BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Handout # 1
ETHICS – is a set of moral principles and values that we use to answer questions of right and wrong.
o Also defined as the study of the general nature of morals and of the moral choices made by individuals in their relationship with
others.
ETHICAL RELATIVISM – it is our choices are based on what seems reasonable or logical to us according to our personal value system
because it cast ethics in the role of being relative to what the situation is or how we feel about it.

Business ethics – also called as Corporate ethics – is a form of applied ethics or professional ethics that examines ethical principles and
moral or ethical problems that arise in a business environment.
o Refers to contemporary (existing) standards or sets of values that govern the actions and behavior of an individual in the business
organizations.
Dimensions (aspect) of business ethics:
1. Normative dimensions – as a corporate practice and a career specialization
2. Descriptive dimensions – academics attempting to understand business behavior
SOCIAL RESPONSIBILITY – like ethics, it concept is distinguishing right from wrong and doing right.
o It is an ethical framework which suggests that an entity, be it an organization or individual, has an obligation to act for the benefit
of society at large.
o It is a duty every individual has to perform so as to maintain a balance between the economy and the ecosystem
Corporate Social Responsibility (CSR) – is a management’s obligations to make choices and take actions that will contribute to the welfare
and interests of society as well as the organization.
It is important to distinguish social responsibility and business ethics because:
o The concept of social responsibility suggests that: at any one time in any society, there is a set of generally accepted relationships,
obligations, and duties between the major institutions and the people or called by the Philosophers and political theorist as “the
social contract”.
The contract differs amongst societies and may change over time, like today we expect that businesses will take care:
o Not to pollute the air we breathe and water to drink
o Not to damage the ozone layer
o To offer fair wages and employee benefits
o To provide satisfactory product or service at a reasonable price, and
o To participate in making the community in which they operate a better place

BUSINESS – is an organization or economic system where goods and services are exchanged for one another or for money.
- Requires some form of investment and enough customers to whom its output can be sold on a consistent basis on in order to
make profit (www.businessdictionary.com).
- Also known as an enterprise, agency or a firm
- Is an entity involved in the provision of goods and/or services to consumers
- Can refer to a particular organization or to an entire market sector. The goal is for sales (income) to be more than expenditures
(expenses) resulting in a profit (“Business, 2016)

BUSINESS ORGANIZATION – is an entity formed for the purpose of carrying on commercial enterprise. Such an organization is established
on systems of law governing contract and exchange, property rights, and incorporation (www.britannica.com).

BASIC FORMS OF BUSINESS ORGANIZATIONS

1. Sole Proprietorship
2. Partnership
3. Corporation
4. Limited Liability Corporation
5. Cooperative

SOLE PROPRIETORSHIP
- A company owned by one person who is usually hands-on in managing the day-to-day activities
- own the entire business, including all assets and profits; and also responsible for all liabilities of the business
- considered as single taxpayers and are assigned a single tax identification number (TIN); and apply for a business trade name and
register with the Department of Trade and Industry (DTI)

Advantages of Sole Proprietorship:

- the most manageable and least expensive form of ownership
- proprietor have complete control over the business and can make decisions based on their own judgment
- easy to implement changes in the business setup
- if desired by the owners, the business can easily be dissolved
- tax savings
- few governmental regulations
Disadvantages of Sole Proprietorship
- have unlimited liability since they assume all the debts of the business that may put personal assets at risk when the business
experience losses
- obtaining capital is difficult because of low guarantee of profitable returns to lenders
- lack of continuity
- highly skilled employees will not be attracted to work in the business because of the low chance to advance in their careers and to get
attractive compensation package

PARTNERSHIP
- is a form of business where ownership of the business is shared by two or more members (as long it was registered as partnership; its
objective is to share the profit among themselves according to the agreed contract)
- the agreed contract may include but not limited to:
o the partners mutually agree as to how decisions will be made and how the profits and losses be shared
o they agree on how future partners will be admitted and how disputes will be resolved legally
o 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 Civil Code of the Philippines, a partnership is considered a juridical person or an entity having a separate legal personality from
the partners
- partnership with a capital of more than three thousand pesos (P3,000.00) should register with the SEC
- income tax computation is the same with corporations
- a partnership can either be a general partnership or a limited partnership

