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FORMS OF BUSINESS ORGANIZATIONS

1. SOLE PROPRIETORSHIP- a form of business organization with only one owner. It is considered as the simplest form under which a
business can operate. Has no separate legal existence. Can take fictitious names, otherwise known as trade names example: “ Aling Nene sari-
sari store” . Fictitious names are merely trade names that aim to instill brand recall to customers. Thus, fictitious names do not, in any way,
result in a separate juridical personality for the business. Being indistinguishable with the owner, a business operating as a sole proprietorship
enters into contracts under the owners name. Sole proprietorship can also sue and be sued under the owners name.

ADVANTAGES DISADVANTAGES

Ease of formation-easier to establish compare to other forms of Unlimited liability – The owner is personally liable for all the debts
business organization, does not have to go through a rigid of incurred by the business since a sole proprietorship has no separate
registration process before it can operate. In Philippines, sole legal existence distinct from the owner. Unlimited liability means
proprietorship can register in local municipal hall. Business permits that creditors, customers, the government, and other outside parties
and other licenses can also be acquired from such places. The whole can go after the personal assets of the owner even after extinguishing
process is easy and inexpensive. Can start operating the business with all the assets of face.
the small amount of capital.

The owner has full control of the business- owners can single- Difficulty of raising additional capital – The initial investment of
handedly decide on matters pertaining to the business. Does not the owner is the capital of the business. When all of the initial
experience internal conflict regarding business decisions. investment are used up, the owner is the only person that can provide
additional capital.

Owners can mix personal and business assets – Owners may freely Owner’s bias – Only the sole proprietor has the authority to make
mix their personal assets with the business assets since sole decisions for the business. When deciding how the company will
proprietorships are not separate juridical entities distinct from the move forward, the owner always has the final word. This can possibly
owners. If the business is experiencing financial difficulties, a sole be detrimental to the business especially when the owners bias
proprietor may use personal assets to help the business recover. prevails and he or she does not make rational decisions.

Owners have all the profits for themselves - profits belong solely
to the owner

Simple taxation – the profits of the sole proprietorship are


considered the income of the owner.

2. PARTNERSHIP – a contract whereby 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.

General Features of a Partnership

a. 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). Being an artificial person, a partnership can
perform the acts that the partners can do except those acts that are purely personal in nature . Some examples of these acts are voting in
elections and holding positions in public office. A partnership can also acquire property under its own name. A partnership has separate
legal existence, its income is not taxed as a separate entity. After the income has been distributed to the partners, it will be included in their
respective tax returns and it will be taxed accordingly.

b. Mutual agency – Partners being co- owners of the business, can perform acts for the partnership even without asking permission from
other partners. Mutual agency means that the acts of a partner are binding on a partnership even though he or she has no authority to do
so as long as the acts concerns the normal business operations of the partnership.

c. 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. Like in a sole proprietorship, creditors and other parties can go after the personal assets of the partners when
partnership assets are not enough to satisfy their claims.

d. 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 partners is admitted. Dissolution occurs when there is a change in the
relationships among the partners. Dissolution of a partnership does not necessarily mean that the partnership will cease to exist.
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.

e. 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 or her money and/or property, it does not belong to him or her anymore. The contributed
money and property belong to the partnership and the partners only have a proportionate share of partnership assets. In the ABC
Partnership, assume that Bart contributed a delivery van valued at P 500,000. Bart cannot subsequently claim that he is the owner of the
van. From the moment he contributed the delivery van to the partnership, he only has a proportionate share of the asset. Andr e, Bart, and
Charles became co- owners of the van. 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, profit ( or loss) are distributed according to the original capital
contributions of the partners.
f. Partnership agreement – the definitions provided by 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. This written contract is called the articles of partnership, and it contains the following
information: Name of the partnership, Location of the principal office of the partnership, The names, citizenship, and residence of the
partners, term for which the partnership is to exist, the purposes for which the partnership is formed, original capital contributions of the
partners, profit and loss sharing agreement among the partners. The articles of partnership may also contain stipulations pertaining to the
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 GENERAL PARTNERSHIP

ADVANTAGES DISADVANTAGES

 Easier to create than a corporation  Unlimited liability

 Better ability to acquire additional capital than sole  Mutual agency


proprietorship
 Limited life
 Larger pool of human capital than sole proprietorship

OTHER FORM OF A PARTNERSHIP

The partnership we have just discussed is called a general or regular partnership. Because of the unlimited liability characteristics of a
general partnership, individuals planning to work together sometimes use the other forms of partnership. These are the limited partnership,
limited liability partnership, and limited liability company.

a. Limited Partnership – In a limited partnership, at least one partner has unlimited liability and at least one partner has limited
liability. Partners having unlimited liability are called general partners while partners having limited liability are called limited
partners. Limited partners are exposed to a lower level of risk. The maximum loss that a limited partner can shoulder amounts
to his or her initial investment. Creditors cannot go after his or her personal assets. To compensate general partners for the
higher levels of risks they take, they are the only ones allowed to participate in the management of the partnership. 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.

b. Limited Liability Partnership – a type of partnership that aims to protect innocent partners from the malpractice and
wrongdoings of other partners. This kind of partnership possesses multiple insurance claims to protect the partners from such
wrongful acts of other partners. The limited liability partnership is mostly used by individuals forming a partnership for the
practice of a profession (e.g. lawyers, accountants, medical professionals, auditors).

c. Limited Liability Company – another form of organization having partnership characteristics. Have features of both a
corporation and a partnership. The owners are called members and they enjoy limited liability. Unlike the limited partners in a
limited partnership, members of a limited liability company can participate in management without losing the limited liability
protection.

