be paid by partnership assets.
Creditors and other parties can go after the personal assets of the partners when
partnership assets are not enough to satisfy their claims. Creditors can claim the
deficiency from any of the partners or from all the partners.
4. Limited life. The life of a partnership can be easily ended through partnership
dissolution or liquidation. Partnership dissolution occurs when one of the partners
withdraws from the partnership or if a new partner is admitted. Dissolution occurs
when there is a change in the relationship among the partners. Dissolution of the
partnership does not necessarily mean that the partnership will cease to exist.
Withdrawal and admission of partners are normal occurrence in a partnership, and
they only lead to the formation of a new partnership.
Partnership liquidation, on the other hand, ends the operation of the
partnership. During liquidation, partnership assets are sold, liabilities are paid, and
the remaining assets are distributed to the partners. Liquidation ends the life of the
partnership.
5. Co-ownership of partnership property. In the formation of a partnership, partners
contribute money, property, and industry into a common fund. Once a partner has
contributed his money and/or property, it does not belong to him anymore. The
contributed money and property belong to the partnership and the partners only
have a proportionate share of partnership assets.
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Profits (or losses) of the partnership do not also belong to a specific

partner. All partners have a claim on a definite portion of the profits. The
distribution of the profits should follow a profit-sharing scheme agreed upon during
the formation of the partnership. If there is no profit sharing scheme, profits (of
loss) are distributed according to the original capital distributions of the partners.
6. Partnership agreement. The definition provided by the law states that a partnership
is a contract. Contracts are perfected through oral or written agreement. Thus, a
partnership can be formed orally or in written form. However, to protect the
interests of all partners, it is ideal to form a partnership in a written contract. The
written contract is called the articles of partnership, and it contains the following
information:
a. Name of the partnership
b. Location of the principal office of the partnership
c. The names, citizenship, and residence of the partners
d. Term for which the partnership is to exist
e. The purposes for which the partnership is formed
f. Original capital contribution of the partners
g. Profit and loss sharing agreement among the partners
The articles of partnership may also contain stipulations pertaining to
admission and withdrawal of partners, death of a partner, and partnership
liquidation. The articles of partnership should try to anticipate all situations that a
partnership may encounter.

Advantages and Disadvantages of a Partnership

Advantages Disadvantages
 Easier to create than a corporation  Unlimited liability
 Better ability to acquire additional  Mutual agency
capital than sole proprietorship  Limited life
 Larger pool of human capital than
sole proprietorship

3. Corporation. A corporation is an artificial being created by operation of law having

the right of succession and the power, attributes and properties expressly authorized by
law or incident to its existence. (RA No, 11232 known as the Revised Corporation Code
of the Philippines). A corporation has a greater source of capital compared to the sole
proprietorship and the partnership.
This definition emphasizes four things about a corporation.
1. A corporation is an artificial being. It means that it is an entity separate and
distinct from its owners.
2. A corporation is created by operation of law. Individuals cannot form a
corporation by themselves. The law must play a role in the formation of a
corporation.
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3. A corporation has the right of succession. Ownership rights can be passed to

other persons through sale, donation, or any other mode of transfer.
4. The law is the source of the powers and attributes of a corporation. Being the
source, the law can likewise restrict the authority of corporations in
performing acts.