Advantages of Partnership:
- Easy to establish; however, time should be invested in developing the partnership agreement
- Wider capital base – having more partners involved in the business allows for diversification (change/modification) of the contributed
monetary funds, skills, and resources
- Expansion is easier since there are more people will manage the different branches of the business
- Those who would like to be employed in the partnership may be attracted by the incentive of becoming a partner later on

Disadvantages of Partnership:
- Partners are jointly liable for all the obligations and effects stemming (stopping) from the decisions of the other partners
- Since decisions are shared, disagreement among the partners may occur unless the individual responsibilities and liabilities are
clearly delineated
- Have limited life because of its general instability – instability is not referring to business unprofitability but rather to several internal
factors which make the partnership vulnerable to dissolution – internal factors include death, withdrawal, or insolvency (bankruptcy)
of a partners

TYPES OF PARTNERSHIP
General Partnership – partnership divide responsibility for management and liability, as well as the shares of profit or loss according
to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
Limited Partnership and Partnership with Limited Liability – “Limited” means that most of the partners have limited liability (to
the extent of their investment) as well as limited input regarding management decision, which generally encourages investors for
short-term projects, or for investing in capital. It is more complex and formal that general partnership (limited partners have liability
that is only up to the amount equal to their capital contributions)
Joint Venture – acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint
venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated
partnership assets upon dissolution of the entity (Kenner & Speck, 2016)

CORPORATION
- Has a minimum of five to a maximum of 15 incorporators/owners
- Has a distinct (different) personality separate from its owner – it is treated like an individual person with benefits from certain rights
as well as obligations and responsibilities
- Can be either government-owned or privately owned
o Privately owned – if for profit corporation is owned by its shareholders, who elect a board of directors to direct the corporation
and hire its managerial staff
- Can enter into contracts, secure loans, sue and be sued, hire employees, and pay taxes
- Has shareholders that owns a part of the company and has some authority over its direction
- Elects a board of directors who oversee the major policies and decisions of the corporation among the shareholders.
- Owned and established under the Corporation Code and regulated by the SEC
- Shareholders of a 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 (Articles of
Incorporation)
- The liability is only up to the extent of their share capital
- The minimum paid up capital required of corporations in the Philippines is P5,000
- Subject to tax, which is separate from the individual taxes of its shareholders – corporate taxes is not deductible from the individual
taxes of shareholders (because of its separate entity)
 Advantages of a Corporation
- Shareholders have limited liability for the corporation’s debt
- Only held accountable for their individual investment of shares/stocks in the corporation
- Corporation can deduct the benefits it provides to its employees and consider them as expenses
- Has generally stability since the death or withdrawal of one shareholder does not result into dissolution

Disadvantages of a Corporation
 Process of forming the corporation or incorporation is more complicated than forming as sole proprietorship and partnership (need to
submit Articles of Incorporation, Board of Directors to represent the corporation)
 Closely monitored by the government and other local agencies like the SEC, BIR and others, as a result, more paperwork is required of
corporation to comply with permits and other legal requirements

Two types of corporation:

1. Stock Corporation – has a capital stock divided into shares and dividends, surplus profits are given to shareholders depending on the
number of shares held
2. Non-stock Corporation – does not issue stock and is established primarily for public interests such as a foundation for charitable,
educational, social, cultural, and other similar purposes

LIMITED LIABILITY COMPANY (LLC)

- In USA, it is a hybrid (mix) forms of business that have characteristics of both a corporation and a partnership
- This business structures protects the owner’s personal property/asset from financial liability and provides some protection against
personal liability

Advantages of a Limited Liability Company (LLC)

- Limited liability: as the name implies, members’ liabilities for the debts and obligations of the LLC are limited to their own investment
- Limitless ownership
- Freedom in management
- Fewer corporate formalities
- Ability to use the cash method accounting
- Tax flexibility – only files an informational tax return and may choose to be taxed as a sole proprietorship, a partnership, or a
corporation (www.accountingverse.com)