ADVANTAGES AND DISADVANTAGES OF DIFFERENT FORMS OF PARTNERSHIP

FORMS OF PARTNERSHIP ADVANTAGES DISADVANTAGES

General Partnership Simple and inexpensive to create and operate Owners (partners) personally liable for business
debts

Limited Liability Partnership  Limited partners have limited personal  General partners personally liable for
liability for business debts as long as business debts
they do not participate in management.
 More expensive to create than regular
 General partners can raise cash partnership
without involving outside investors in
management o9f business  Suitable mainly for companies that
invest in real estate.

Limited Partnership  Mostly of interest to partners in old  Unlike a limited liability company,
line professions such as law, medicine, owners (partners) remain personally
and accounting liable for many types of obligations
owed to business creditors, lenders,
 Owners (partners) are not personally and landlords
liable for the malpractice of other
partners  Often limited to a short list of
professions

Limited Liability Company Owners have limited personal liability for More expensive to create than regular
business debts even if they participate in partnership
management
3. CORPORATION – 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.” This definition emphasizes four things about a corporation.

a. A corporation is an artificial being – it means that it is an entity separate and distinct from its owners
b. 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
c. A corporation has the right of succession – owners rights can be passed to other person through sale , donation or any other
mode of transfer.
d. The law is the source of powers and attributes of a corporation. Being the source, the law can likewise restrict the authorit y of
corporations in performing acts.

Unlike in the definition of partnership, the law did not mention the purpose of a corporation. Corporation can be organized to generate profit or
it may be not-for-profit. This is one classification of corporations. Corporations can also be classified as being publicly held or privately held.
A publicly held corporation has thousands of stockholders (owners) while a privately held corporation has only a few.

GENERAL FEATURES OF A CORPORATION

a. Separate legal existence – Just like a partnership, a corporation is treated by law as an artificial being separate and distinct from
its owners. A corporation can enters into contracts and transactions under its name. It can also perform acts that can be done by
natural person except those that are purely personal in nature such as voting and holding positions in public office. In
corporation, the acts of the owners or stock holders 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.

b. Limited Liability – The limited liability characteristics is an advantage a corporation has over a partnership. The 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 or her investment. This characteristics is a major consideration of aspiring businessman
who do not want to be exposed to too much risk. Even if the corporation is bankrupt or has unpaid claims due to accidents and
lawsuits, the stockholders cannot be obligated to pay any deficiency.

c. Transferable ownership rights – ownership rights in a corporation are represented by stocks. A stocks is an intangible ( no
physical form) assets 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 or she is an owner of the company. Stocks can be transferred to other
persons through sale, donation, or other modes of transfer. This is not the case in partnership. In a partnership, an individual
cannot be admitted as a partner without the consent of all existing partners. Stocks of a corporation can be transferred even
without the consent of other stockholders unless the corporation is privately held. Transfer of stocks do not result in the
dissolution or liquidation of a corporation. Stock transfer are normal for corporations especially for those that are publicly held.
This does not, in any way, affect the operations of the corporations. 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.

d. 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. This gives corporation virtually unlimited life. 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 corporations can avail of. A corporation is also not affected by the withdrawal, death, and
admission of stockholders. The withdrawal, death, and admission of stockholders only change the composition of the owners of
a corporation, but these events do not require the stockholders to formulate a new agreement. A corporation does not need to
deal with legal formalities associated with these events unlike a partnership.

e. 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. However, unlike in sole proprietorship and partnerships
where the owners or partners manage the business, stockholders may elect a board of directors to manage the corporation. The
board of directors 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.

f. Government regulations – corporations are subject to stricter government regulation than sole proprietorships and
partnerships. Being major contributors to the income of the whole economy, the operations of corporations are closely
monitored by the government. The bankruptcy of a large corporation can cause the whole economy to spiral downwards.

g. Double taxation – The income of a corporation is taxed on the corporate level and the individual level. The income of the sole
proprietorship or a partnership is part of the individual income of the owners. It is taxed once the owners file their respective tax
returns. In a corporation, the income is already taxed before being distributed to the stockholders. Once a stockholders receives
his or her share of the income, it is included in his or her tax return and will be taxed for the second time.

h. Dividends – When a sole proprietorship or a partnership generates income, it is immediately distributed to the owners or
partners. This is not the case for a corporation. 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. It is normally stated as a nominal amount of per share of stocks. Stocks dividends are distribution of income in the
form of additional stocks.
ADVANTAGES AND DISADVANTAGES OF A CORPORATION

ADVANTAGES DISADVANTAGES
 Ability to acquire additional capital  Heavily regulated by the government
 Transferable ownership rights  Double taxation
 Limited liability of stockholders  Not easy to form
 Virtually unlimited life  More expensive to form than sole proprietorship and
 Large pool of human capital partnership

4. COOPERATIVES - a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to
achieve a lawful 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. From this, we can see that a cooperative is an association of individuals who share a common goal.
Membership in a cooperative shall be voluntary and available to all individuals regardless of their social, political, racial, or religious
background and beliefs.

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
increased income and savings. A cooperative maybe formed by at least 15 persons for any of the 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 ensure against losses of the members
8. To promote and advance the economic, social, and educational status of the members

Other Characteristics of a cooperative include 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. A cooperative has its set of board of directors
6. Income of a cooperative (called net surplus) belongs to its members.

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