General Features of a Corporation

1. Separate legal existence. A corporation is treated by law as an artificial being
separate and distinct from its owners. A corporation can enter into contracts and
transaction under its name. It can also perform acts that can be done by natural
persons except those that are purely personal in nature such as voting and holding
positions in public office. In a corporation, the acts of the owner or stockholders
generally do not bind the corporation. Owners or stockholders are often involved in
decision-making through voting but this does not give them the right to perform
acts for the corporation. A corporation has a management structure that is
composed of individuals with specific authorities.
2. Limited liability. Personal assets of the stockholders of a corporation are protected
from the claims of creditors and other outside parties. Thus, the maximum loss that
a stockholder can bear equals his investment. Even if the corporation is bankrupt or
has unpaid claims due to accidents and lawsuits, the stockholders cannot be
obligated to pay any deficiency.
3. Transferable ownership rights. Ownership rights in a corporation are represented
by stocks. A stock is an intangible (i.e., no physical form) asset evidencing a
proportionate share in the properties of a corporation. A stock is represented by a
stock certificate. If an individual has stocks of a corporation, he is an owner of the
company. Stocks can be transferred to other persons through sale, donation, or
other modes of transfer. Stocks of a corporation can be transferred even without the
consent of other stockholders unless the corporation is privately held. Moreover, a
corporation may sell additional stocks to existing stockholders or to other persons
outside the company. This enables a corporation to acquire additional capital with
relative ease.
4. Virtually unlimited life. A corporation shall exist for a period not existing 50 years
from the date of its formation. The term of a corporation may, however, be
extended for periods not existing 50 years. As long as the stockholders want to
continue business operations, they are allowed to extend the life of the corporation.
There is no limit to the number of extensions a corporation can avail of.
A corporation is also not affected by the withdrawal, death and admission of
stockholders. It can only change the composition of the owners of a corporation,
but these events do not require the stockholders to formulate new agreement.
5. Corporation management. The management structure of a corporation is more
complex than that of the other forms of business organizations. Stockholders are
the owners of a corporation. Stockholders may elect a board of directors to manage
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the corporation. The BOD represents the interest of the stockholders and they are
responsible for creating operating policies for the company. Stockholders can also
be a member of the board of directors.
6. Government regulations. Corporation are subject to stricter government regulation.
Being major contributors to the income of the whole economy, the operation of
corporations are closely monitored by the government.
7. Double taxation. The income of the corporation is taxed on the corporate level and
the individual level. The income of corporation is already taxed before being
distributed to the stockholders. Once a stockholder receives his share of the
income, it is included in his tax return and will be taxed for the second time.
8. Dividends. The corporation is not required to distribute to stockholders the income
it generated from operations. The stockholders of a corporation will only be
entitled to receive a share of the income once the board of directors approves the
distribution. The income distributed to stockholders is called dividends. Dividends
may be in the form of cash, stock, or property. Cash dividends are distribution of
income in the form of cash. It is normally stated as a nominal amount of per share
of stock. Even though the approval of the board of directors is necessary before
income can be distributed, dividends are given to the stockholders on a regular basis
to keep them happy. If stockholders do not regularly receive dividends, they tend to
become dissatisfied and sell their stocks.

Advantages and Disadvantages of a Corporation

Advantages Disadvantages
 Ability to acquire additional  Heavily regulated by the
capital government
 Transferable ownership rights  Double taxation
 Limited liability of stockholder  Not easy to form
 Virtually unlimited life  More expensive to form
 Large pool of human capital

4. Cooperative. A cooperative is an autonomous and duly registered association of

persons, with a common bond of interest, who have voluntarily joined together to achieve
their social, economic and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and services and
accepting a fair share of risks and benefits of the undertaking in accordance with the
universally accepted cooperative principles. (RA 9520 known as Cooperative Code of
the Philippines of 2008). The Cooperative Development Authority is the sole
government agency mandated to register all types of cooperative.
According to the same Code, the primary objective of a cooperative is to provide
goods and services to its members and enable them to attain increase income and savings.
A cooperative may be formed by at least 15 persons for any of the following purposes:
1. To encourage thrift and savings mobilization among the members.
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2. To generate funds and extend credit to the members for productive and
provident purposes.
3. To encourage among members systematic production and marketing.
4. To provide goods and services and other requirements to the members.
5. To develop expertise and skills among its members.
6. To acquire lands and provide housing benefits for the members.
7. To insure losses of the members.
8. To promote and advance the economic, social, and educational status of the
members.

Other characteristics of a cooperative includes the following:

1. It can sue and be sued under its own name
2. It has the right of succession
3. Members of a cooperative are subject to limited liability
4. It shall exist for a period not exceeding 50 years from the date of formation.
The cooperative term may be extended for periods not exceeding 50 years.
5. Income of a cooperative (called net surplus) belongs to its members.

