CHAPTER I: The Role of Business in Social and Economic Development
Lesson 1: The Nature and Forms of Business Organization
Time Frame: Week 1
Content Standard:
The learner demonstrates an understanding of the nature and forms of business organization.
Performance Standard:
The learner shall be able to identify forms of business organization and their characteristics.
Learning Competencies:
At the end of this module, the learner shall be able to:
1. Differentiate the forms of business organizations; and
2. Give examples of the forms of business organizations.
LESSON CONTENT
THE ROLE OF BUSINESS IN SOCIAL AND ECONOMIC DEVELOPMENT
Profit Sharing System at San Jose Kitchen Cabinets Manufacturing
From the start of business in 1982, San Jose Kitchen Cabinets was already sharing profits with employees.
Although this practice is not common, Mr. Chan, founder and manger, had always been of the belief that profit
sharing can aid economic stability and decrease unemployment. The profit share percentage of employees was
arbitrary, until in 1987, Mr. Chan realized that in any economic activity or business enterprise, there are always
two partners: labor and capital, and one cannot exist without the other. Thus, it followed that a 50/50 percent
share would be logical. This profit share is over and above the salaries and social security paid to the employees.
In addition, there was a cap on executive compensation: there is a policy that the compensation, both salary and
profit share, of the highest-ranking employee should not exceed ten times that of the lowest-ranking employee.
All in all, a lot of efficiencies have been gained: the average return on equity from 1987 to the present has been
30%, and high levels of job satisfaction have been felt throughout the organization.
Source: Chan, Oscar. (2015). The Profit-Sharing System Study of San Jose KCM. Paper presented at the 9th
International Symposium on Catholic Social Thought Management Education. Manila, Philippines.
Introduction
The aforesaid story shows that there are still some businessmen who practice social responsibility in
business through fairness and generosity to employees. Profit sharing has the positive effect of minimizing
productivity-reducing conflict and generating productivity enhancing cooperation and innovation. If only more
entrepreneurs and businessmen will practice the same, job satisfaction across the labor force might be likely and
the results would be immeasurable.
Businesses have a multiplicative effect, since they are part of the complex web of interaction among
institutions and people. As such, business activities must be viewed and examined from the perspective of ethics
and social responsibility. Thus, continued business success would be a function of everyone when the same will
commit themselves to learning more about business organizations, our role in them, the importance of
virtuousness on the part of individuals and institutions, and the ways in which we all can help in social
development.
The Nature and Forms of Business Organization
Business – an activity that part and parcel of human society; it is an entity in which economic resources
or inputs, such as materials and labor, are put together and processed to provide goods and services or outputs to
customers. It is usually a complex enterprise involving major activities like purchasing, manufacturing,
marketing, advertising, selling, and accounting. Its objective is to earn profit (although this is not the sole purpose
as we shall see further).
Profit – the difference between the amount earned and the amount spent in buying, operating, or producing
something.
In this text, the focus is on businesses operating to earn a profit, even though many of the same concepts
and principles also apply to not-for-profit organizations. The fundamental reason for examining the activities of
business from a moral point of view is that business organizations, in principle, have an obligation to help in the
promotion of the common good and in the protection of persons’ rights and interest.
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Prepared by: MR. JOSE EMMANUEL B. CALAG
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Thus, business make the goods and services you use each day. That includes the products and services
used by other businesses as well as those needed by individual consumers. There are generally three types of
business organizations operated for profit: service, merchandising, and manufacturing businesses. Service
businesses provide services rather than products to customers. Merchandising business sells products they
purchase from other businesses to customers. Manufacturing business change basic inputs into products that are
sold to customers.
The Various Forms of Business Organization
A business organization may take the form of a proprietorship, partnership, or corporation. The three types
of businesses we discussed earlier – service, merchandising, and manufacturing – may be organized as
proprietorships, partnerships, or corporations
1. Sole Proprietorship – a business owned by one person. Its advantages are: (a) total undivided
authority; (b) low organizational cost and license fees; (c) tax savings; and (d) no restrictions on type
of business (as long as it is legal). Its disadvantages are (a) unlimited liability; (b) limitation on size
(and thus on fund-raising power); and (c) limited by management’s ability to be jack-of-all-trades.
2. Partnerships – an association of two or more people as partners; it refers to an arrangement in which
the individuals share profits and liabilities of a business venture. Its chief characteristics are: (a)
associations of individuals; (b) mutual agency; (c) limited life; (d) unlimited liability; and (e) co-
ownership of property.