Disadvantages of a Limited Liability Company

- Owners must immediately recognize profits
- Fewer fringe benefits
- Higher fees
- Lack of case law
- Must be dissolved upon the death or bankruptcy of a member in the absence of business continuation agreement

COOPERATIVE
- A limited liability business that can organize for-profit or not-for-profit.
- A business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group
are called member, unlike in a corporation owners are called shareholders
- Formed not for the purpose of making profit but to provide its members goods and services at reasonable rates (primary protects and
safeguards the economic interests of its members)
- A voluntary association, formed with a service motive;
- A dividend on trading surplus, if any, is the primary source of income being the members
- The organization functions as a separate legal entity in a democratic way and is governed by the state regulation
- Different types of cooperatives are the following:
- Consumer’s cooperative
- Producer’s cooperative
- Marketing cooperative
- Housing cooperative
- Credit cooperative
- Farming cooperative
- Structures of a cooperative ensures:
- All members have an equal say (one vote per member, regardless of the number of shares held)
- Open and voluntary membership
- Limited interest on share capital
- Surplus is returned to the members according to amount of patronage

Advantages of Cooperative Organization:

- Generally inexpensive to register (depends on the subscribed capital over small percentage)
- Owned and controlled by members
- Members have an equal vote at general meetings regardless of their level of investment or involvement; one member, one vote
- All members must be active in the cooperative
- Has a limited liability
- Profit distribution (surplus earnings after deduction of statutory funds such as general fund, optional fund, community & educational,
training fund) to members is carried on in proportion to the use of service (patronage refund); surplus may be allocated in shares or
cash

Disadvantages of Cooperative Organization

- Entails longer decision-making process (need for the approval of general assembly)
- Requires members to participate for success
- Less incentive, and there’s also a possibility of development of conflict between members
- As cooperatives are formed to provide a service to members rather than a return on investment, it may difficult to attract potential
members seeking a financial return
- There is usually limited distribution of profits to members and some cooperatives may prohibit the distribution of any surplus
- Members providing greater involvement or investment than others will still only get one vote
- Extensive record keeping is necessary
- Requires ongoing education programs for members

BASIC CLASSIFICATIONS OF BUSINESS

1. Service Business
2. Merchandising Business
3. Manufacturing Business
4. Hybrid Business

SERVICE BUSINESS
- A service type of business provides intangible products (products without physical form). It offers professional skills, expertise, advice,
and other similar products.
- is a type of business that provides labor and other services to customers

TYPES OF SERVICE BUSINESS:

a. Service businesses – offers intangible goods or services and typically charge for labor or other services provided to government, to
consumers, or to other businesses.
- Includes professional services like accounting, auditing, legal, engineering, and customer service, school, repair shops, hair salon,
entertainment like amusement parks and movie houses, hotels and restaurants, apartments, event planners, telecommunication
services, medical services, media
b. Financial businesses – companies generate profits through investment and management of capital
- Include banks and lending companies
c. Transportation businesses – deliver goods and individuals to their destination for a fee.
- transportation companies like land transportation, airlines and shipping lines
d. Utilities – produce public services such as electricity or sewage treatment, usually under a government

MERCHANDISING BUSINESS
- This type of business buys products at wholesale price and sells the same at retail price or known as “buy and sell”.
- It makes profit by selling the products at prices higher than their purchase costs.
- Sells product without changing its form
- Examples are grocery stores, convenience stores, distributors, appliance centers, and other resellers

Retailers and distributors – act as middlemen and get goods produced by manufacturers to the intended consumers; they make their
profits by marking up their prices. Most stores and catalog companies are distributors or retailers.

MANUFACTURING BUSINESS
- It buys products with the intention of using them as materials in making a new product.
- is a type of business where raw materials are transformed into finished goods through product-processing, labor, and other
manufacturing processes

Types of Manufacturing business

1. Agriculture and mining business – produce raw material, such as plants and minerals
2. Manufacturers – produce products, either from raw materials or from component parts, then sell their products at a profit
3. Real-estate businesses – sell, rent, and develop properties – including land, residential homes, and other buildings
4. Information businesses – generate profits primarily from the sale of intellectual property – they include movie studios, publishers, and
internet and software companies

HYBRID BUSINESS
- Are companies that may be classified in more than one type of business