Classification of Business Organization Operation

A business organization is set up according to the nature of its operation or what it
intends to do. There are four (4) different types of business organization classified as to
the nature or purpose of its operation, they are:
1. Service Concern. Service concern is the simplest type of business which perform
service for a fee to a client or customer. It is a type of business which does something
instead of giving something to consumers. It provides work performed in an expert
manner by an individual or team for the benefit of its customers. The typical service
business provides intangible products and there is no transfer of ownership; thus, it
cannot transport or store a service. They only exist while the provider is supplying it
and the customer is consuming it. For example, a bookkeeping is a service rendered
by the accountant; you cannot transport or store bookkeeping. A teacher who teaches
in a school; you cannot take the teacher home but instead, he or she teaches students
in order to learn.
Operating Cycle – Service Business
Receives Pays
Render operating
Cash
Service expenses

A service concern business relies heavily on the skill of the human resources.
In order to succeed in this kind of business, the service provided has to constantly update
the skills and competence needed.
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2. Merchandising Business. Unlike service business, merchandising business has an

actual transferring of tangible goods from the seller to the buyer. The business is
conducted by buying finished goods and sell them in the same form. It is rarely that
the seller will add some features to the product; otherwise it is already a
manufacturing business.
Operating Cycle – Merchandising Business
The operating cycle of a merchandising business is longer than the service
business but shorter as compared to the manufacturing business. It starts with the
purchase of merchandise which is held for resale, sale of the merchandise, collection of
cash from customers on account and then the purchase and then the purchase of
merchandise again.

Cash Purchase
Merchandise

Collects cash or receivables Sell the merchandise

From sale of merchandise

3. Manufacturing. Manufacturing firms purchase raw materials, convert them into

finished products and sell these finished products at a profit.
Among the business activities, the manufacturing business is the most
complicated. It has a longer process compared to a merchandise business who buys
only their product from a manufacturer or wholesaler. A manufacturing business
manufactures their product. They buy the basic raw materials and transform them to
a finished product for reselling to the customer. The cost of the product
manufactured consists of the costs of the raw materials, direct labor and
manufacturing overhead needed to process the product. A manufacturer can be both a
wholesaler and a retailer.

Like a merchandising business, a manufacturing business derives their revenue

from selling their manufactured product. Example are Purefood, the manufacture
processed foods and sell them to the market. Honda Philippines manufactures cars
and
sell them to dealers. Apple manufactures laptops and cellphones and sell them
around
the world.
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Summative
Assessment

I. Identification. Place your answers on the spaces provided before the numbers.

________________ 1. An organization created by law that can be formed by one person.

________________ 2. A business organization that derive their income from the sale of
finished products they have produced.
________________ 3. Also known as Revised Corporation Code of the Philippines.
________________ 4. Concerned with the planting of crops or raising animals, and
selling of their products either in raw or finished form at a profit.
________________ 5. Business firms that render services to clients.
________________ 6. A business organization that is created by mere agreement.
________________ 7. Simplest form of business organization.
________________ 8. A business firm that derive their income from sale of
merchandise.
________________ 9. Also known as Cooperative Code of the Philippines of 2008.
________________10. A written contract in partnership.

II. Classification of Business Organizations. Write S for sole proprietorship, P for

partnership, C for corporation and O for cooperative.

_____ 1. Globelines, Inc.

_____ 2. Grande Enterprise
_____ 3. Philippine National Bank
_____ 4. PLDT
_____ 5. Villareal Law Office
_____ 6. Sunrise Cooperative
_____ 7. Sycip, Gorres and Velayo & co. Accounting Firm
_____ 8. Mang Tomas Sari-Sari Store
_____ 9. ABC Partnership Ltd.
_____10. Potato and Potato Law Office
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[Link] or False. Write true if the statement if correct, otherwise write false. Write
your answers on the spaces provided before the numbers.
_______ 1. A corporation is formed by 5 to 15 persons.
_______ 2. A cooperative has limited life and unlimited liability.
_______ 3. A partnership is formed by at least two persons.
_______ 4. A cooperative is formed by mere agreement.
_______ 5. Manufacturing companies are those businesses that buys finished goods and
then offer those goods for sale.
_______ 6. Sole proprietorship is a type of business owned by two or more persons.
_______ 7. Service businesses are those that performs or offer service for a fee.
_______ 8. A corporation is a limited liability business that as the same legal personality
from its members.
_______ 9. A business is an organization designed to provide goods, services, or both to
consumers.
_______10. Merchandising businesses are those that bur raw materials convert them into
products and eventually offer those goods for sale.