The association of individuals in a partnership may be based on as simple as an act of handshake;
however, it is preferable to state the agreement in writing.
• A partnership is a legal entity for certain purposes.
• A partnership is an accounting entity for financial reporting purposes.
• Net income of a partnership is not taxed as a separate entity.
Mutual agency means that an act of any partner is binding on all other partners, so long as the act
appears to be appropriate for the partnership. This is true even when partners act beyond the scope of
their authority. Partnerships have a limited life. Partnership dissolution occurs whenever a partner
withdraws or a new partner is admitted.
Each partner has unlimited liability. Each partner is personally and individually liable for all
partnership liabilities. Creditors’ claim attaches first to partnership assets and then to personal
resources of any partner, irrespective or that partner’s capital equity in the company.
3. Corporation – an entity created by law that is separate and distinct from its owners and its continued
existence is dependent upon the corporate statutes of the state in which it is incorporated.
The characteristics that distinguish a corporation from proprietorships and partnerships are:
a. The corporation has separate legal existence from its owners.
b. The stockholders have limited liability.
c. Transferable ownership rights (ownership is in shares of stocks).
d. Ability to obtain capital (relative ease).
e. The corporation can have a continuous life.
f. The corporation is subject to numerous government regulations.
g. The corporation must pay an income tax on its earnings, and the stockholders are required to pay
taxes on the dividends they receive: the result is double taxation of distributed earnings.
h. An artificial/juridical “person” endowed with ability for self-management, that is, the management
structure is at the discretion of the board of directors.
The first step in forming a corporation is to file an application of incorporation with government
(in the Philippines, this is done through the Securities and Exchange Commission or SEC). After the
application of incorporation has been approved, the corporation is granted a charter or articles of
incorporation. The articles of incorporation formally create the corporation. The corporate
management and board of directors then prepare a set of bylaws, which are the rules and procedures
for conducting the corporation’s affairs. Costs may be incurred in organizing a corporation. These
costs include legal fees, taxes, state incorporation fees, license fees, and promotional costs. Such are
considered Organizational Expenses.
Comparison and Contrast Among the Various Forms Business Organization
The owner of a sole proprietorship has complete control over the company’s finances and operations. Sole
proprietors are not required to consult with anyone when it comes to making business decisions. All partners of a
partnership have input regarding how the company’s resources are used and towards other important business
decisions. In a partnership business, all partners are responsible for making decision that will impact the business.
This may provide multiple viewpoints, which could potentially lead to better business decisions.
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Prepared by: MR. JOSE EMMANUEL B. CALAG
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The sole proprietor can maintain complete control over all aspects of the business. There are no
shareholders to pacify and no board of directors to appease. If you feel you need to purchase a piece of equipment,
you do not have to justify your actions to others. On the other hand, corporations have an advantage when it
comes to raising capital for the business – the ability to raise funds through sale of stock. In addition, corporations
file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them
in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate,
which is usually lower than personal income tax rate. This is as opposed to single proprietorships which often pay
income tax twice, first on the business earnings and then on personal income when the owner draws a salary or
takes distribution from the company.
The Role of Each Form of Business Organization in the Economy
Small businesses owned by sole proprietors are will recognized worldwide as vital and significant
contributors to economic development, job creation, and the general health and welfare of economies.
Microbusinesses (firms that employ fewer that then people) form a dynamic, integral part of the market economy,
providing goods and services and a gateway by which millions enter the economic and social mainstream of
society. In the US, for example, about half of all private sector workers are employed by microbusiness firms.
In contrast, the Industrial Revolution brought with it new forms of machine production that enabled
businesses to make massive quantities of goods to ship and sell in national markets. These changes, in turn,
required large organizations to manage the enormous armies of people that had to be mobilized to process the
output of these machines on long assembly lines in huge factories. These large businesses, in general, offer better
jobs than small businesses, in terms of both compensation and stability. Also, corporations provide such benefits
as: links with suppliers, increased consumer spending, the transfer of knowledge from one firm to another, and
the sharing pools of workers. However, competitive forces sometimes fail to steer companies in a socially
beneficial way and, instead, lead them to act in a socially harmful manner. For example, a company might
knowingly pollute a neighborhood with substance that is not yet illegal, in order to save the costs of reducing its
pollution and thereby be more competitive. This wave of large corporations has brought with it a host of new
ethical issues, including the possibilities of exploiting the workers who labor at the new machines, manipulating
the new financial markets that finance these large enterprises, and producing massive damage to the environment.
BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Prepared by: MR. JOSE EMMANUEL B. CALAG
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