forms of business ownership by: mrs. belen apostol

FORMS OF BUSINESS OWNERSHIP

By: Mrs. Belen Apostol


The form of business ownership that will have to be adapted is a strategic decision that must be considered at the inception of the business. The decision may later prove to be supportive of the objectives of the owners, or may have turned out to be the biggest obstacle.

Three Major Types of Business:1.sole proprietorship, 2.partnership, and 3. corporation.


The minor types of business:

1. joint stock company, 2. the joint venture, 3. and the business trust.


Sole Proprietorship

The sole proprietorship is that type of business entity owned and operated by a single person.


Advantages of Sole Proprietorship

1.Ease and cost of formation; 2.Secrecy;3.Distribution and use of profits;4.Control of the business;5.Government regulation;6.Taxation; and7.Closing the business.


Ease and Cost of Formation. Among the three forms, the sole

proprietorships is the easiest and least costly to organize. The only requisites for its legal existence are the following:1.The sole owner’s resolve to start operating;2.Getting the required permits and licenses.


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 advantage of keeping his intentions secret. As he does not have, and is not required by law, to share information with anyone, he can proceed with his activities in secrecy. His competitors can only guess what his intended moves are.


Distribution and Use of Profits.

If because of his efforts, the business made much profits, the sole proprietor is the sole beneficiary. He does not have to share these with anyone.


Control of the Business.

The sole owner is also vested with the power to control solely the business. This sole authority is very important especially under critical competitive situations.


Government Regulation.

The sole proprietorship is spared from various government rules which apply to partnerships and corporations. Also, sole proprietorships are required by the government to submit fewer reports.


Taxation.

The net income of the sole proprietorship is treated as the personal income of the sole owner and is taxed accordingly.


Closing the Business.

Sole proprietorships can be dissolved by the owners at will.

If business conditions had become unprofitable, the sole proprietor has the advantage of immediate cessation of operation. This allows him to cut his losses to the minimum.


Disadvantages of Sole Proprietorships 1.The owner’s possible lack of ability and experience2.The difficulty of attracting and keeping quality employees3.The difficulty of raising capital4.The limited life of the firm; 5.The unlimited liability of the proprietor


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 performed like those for marketing, production, finance, accounting, personnel, and research.


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.


Difficulty in 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 which becomes more difficult when credit is getting tight and interest rates become prohibitive. The difficulty in raising additional capital often aggravates the problem of meeting competition.


Limited Life of the Firm. The existence of the sole proprietorship

depends on the physical well-being of the owner

Unlimited Liability of the Proprietorship. Any liability incurred by the sole

proprietorship extends to owner’s personal assets.


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 formation2.Pooling of knowledge and skills3.Availability of more funds4.Ability to attract and retain employees; and5.Tax advantage


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 the like. A written agreement called the contract of partnership is drawn to formalize what has been agreed upon.


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. This condition also paves the way for specialization which is a very important competitive tool in business.


More Funds Available.

The combined resources of the partners provide a bigger source of funds. This condition leads to a higher credit rating for the partnership. The resource potentials of the partners combined with high credit rating result to a formidable capability for the partnership.


Ability to Attract and Retain Employees.

Attracting and retaining employees is a difficulty inherent to sole proprietorships. Partnerships have the ability to overcome this difficulty by offering partner status to valuable employees. This advantage also minimizes the potential harm that may be done by a key employee moving to a competitor.


Tax Advantage.

The income of the partnership is not taxed separately from the partners’ incomes. Any profits derived by the partners are treated and taxed as their individual incomes.


Disadvantage of Partnerships 1.Unlimited liability2.Limited life3.Potential conflict between partners; and4.Difficulty in dissolving the business


Unlimited Liability.

Partnerships, like sole proprietorships, are saddled with the 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.


Limited Life.

When the partners dies or withdraws from the business, the partnership is terminated. The life of the partnership, in essence, is more limited than the sole proprietorship.


Potential Conflict Between Partners. There are occasions when partners disagree

on certain ways of operating a business; and there are many potential areas of disagreement. Among these are the following:1.Adding new lines; 2.Hiring new employees;3.Decisions on credit extensions; and4.Granting employee welfare benefits.


Difficulty in Dissolving the Business. Partnerships are not easy to dissolve as proprietorships. After dissolving the sole proprietorship, whatever assets or liabilities left are concerns of the sole owner alone. In a partnership dissolution, it may not be easy to divide whatever assets are left for distribution to the partners. This is because some of the assets may be fixed or immovable.


Types of Partnerships

Partnerships may be classified according to the liability of the partners.

1.General partnership, and2.Limited partnership


A general partnership is an association of two or more persons, each with unlimited liability, who are actively involved in the business.

A limited partnership is an arrangement in which the liability of one or more partners is limited to the amount of assets they have invested in the business.


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.


Corporation

The corporate form of business is the third ownership option open to businesspersons. Owners of corporations are called stock holders. They are issued certificates of ownership called stocks. Some of these are openly traded in the country’s stock exchange.


Advantages of Corporation 1.Limited liability2.Ease of expansion3.Ease of transferring ownership4.Relatively long life; and5.Ability to hire specialized management.


Limited Liability.

The liability of stockholders are limited to the amount of their stockholdings. A stockholder may lose the entire value of his stocks in the event of bankruptcy. Beyond the said value, he has no more liability.


Ease of expansion. The authority granted to corporations to sell its own shares of stock provides a means to pool large amount of funds. The price per share of stocks could be made low enough to attract even the smallest investor. As the ownership of the stocks can be easily transferred, this provides more reason for the investor to buy stocks. The ability of the corporations to accumulate large amounts of capital, make it easier for them to consider business expansion.


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.


Relative 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.


