LESSON 4: FORMS OF BUSINESS ORGANIZATIONS

Learning Objectives

At the end of this lesson, the learners should be able to:

1. Identify the forms of business organizations by nature of ownership.

2. Give examples of businesses in their respective communities and identify the
form
3. Identify the advantages and disadvantages of the four forms of business
organization

Business

A business is an organization that utilizes resources and information, supplying the

wants and needs of the customers through goods and services, in exchange for the
money or giving back different kinds of goods or services. There are several types of
businesses, categorized according to ownership and to activities.

Types OF Business According To Ownership

Sole/Single Proprietorship

A sole proprietorship is a form of business that 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

1. The owner keeps all the profits.

2. The owner makes all the decisions.
3. It is easy to form and operate.

Disadvantages

1. 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.
2. The amount of capital is limited only by the wealth of the proprietor.

Partnership

In a contract of 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 (Civil Code of the Philippines, Article 1767).
Advantages

1. Higher capital because two or more persons will contribute to the common
fund.
2. It is easy to operate like a sole/single proprietorship
3. Less regulations compared to corporations
4. Combines special skills, expertise and experience of the partners

Disadvantages

1. The profits are divided among the partners.

2. A partner can be held liable for the acts of the other partners.
3. 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.

Corporation

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 (The Corporation Code of the Philippines, Sec. 2).

Advantages

1. The corporation has legal capacity to act as a legal entity.

2. Shareholders have limited liability.
3. It has continuity of existence.
4. Shares of stock can be transferred without the consent of the other
shareholders.
5. Its management is centralized in the board of directors.
6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.

Disadvantages

1. It is relatively complicated to set up.

2. Subject to several legal restrictions as listed in the Corporation Code of the
Philippines
3. It is subject to heavier taxation than other forms of business organizations.
4. Minority shareholders are subservient to the wishes of the majority.

Cooperatives

A cooperative is a duly registered association of persons, with a common bond of

interest, voluntarily joining together to achieve their 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 (Cooperative Code of the Philippines).
Advantages

1. Enjoys certain tax exemption privilege

2. Promotes the concept of sharing resources

Disadvantages

1. Limited distribution of surplus

2. Requires continuous education programs for members.
3. The members have active and direct participation in the business of the
cooperative.