Chapter 4: Forms of Business Organizations

Sole/Single Proprietorship
Partnership
Corporation
Cooperatives
Week 5

SOLE/SINGLE PROPRIETORSHIP

A form of business is owned by one person; the simplest, and the most common form of business
organization. It is not separate from the owner. The business and the owner are inseparable.

ADVANTAGES OF SOLE/SINGLE PROPRIETORSHIP

 The owner keeps all the profits.
 The owner makes all the decisions.
 It is easy to form and operate.

DISADVANTAGES OF SOLE/SINGLE PROPRIETORSHIP

 The life of the business is limited to the life of the owner. Once the owner dies, the
business will cease to operate under the name of the proprietor.
 The amount of capital is limited only by the wealth of the proprietor.
 Unlimited liability.
 Owner’s bias

REQUIREMENTS FOR FORMATION

It is registered through the Bureau of Trade Regulation and Consumer Protection (BTRCP) of
the Department of Trade and Industry (DTI).

PARTNERSHIP

Arts. 1767-1867, CIVIL CODE OF THE PHILIPPINES

ARTICLE 1767. By the contract of a partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

A partnership is an association of two or more persons to carry on as co-owners a business for

profit. It is a legal relation based upon the expressed or implied agreement of two or more
competent persons whereby they unite their property, labor, or skill in carrying on some lawful
business as principals for their joint profit. (Mechem, Elements of the Law of Partnership [1923],
p. 1.) A partnership is a joint undertaking to share in the profit and loss. (Eastman vs. Clark, 53
N.H. 276, 16 Am. Rep. 192.)
PARTNERSHIP FOR THE EXERCISE OF A PROFESSION

A profession is a calling in the preparation for or practice of which academic learning is required
and which has for its prime purpose the rendering of public service. It may also refer to the
whole body of persons or a group of persons engaged in a calling. Thus, it has been defined as “a
group of men pursuing a learned art as a common calling in the spirit of public service – no less a
public service because it may incidentally be a means of livelihood.” (In the matter of the
Petition for Authority to continue use of firm name “Ozaeta, Romulo, etc.,” 92 SCRA 1.)

Paragraph 2 relates to a general professional partnership or a partnership for the exercise of a

profession. Strictly speaking, the practice of a profession is not a business or an enterprise for
profit. However, the law allows the joint pursuit thereof by two or more persons as partners.

ARTICLE 1783. A particular partnership has for its object determinate things, their use or
fruits, or a specific undertaking, or the exercise of a profession or vocation. (1678)

CLASSIFICATIONS OF PARTNERSHIP

 GENERAL PARTNERSHIP
1. Separate legal existence
-an artificial being created by operation of law.
2. Mutual agency
-being co-owners of the business, can perform acts for the partnership even
without asking permission from other partners.
3. Unlimited liability
4. Limited life
-Partnership Dissolution- occurs when one of the partners withdraws from the
partnership or if a new partner is admitted.
-Partnership Liquidation- occurs when partnership assets are sold, liabilities are
paid, and the remaining assets are distributed to the partners. Liquidation ends the
life of partnership.
5. Co-ownership of partnership property
6. Partnership agreement
-Partnership is a contract. To protect the interest of all partners, it is ideal to form
a partnership in a written contract.

ADVANTAGES OF GENERAL PARTNERSHIP

 Easier to create than a corporation
 Better ability to acquire additional capital than sole proprietorships
 Larger pool of human capital than sole proprietorships

DISADVANTAGES OF GENERAL PARTNERSHIP

  Unlimited liability
 Mutual agency
 Limited life
 In a lawsuit, the personal properties of the partners can be held beyond their contributions
and may be used to answer for any liability of the partnership.
 The profits are divided among the partners.

 LIMITED PARTNERSHIP
1. At least one partner has unlimited liability and at least one partner has limited
liability.
2. Partners having unlimited liability are called general partners while partners
having limited liability are called limited partners.
3. Limited partners are exposed to lower level of risk.
4. General partners are exposed to higher level of risk since they are the only ones
allowed to participate in the management of the partnership.
5. If a limited partner participates in the management of the partnership, he or she
loses the limited liability protection. He or she becomes a general partner.

 LIMITED LIABILITY PARTNERSHIP

1. A type of partnership that aims to protect innocent partners from the malpractice
and wrongdoings of other partners.
2. It is mostly used by individuals forming a partnership for the practice of a
profession.

 LIMITED LIABILITY COMPANY

1. It is a corporate structure whereby the members of the company are not personally
liable for the company’s debts or liabilities.
2. Hybrid entities that combine the characteristics of a corporation and a partnership
or sole proprietorship.
3. LLC has to be dissolved upon the death or bankruptcy of a member, unlike a
corporation, which can exist in perpetuity.
4. A form of business organization with the liability-shield advantages of a
corporation and the flexibility and tax pass-through advantages of a partnership.
5. Members of a limited liability company can participate in management without
losing the limited liability protection.
6. More expensive to create than regular partnership.