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 enterprise will be a little more exacting than those required for sole proprietorship or partnerships.


Disadvantages of corporations 1.More expensive and complicated to organize:2.Double taxation3.More extensive government restrictions and reporting requirements ; and4.Employees lack personal identification with and commitment to corporate goals than those employed by sole proprietorship and partnerships


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 from Securities and Exchange commission (SEC) a certificate of incorporation if it finds that the articles of incorporation is fully compliant with all requirements.


The articles of incorporation contain the following:1.The name of the corporation; 2.Specific purpose or purposes3.Principal office of the corporation;4.Term of existence of the corporation5.Names, nationalities, and residence of incorporators;6.Number of directors or trustees;7.Names, nationalities, and residences of directors;8.Amount of authorized capital stock; and 9.Other matters


The treasurer’s affidavit indicating payment of minimum subscribed capital stock is also a requirement. The articles of incorporation and the treasurer’s affidavit must point by point; conform to the requirements of the corporation code. Complying with these requirements takes time, however, and this makes it a distinct disadvantage of corporations.


Double Taxation. The profits derived by stockholders are taxed

twice by the government. First, when the corporation realizes profits, and second, when the individual stockholders declare as part of their personal income the dividends they receive from the corporation.


More Extensive Government Restriction and Reporting Requirements.

Corporations are subject to stringent government restrictions and are required to submit various reports on a periodic basis.


Employees Lack Personal Identification with and Commitment.

Many stockholders are detached from the daily operation of the corporation. Those who work for the corporation usually do not own the company’s stocks. The relationship between the corporation and employees are too impersonal. Employees do not feel deep attachment to the corporation resulting to less commitment to their work.

Top 10 Corporations in the Philippines (based on Gross Revenue-2008 FY)

Source: Philippine Business Profiles and Perspectives Inc.'s Top 7000 Corporations: Business Profiles 2009-2010 Edition


Area of Concern

Sole Proprietorship

Partnership Corporation

1. liability of owners

Unlimited Limited/ unlimited

Limited

2.ease of expansion

Not easy Not easy easy

3.life of firm Dependent onthe owner

Dependent onthe partners

Independent of the owners

4.decision making

Can be madequickly

Tends to be slower

Tends to be the slowest

5.taxation of income

Once Once Twice

6.ease of formation

easiest easy Not easy


Modifications of the Corporate Form of Ownership 1.Cooperatives, and2.Mutual companies


Cooperatives

A cooperative is an organization composed of individuals or businesses that have banded together to reap the benefits of belonging to a large organization. Cooperatives are not organized for profit but to make its members individually profitable or save money.


Cooperatives

A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles (Sec.3, RA#6938).

Every cooperative shall conduct its affairs in accordance with Filipino culture and experience and the universally accepted principles of cooperation which include the following:

(1) “Open and Voluntary Membership”: Membership in a cooperative shall be voluntary and available to all individuals regardless of their social, political, racial or religious background or beliefs.

• (2) “Democratic Control”: Cooperatives are democratic organizations. Their affairs shall be administered by persons elected or appointed in a manner agreed upon by the members. Members of primary cooperatives shall have equal voting rights on a one-member-one-vote principle.

• (3) “Limited Interest in Capital”: Share capital shall receive a strictly limited rate of interest.

• (4) “Division of Net Surplus”: Net surplus arising out of the operations of a cooperative belongs to its members and shall be equitably distributed for cooperative development common services, indivisible reserve fund, and for limited interest on capital and/or patronage refund in the manner provided in the Code and in the articles of cooperation and by-laws.

• (5) “Cooperative Education”: All cooperatives shall make provision for the education of their members, officers and employees and of the general public based on the principles of cooperation.

• (6) “Cooperation among Cooperatives”: All cooperatives, in order to best serve the interest of their members and communities, shall actively cooperate with other cooperatives at local, national, and international levels. (Sec.4, RA#6938)


Types of cooperatives. Cooperatives are various types. These are classified according to the special interest of its members. These are as follows: 1. Credit union. It accepts deposits from the members and lends money to its members at a very reasonable interest rate.2. Producers cooperative. Its purpose is to actually assist one another in the procurement of raw materials, machinery, equipment, and other time-saving devices.


Types of cooperatives

3. Marketing cooperative. Its purpose is to assist members in the marketing of their produce.4. Consumers cooperative. Its purpose is to provide members with quality goods and services at reasonable prices5. Service cooperative. Its purpose is to make services readily available and at a lower price.

6. Multi-Purpose Cooperative is one which combines two or more of the business activities of these different types of cooperatives.


Mutual Companies

A mutual company is a financial-service firm (such as an insurance company or a savings and loan association) owned by its policy holders or depositors.


Types of Mutual Companies. Mutual companies may be classified according to products or services they carry. 1. Mutual saving banks. It is owned by depositors and specializes in savings and mortgage loans. The profits of the company are credited to the account of the depositors.


Types of Mutual Companies2. Mutual insurance company. It is a cooperative corporation organized and owned by its policyholders. Voting control is in the hands of those 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.Joint stock company;2.The joint venture; and3.The business trust.


The Joint Stock Company

The joint stock company is a form of 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 Joint Stock CompanyAdvantages: 1.fewer taxes, 2.greater ease of formation, 3.mobility, and 4.freedom from government regulation.Disadvantages:1.lack legal personality to enter into contracts and2. hold title to real property.3.the unlimited liability


The Joint venture

A joint venture 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.


The Business Trust The business trust 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 entitle the owners to participate in the profits of the operation. The liability is transferred to the trustees, however.

forms of business ownership by: mrs. belen apostol

Documents

business trust

business conditions

forms of business ownershipby

sole owners

major types of business

sole authority

sole beneficiary

type of business entity