Chapter 5 – Business Ownership & Organization

Forms of Business Organization

- An organization is defined as having two or more individuals working together towards
the attainment of a goal or goals. A business is therefore an organization formed in any
of the following:

1. Sole-Proprietorship - a business that is owned and operated by an individual.

2. Partnership - two or more owners come together to become joint owners and control
a business.
3. Corporation - different individuals come together to form a group and manage a
business.
4. Cooperative - an enterprise privately owned by the individuals who benefit from it.

1. Sole-Proprietorship
Also known as individual entrepreneurship, sole trader, or simply proprietorship, this type of
business ownership involves a person owning and operating the business. It is the simplest
form of business entity commonly found in small businesses and startups.

Key Features of Sole Proprietorship

• The owner has complete control over all aspects of the business, including decision-
making, building strategies, creating objectives, and handling operations.

• The owner is personally liable for all business debts and obligations.
• Setting up a sole proprietorship is relatively easy as it involves minimal paperwork and
legal formalities.
 • There is no need to share profits, as anything the business makes belongs exclusively
to the owner.
• Regarding tax benefits, sole proprietorships can report business profits and losses on
their tax returns. The business itself is not taxed separately.
• This form of business may not be able to access capital funding from other
organizations easily.

Advantages of Sole Proprietorship

Let's explore the advantages of this business structure:
• Sole proprietorships do not have a pyramid of decision-makers. The owner can make
and implement decisions quickly without going through a big team's arduous approval
system.
• One of the best advantages of this form of business is that of customer relationship. The
owners can personally interact with their customers and gauge customer preference and
satisfaction with their products and services.
• Sole proprietors can easily adapt their business models, products, or services and
establish unique identities.
• There is greater privacy regarding financial and operational matters because the owner
controls all business aspects.
• If the owner decides to sell the business, it is easier than any other form of business.

Disadvantages of Sole-Proprietorship
From unlimited liability to struggling to raise funds, such as:
• Sole-proprietorship owners build their businesses by putting at stake their assets, such
as savings, property, and investments. They are personally liable for any debts and
obligations, which could make this form of business a high-risk investment.
• This factor and the outlook of sole proprietorships make it challenging for the owners
to secure financing and investment capital. The business could discontinue when
resources are depleted for personal or impersonal reasons.
• They work in small teams, so they may lack access to specialized skills, expertise, and
resources that any large company can afford.
2. Partnership
Partnership businesses operate on the merit of legal partnership. A partnership business is
formed when two or more individuals collaborate to operate and manage the business, outlining
each partner’s rights, responsibilities, and profit-sharing arrangements.

Key Features of Partnership

• Partners individually combine their resources, skills, and expertise to achieve a

common business objective.
• Decision-making is shared among partners.
• Any form of debt and liabilities are shared between partners.
• There is a shared goal among partners, and both strive to achieve it.

Advantages of Partnership Business

Partnership businesses offer a unique blend of shared responsibility and collaborative decision-
making, fostering a sense of mutual trust and support among partners. This structure allows for
a more personalized approach to entrepreneurship, where individuals can leverage diverse
skills and resources to achieve common goals.
• Each partner brings unique strengths and perspectives, leading to better decision-
making and problem-solving collectively or focusing on their particular niche heading
for a common goal.
• The partners distribute the financial burdens and can make better decisions about
investment in growth opportunities.
• Depending on the jurisdiction and partnership agreement, partnerships may offer tax
advantages such as pass-through taxation for businesses that do not pay taxes on the
entity level. Instead, the income passes to the business owners, who pay personal
income taxes for their share of the business. Business profits and losses are reported on
individual partners’ tax returns, potentially resulting in lower overall tax liabilities.
 • These businesses can withstand dire situations in the dynamic landscape, adding
longevity and stability benefits.
• There is no need to go through the legal formalities to initiate a business partnership. It
is solely a personal choice of whoever wants to partner with and set up a business.

Disadvantages of Partnership Business

Partnership businesses offer close collaboration between individuals.
• While shared decision-making may result in better results, in some cases, it can also
lead to conflict between the partners, often stemming from different management styles,
perspectives, and priorities.
• Partnership business involves sharing profits, which may compromise individual
autonomy and financial returns compared to sole proprietorship.
• If any business partners decide to withdraw, it might not be the easiest thing to do. In
such a case, disputes concerning shares and asset distribution might arise.
• Imbalances in workload, investment, or decision-making authority can lead to partner
dissatisfaction and affect the company’s functioning.