CORPORATION

The Corporation Code of the Philippines (B.P. Blg. 68.)

Section 2. Corporation defined. – A corporation is 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. (2)
ATTRIBUTES OF A CORPORATION
1. It is an artificial being;
2. It is created by operation of law;
3. It has the right of succession; and
4. It has only and the powers, attributes and properties expressly authorized by law or
incident to its existence.

CORPORATION AS AN ARTIFICIAL PERSONALITY

 A corporation is a legal or juridical person with a personality separate and apart from its
individual members or stockholders who, as natural persons, are merged in the corporate
body.
 It is not, in fact, and, in reality, a person but the law treats it a though it is a person.
 The stockholders or members compose the corporation but they are not the corporation.

As a consequence of this legal concept of a corporation:

1. As a rule, a corporation is not liable for the debts of its stockholders, and the latter are not
individually liable for the corporation’s debt.
2. It may acquire and possess property of all kinds, as well as incur obligations and bring
civil and criminal actions in its own name in the same manner as a natural person.
3. All contracts entered into its name by its regular appointed officers and agents are the
contracts of the corporation and not those of the members or stockholders.
4. A corporation cannot be held liable for the personal indebtedness or obligation of a
stockholder even if he should be its president. (Smith & Co.., Inc. vs. Ford, 63 Phil. 786)
Neither is the latter liable for the indebtedness of the former.
5. A corporation remains unchanged and unaffected in its identity by changes in its
individual membership. It has continuous existence since it would exist even if all
stockholders die.

 DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

 Being a mere creature of the law, a corporation maybe allowed to exist solely for lawful
purposes but where the fiction of corporate entity is being used as a cloak or cover for
fraud or illegality, this fiction will be disregarded and the individuals composing it will
be treated as identical. In other words, the law will not recognize separate corporate
existence. Creditors of financially troubled corporations benefit when they succeed in
piercing the corporate veil for they can go after the assets of the individual stockholders.
(Claparols vs. Court of Industrial Relations, 65 SCRA 613; Republic vs. Razon, 20
SCRA 234.)

CORPORATION AS A CREATION OF LAW OR BY OPERATION OF LAW

 Corporations cannot come into existence by mere agreement of the parties as in the case
of business partnerships.
 They require special authority or grant from the State.
 The general law which governs the creation of private corporations is Batas Pambansa
Blg. 68, otherwise known as the “Corporation Code of the Philippines.”
  Private corporations owned or controlled by the government or any subdivision or
instrumentality thereof are created by special laws. (Constitution of the Philippines, Art.
XII, Sec. 16.)
 An exception to the rule that legislative grant or authority is necessary for the creation of
a corporation obtains with respect to corporations by prescription.

RIGHT OF SUCCESSION OF A CORPORATION

 Under the Corporation Code, the life of the corporation is limited to the period of time
stated in the articles of incorporation not exceeding 50 years from the date of
incorporation unless sooner dissolved or unless said period is extended.
 Corporations created by special laws have the right of succession for the term provided
in the laws creating them.

POWERS, ATTRIBUTES, AND PROPERTIES OF A CORPORATON

 A corporation, being a mere creation of law, may exercise only such power as are
granted by the law of its creation.

ADVANTAGES OF A CORPORATION
 Ability to acquire additional capital
 Transferable ownership rights
 Limited liability of stockholders
 Virtually unlimited life
 Large pool of human capital

DISADVANTAGES OF A CORPORATION
 Heavily regulated by the government
 Double Taxation
 Not easy to form
 More expensive to form than sole proprietorship and partnership

COOPERATIVE
A cooperative is a duly registered association of persons with a common bond of interest,
voluntarily joining together to achieve their social, economic and cultural needs.

A cooperative may be formed by at least 15 persons for any following purposes:

1. To encourage thrift and savings mobilization among the members
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 against the losses of the members
8. To promote and advance the economic, social, and educational status of members

Other characteristics of a cooperative include the following:

 1. It can be 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. A cooperative has its set of board of directors
6. Income of a cooperative belongs to its members

Types of cooperative in the Philippines:

 Credit Cooperative- It promotes and undertakes savings and lending among its members.
 Consumers’ Cooperative- It procure and distribute commodities to members and non-
members.
 Producers’ Cooperative- It undertakes a joint production whether agricultural or
industrial.
 Marketing Cooperative- It engages in the supply of production inputs to members and
markets the members products.
 Service Cooperative
 Multipurpose Cooperative- It combines two or more business activities of these different
types of cooperative.
TAX EXEMPTION
 Cooperatives with accumulated reserves and undivided net savings of not more than Ten
Million (Php10, 000,000.00) – Exemption from all national internal revenue taxes.

