CHAPTER 05

• Forms of business organization based on ownership structure

  • Sole proprietorship
  • Partnership
  • Corporation
• Sole proprietorship


  Company owned by one person who is usually hands-on in managing the day-to-day activities
• Sole proprietorship


  • Owner owns the entire business, including all assets and profits
  • Owner is responsible for all the liabilities of the business
• Assets


  Resources with economic value that are owned and controlled by the business owners
• Liabilities


  Debts or obligations which arise in the course of the business operation
• Sole proprietorship


  • Considered a single taxpayer and assigned a single Tax Identification Number (TIN)
  • Owner applies for a business trade name and registers the business with the Department of Trade and Industry
• Advantages of sole proprietorship

  • Most manageable and least expensive form of ownership
  • Proprietors have complete control over the business and can make decisions based on their own judgement
  • Easy to implement changes in the business setup
  • Business can be easily dissolved
• Disadvantages of sole proprietorship

  • Unlimited liability as owner assumes all the debts of the business
  • May put personal assets at risk when the business experiences losses
  • Obtaining additional capital is difficult due to low guarantee of profitability to lenders
  • Difficulty in attracting and retaining high skilled employees
• Partnership


  • Form of business organization where ownership is shared by two or more members
  • Partners mutually agree on how decisions will be made, how profits and losses will be shared, how future partners will be admitted, and how disputes will be resolved
• General partnership


  Partners have unlimited liability for the debts and obligations of the partnership
• Limited partnership


  One or more general partners have unlimited liability and the limited partners have liability only up to the amount equal to their capital contribution
• Partnerships with a capital of more than three thousand pesos should register with the SEC
• Income tax computations for partnership are the same as corporations
• Advantages of partnership


  • Wider capital base
  • Diversification of contributed monetary funds, skills, and resources
  • Easier expansion with more people to manage different branches
  • Incentive for employees to become partners later on
• Disadvantages of partnership


  • Partners are jointly liable for all the obligations and effects stemming from the decisions of the other partners
  • Limited life due to general instability caused by factors like death, withdrawal, or insolvency of a partner
• Corporation


  • Distinct personality separate from its owners
  • Treated like an individual person with benefits, obligations, and responsibilities
  • Can enter into contracts, secure loans, sue and be sued, hire employees, and pay taxes
  • Minimum of 5 and maximum of 15 owners called shareholders
• Shareholders


  • Own a part of the company and have some authority over its direction
  • Elect a board of directors who oversee the major policies and decisions of the corporation
• Corporations are owned and established under the corporation code and regulated by the SEC
• Shareholders of the corporation are registered with the SEC and assigned at least one share of the company stock
• The total shares of the company stock that shareholders may acquire depend on the capital they have invested
• Shareholders' liability is only up to the extent of their share capital
• The minimum paid-up required of corporations in the Philippines is five thousand pesos
• Corporations are subject to tax, which is separate from the individual taxes of its shareholders
• Stock corporation


  Has a capital stock divided into shares and dividends, with surplus profits given to shareholders depending on the number of shares held
• Non-stock corporation


  Does not issue shares of stock and is established primarily for public interest such as foundations for charitable, educational, social, cultural, and other similar purposes
• Advantages of corporation


  • Limited liability to shareholders
  • Can deduct the benefits it provides to employees as expenses
  • General stability as the death or withdrawal of one shareholder does not result in its dissolution
• Disadvantages of corporation


  • More complicated process of forming or incorporating
  • Closely monitored by the government and other local agencies like the SEC, requiring more paperwork to comply with permits and legal requirements
• Cooperative


  Organized and controlled by its members, who pool resources together to provide themselves and their patrons with goods, services or other benefits
• Advantages of cooperative


  • Owned and controlled by members
  • Democratic control (one member, one vote)
  • Limited liability
  • Profit distribution (surplus earnings) to members in the form of dividends
  • Dividends are in proportion to a member's use of cooperative services
  • Highly encouraged by government due to benefits received by a greater number of people
• Disadvantages of cooperative


  • Possible development of conflict between members
  • Numerous members tend to diminish one's share in total dividends
  • Longer decision-making process than corporations due to more votes to count
  • Requires members to participate for success
  • Extensive record keeping necessary
  • Less incentives for members to invest additional capital