Partnership may be classified:

A. As to object
• a.1 Universal partnership – one where the partners contribute all their property into a
common fund with intention of dividing it, as well as its profits.
• a.2 Particular partnership – may be establish over a determinate thing, it use of fruits
for the accomplishment of specific undertaking, or the exercise of a profession.
B. As to liability
• b.1 General partnership – most common form of partnership and the oldest form of
business ownership. It is contractual relationship that may be entered into by any
person, who possess the right to contract in his own right and partners are liable pro-
rata.
• b.2 Limited partnership – partners are liable only for the amount of their investment
in the partnership. They take no part in the active management. A limited partner may
contribute cash, but not service.
3. Corporation
Corporations are not owned by individuals per se but are legally treated as individuals. This
business is run and governed by a board of directors who are not personally liable for any of
the company’s debts. This aspect of the business is termed incorporation.
Key Features of Corporation
• There are no personal liability issues.
• Such businesses' lifespans are longer, allowing them to continue operations regardless
of any company mishaps.
• Such businesses can easily raise capital funds for operation, management, and
expansion.
• Building a corporate business requires systematic planning, including legal formalities,
financial planning, and adherence to regulatory requirements.

Advantages of Corporation Business

Let us look at the advantages of corporation business in detail:
• Limited liability keeps the board members' assets hidden and protects them from
financial losses beyond the investments they have made within the corporation.
• Such businesses have higher credibility and, hence, a better chance of raising capital,
whether human, labor, or financial capital (debt and equity).
• Shares of stock in corporations are generally transferable, allowing shareholders to buy,
sell, or transfer their ownership interests without disrupting the company's operations.
• Corporate businesses have the resources to access a bigger talent pool and professional
management.

Disadvantages of Corporation Business

The disadvantages of this business structure can often outweigh its benefits. Let's look at some
of the disadvantages of corporation-type business ownership.
• Corporations must go through endless paperwork to make their products and services
operational.
• Corporate-level businesses have to bear double taxation, one that of profit taxes and
then of shareholders who are taxed on dividends or capital gains they receive from the
corporations.
• Maintaining corporate businesses can be expensive due to their huge product and
service generation capacities.
• The board members finalize decisions regarding any matter, and since there are many
of them, the companies have to follow stringent protocols to avoid conflicts.
Comparing the Three Types of Partnerships

Aspect Sole Proprietorship Partnership Corporation

Owned and operated by Owned and operated by

Ownership Owned by shareholders
one individual two or more individuals

The sole owner bears all Limited liability for

Liability Partners share liability
liability shareholders

Decision Decisions made solely Decisions shared among Decisions made by the
Making by the owner partners board of directors

Taxed as the personal Taxed based on Taxed separately from

Taxation
income of the owner partnership agreement owners

Business ceases upon Depends on partnership Continuity not affected

Continuity
owner's death agreement by ownership changes

Partners' capital Issuance of stocks to

Capital Owner's funds or loans
contributions shareholders

Legal Few legal formalities are Partnership agreement More legal formalities
Formalities required recommended and regulations
 4. Cooperative – is a group of enterprise. It is made up of a number of producers, traders
and consumers who want to produce or trade as a group so that they may avail
themselves of economies of scale which individually they will not be able to obtain.
Advantages of Cooperative

• Owned and controlled by members

• Democratic control (One member, one vote)
• Limited liability
• Profit distribution 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 the 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

Types and categories of Cooperatives

1. Credit cooperative - This form of cooperative promotes thrift and savings among its
members in order to grant loans for production and provident purposes.
2. Consumer's cooperative - This type of cooperative is for the primary purpose of procuring
commodities in bulk and retail the same to the members and non-members.
3. Producers cooperative - This type of cooperative is organized to undertake a production-
oriented concern may it be agricultural or industrial in nature.
4. Service cooperative - As the name implies, this is a service-oriented cooperative which
engages in such areas as medical and dental care, hospitalization, insurance, printing, housing,
labor, electric light and power, communications and other services needed by the members and
non-members in the community.
5. Marketing cooperative - This type of cooperative engages in the supply of production
inputs to members and market their products.
6. Multi-purpose cooperative - This form of cooperative combines the concept of two or more
of the business activities of the different types of cooperatives.
Activity 1: Write your answer in a clean sheet of yellow paper.
1. What are the drawbacks to being a sole proprietor?
2. How does a partnership differ from a sole proprietorship?
3. Which features contribute to the dominance of corporations in the business world?
4. What are the benefits of joint ventures?