ADVANTAGES OF COOPERATIVE
 Elimination of middlemen
 Saving in management expenses
 Minimum stock
 Economy in distribution and production expenditure
 Integration
 Limited liability

DISADVANTAGES OF COOPERATIVE
 Lack of capital
 External financial resources of the society are limited
 Limited scale
 Inefficient management
 Lack of prompt decision
 Chapter 5: Types of Business According to Activities
Service Business
Merchandising Business
Manufacturing Business

Week 5

A business entity is an organization that uses economic resources or inputs to provide goods or
services to customers in exchange for money or other goods and services.

There are three major types of business:

1. Service companies
2. Merchandising companies
3. Manufacturing companies

SERVICE COMPANIES
Service companies are firms that generally use their employees to provide intangible products or
services to customers. These services include professional skills, advice, expertise, and other
related products. The primary source of revenues of service companies is the performance of
services, often referred to as service revenues.

Operating cycle is the time it takes for a company to create products, sell these products, and
collect cash payments from customers.

Cash on
hand

Receives Pays
payment employees
from and other
customers expenses

Performs
services
 Operating Cycle of Service Companies

ADVANTAGES OF SERVICE COMPANIES/INDUSTRY

 Absence of inventory- holding inventory entails proper management and control

measures which make it costly.

 No production facilities- service companies produce intangible products, they do not

require production facilities and that frees up cash for other important business matters.
 Steady work- service industry jobs will always be in demand as people continue to look
these businesses to meet their various needs.
 Entry to entrepreneurism- service industry allows them multiple options for becoming
entrepreneurs.
 Skill Enhancement- working in a service industry can help an individual develop and
perfect specific interpersonal and skills every day, such as effective communication and
managing conflict resolution.

DISADVANTAGES OF SERVICE COMPANIES/INDUSTRY

 Inability to standardize services- services performed vary from one client to another.

 Maintaining human capital

MERCHANDISING COMPANIES
Merchandising companies sell tangible products. This type of business buys finished or almost
finished goods from their suppliers and resells the same to customers. Merchandising companies
primarily earn revenues from sale of the goods or merchandise, also known as sales revenue or
sales.

Retailer- a merchandising company that sells goods directly to customers.

Wholesaler- a merchandising company that sells goods to retailers.
Inventory- the purchase of goods to be held for resale.
 Cash on
hand

Receives
payment
Buys goods
from
customers

Stores
Sells
goods as
inventory
inventory

Operating Cycle of Merchandising Companies

ADVANTAGES OF MERCHANDISING COMPANIES/INDUSTRY

 Visible products- Merchandising should start outside, where customers first see the store
and make decision whether to come in and shop or not. The existence of a tangible
product provides leeway to merchandising companies to make customers notice their
products, thereby promoting sales.
 Maximized sales- Effective merchandising can have a clear and definite positive effect
on retail sales and the bottom line, which is, after all, the goal of any business approach.
Good merchandising strategy can boost the sales of the business.
 Less conversion, time, and effort

DISADVANTAGES OF MERCHANDISING COMPANIES/INDUSTRY

 Demands of staff- An increase in customers often translates to a necessary increase in
payroll.
 Once is not enough- the greatest disadvantage of successful merchandising may be the
need to keep at it to meet the expectations of clientele and to keep steady stream of a new
customers coming in.
 Expense
 Managing inventory- it requires cost which involves security and regular monitoring.

MANUFACTURING COMPANIES
Manufacturing companies, or simply manufacturers, are relatively complicated organization than
service and merchandising companies. Manufacturers create their own products. They use raw
materials, components, or parts which are processed using machines, computers, and labor to
produce finished goods. The operating cycle of manufacturing company has the longest period
compared to service and merchandising industry.

Cash on hand

Pays for
Receives
inputs( raw
payment
materials,
from
labor,
customers
overhead)

Converts
Sells inputs into
inventory finished
goods

Stores
finished
goods as
inventory

Operating Cycle of Manufacturing Companies

ADVANTAGES OF MANUFACTURING COMPANIES/INDUSTRY

 Quality Control- manufacturing companies can ensure that their products meet the
standard set.

 Visible Products- the existence of a tangible product provides leeway to manufacturing

companies to make customers notice their products, thereby promoting sales.

DISADVANTAGES OF MANUFACTURING COMPANIES/INDUSTRY

 Need production facilities- it requires a large sum of capital/money.
 High conversion costs- in converting the inputs to finished goods, overhead costs like
utilities and rent expense are incurred.
 Cost of quality control- multiple quality inspection are carried out to detect spoilage and
prevent low-quality goods.
 Managing inventory